Pros & Cons of the Standard Federal Student Loan Repayment Plan

Written by: Kristyn Pilgrim
Updated: 4/23/20

Student loans have helped millions of people in the United States get a great education in postsecondary institutions. Every year, undergraduate and graduate students accept loans from the federal government and private institutions to earn a degree. Once they graduate, they must begin repaying these loans.

Some loans, like private student loans, must be repaid as soon as they are disbursed. You may begin making monthly payments on your loans while you are in school. Other loans, like subsidized federal loans, forgive interest payments and offer a grace period of six months after you graduate before you begin monthly payments.

Each loan uses 10 years as the standard term for expected repayment. Ideally, you make monthly payments on both the principal and accrued interest until your loan is repaid in 10 years.

There are many benefits to the standard repayment plan, but this repayment time frame does not work for everyone.

Which Federal Loans Qualify for Standard Student Loan Repayment Plans?  

Unless you specify otherwise, or your lender specifies a different duration, your student loans will be placed on the standard repayment plan. This plan divides your loan amount into payments over 10 years, which will be about 120 payments, and adds interest each month based on the remainder of your principal.

Federal loans that are eligible for the standard repayment plan include: 

  • Direct Subsidized Loans. 
  • Direct Unsubsidized Loans.
  • Direct PLUS Loans.
  • Subsidized Federal Stafford Loans.
  • Unsubsidized Federal Stafford loans.
  • Federal Family Education Loans (FFEL).

The minimum monthly payment is $50 but can increase depending on how much interest you accrue and how much you originally borrowed. With standard loan repayment:

  • You go with the default option for student loan repayment, except for some private student loans.
  • Payments are divided up over 10 years.
  • You get the lowest possible interest rate.

Lending agencies assume that a graduate with at least a bachelor’s degree can find a middle-income job and afford living expenses as well as the standard repayment plan for their student loans. However, life is not always that simple. Unemployment or underemployment, public service, medical expenses, family expenses, and bankruptcy can all change your finances so much that you cannot repay your loan on the standard repayment plan.

The Pros & Cons of the Standard Repayment Plan

Before taking on a lot of student loan debt, financial advisors recommend that you consider your potential future budget. What sort of work can you take on after you graduate to repay your loan? How much interest will accrue over time? What will your estimated monthly payments look like?

Even though you cannot predict the future, understanding how you will have to budget once you start making student loan payments will help you understand what kinds of loans you can afford and how much you can afford to borrow. This will also help you understand if you qualify for some forgiveness programs, like the Public Service Loan Forgiveness (PSLF) program.

You can also compare the benefits and detriments of the standard repayment plan to understand if this is the right approach for you.

The pros of choosing the standard repayment plan include: 

  • You pay the least possible interest. 
  • You can pay a little more each month and pay off the loan sooner.
  • It is the automatic repayment option for most loans.

Most graduates pay off their student loans using the standard repayment plan. There is only one potential downside, and that involves your job after you complete your degree. If you are not able to find work, or your first job does not pay enough for you to manage your loan payments and other living expenses, you may find you need a different payment arrangement.

Most federal student loans allow you to adjust your payment plan based on your income. Some of these repayment plans forgive any remaining student loan after 20 to 30 years. However, the downsides of these repayment options are: 

  • You pay much more in interest payments than you would otherwise.
  • You spend more of your life making loan payments.
  • You may end up with a higher interest rate than that of your original loan.

If you struggle to make payments on your federal loans after you graduate, try to adjust your budget before moving away from the standard repayment plan.

Many students struggle financially in their first few years out of college. If you need help, work with your federal loan servicer to change your payment plan.

Private Student Loans Have Different Repayment Plans   

Many students benefit from taking on small private student loans while they complete their degrees. However, private loans often have variable interest rates. While the accruing interest will be small at first, you will pay more in interest over the life of the loan, even as you pay down the principal.

Private loans can offer forbearance, which allows you to temporarily pay only accruing interest on your loan so you can focus on paying your living expenses. You can also refinance your private loans if the overall interest rate is lower. This will change your payment schedule and may put you on a faster track, like paying your loans in 7 years rather than 10 years.

Your private loan may not offer deferment or forbearance. Check the loan terms before you take on the private loan. They can be good options if you aim to enter a high-paying career that allows you to repay your student loans faster than the standard 10-year cycle.