Mastering Student Loans: Your Go-To Guide for Financial Success

• Standard and graduated repayment plans are usually the cheapest ways to pay off federal student loans. 
• Income-driven repayment plans can help lower your monthly payments but will be more expensive over time. 
• If you want to pay off your student loans early, take advantage of the budgeting and saving tools that come with the Payactiv Visa^® Card*. 

College is expensive in the United States. Higher education costs are even more problematic if you take out loans to attend school but don’t finish your degree.

If you take out federal student loans, there are many options when it comes to repayment. The least expensive method is to pay off your loans within 10 years if you can afford it. If you can’t, there are ways to lower your monthly payments and even get a portion of your loan forgiven. While it’s the more expensive route, it might be necessary depending on your monthly budget.

Before we get into the details, make sure you’re utilizing your Payactiv tools to maximize your budget before picking the program that’s best for you.

Standard, Graduated, and Extended Repayment Plans

A standard repayment plan for federal student loans gives you fixed monthly payments that should allow the entire balance to be paid off in 10 years. Graduated repayment plans work similarly, but the initial payments are smaller and get bigger every two years. 

You may qualify for an extended repayment plan if you have $30,000 or more in federal student loan debt. This gives you fixed or graduated payments that ensure your loans will be paid off in 25 years.

When you’re on one of these payment plans, you may want to make even bigger payments to eliminate your balance early. You can use the saving feature of the Payactiv Visa Card to set aside money for this specific goal.

Figure Out Your Discretionary Income

The rest of the repayment plans are based on your income. For most plans, your payment will be based on your discretionary income. You can figure this out by taking your actual income and subtracting 150% of the federal poverty line (FPL).

For example, let’s say you’re earning $40,000 per year. If it’s just you in your household, 150% of the FPL for 2023 is $27,315, making your discretionary income $12,685 per year.

The exception is income-contingent repayment plans (ICR plans). For this repayment plan, you need to figure out your discretionary income by taking your actual income and subtracting 100% of the FPL.

PAYE Repayment Plan

You can use the Pay As You Earn (PAYE) repayment plan if you took out student loans between October 1, 2007, and October 1, 2011. This repayment plan sets your payments at 10% of your monthly income if that number is less than what you’d pay under a standard repayment plan. 

In our example of a single person making $40,000 yearly, the monthly payments would be $105.71. You’d have to make these payments for 20 years. Then, your remaining balance would be forgiven. The forgiven amount will count as taxable income. 

To qualify, you have to have a high debt-to-income ratio. When all is said and done, you’re likely to pay more over time than you would if you were on a standard repayment plan. Even though your monthly payment might be smaller, you’ll be paying interest over a longer period of time, increasing your overall costs.

REPAYE Repayment Plan

The Revised Pay As You Earn (REPAYE) repayment plan is similar to the PAYE repayment plan. You’ll use the same formula to calculate your monthly payments. After 20 years of payments (or 25 years if you took out loans for graduate studies,) your remaining balance will be forgiven. The debt-to-income ratio isn’t as large of a concern as it is with PAYE.

You’ll still likely pay more with this plan than the standard repayment plan since you’ll pay interest for double the time period. Plus, you will have to pay taxes on any amount that is forgiven at the end of that 20 or 25-year period. However, the lower monthly payments may make repayment more manageable based on your current budget.

Income-Based Repayment Plans

Income-based repayment plans (IBR plans) are only available if you have a high debt-to-income ratio. Payments are 10% of your discretionary income if you were a new student loan borrower after July 1, 2014. Otherwise, you’ll pay 15% of your discretionary income if you were a new borrower before that date. 

You make payments for 20 years if you were a new borrower after the July 1, 2014 date, or 25 years if you were a new borrower before then. At that point, the remaining balance will be forgiven (and taxed).

Since payments are spread out over a longer period of time, you’re likely to spend more thanks to interest despite the lower monthly payments. 

Income-Contingent Repayment Plans

One hundred percent of the FPL in 2023 for a single person is $18,210. If you made $40,000, your discretionary income would be $21,790 on an ICR plan. 

The lower FPL calculation isn’t the only thing that makes ICR more expensive on a monthly basis. ICR plans also require monthly payments of 20% of your discretionary income (monthly payments would be $363.17 in our example) or the same amount as a fixed plan would be if you spread payments over 12 years, whichever is less. You make these payments over 25 years before getting (taxable) forgiveness.

This stretches the interest over a very long period of time, making this repayment plan one of the most expensive options.

Should I Refinance My Student Loans? 

When you refinance federal student loans in the private sector, you’re losing all the benefits of discharge and forgiveness programs that come with federal student loans. Currently, interest rates are high even in the private sector, so this might not be an ideal time to refinance.

That said, refinancing could make sense if interest rates were to drop considerably.

Which Repayment Option Is Best for Me?

Ultimately, the best option depends on how much money you can spend on student loan repayment. If you have the money to opt for a standard or graduated repayment plan, going this route can save you money in the long run. Otherwise, the other repayment options could better fit your budget despite costing more over time.

No matter which plan you choose, make sure you set aside money for repayment and use budgeting tools to stay on top of paying off your loans. Take advantage of free financial counseling services offered by Payactiv to understand what’s the best option for you and  fast-track your student loan repayment journey.

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