Student Loan Repayment: Which Payment Type Is Best for You?

Written by: Kristyn Pilgrim
Updated: 4/09/20

Thousands of students graduate from college every year after paying for their education with student loans. Now, you have to start looking for a job while finding ways to reduce your debt and pay off your loans as fast as possible.

Whether you have federal or private loans, there are specific terms in the contract regarding when payments begin, how interest accrues, and how much you will pay a month until the principal is paid off. Understanding these types of loans can help you pay them off faster. 

Your Student Loan Repayment Plan Depends on the Type of Loan & Your Finances 

When you agree to take out a loan, the loan servicer will send you information on the repayment structure and timeline. Federal and private loans have different repayment requirements and penalties, so it is essential to read the information from your loan servicer carefully.

Most loans, regardless of type, have a standard repayment plan of 10 years. In some cases, you can consolidate federal loans or refinance both federal and private loans to extend the repayment period for more than a decade and get a better interest rate.

But how you pay off student loans can depend on whether it is a federal student loan or a private student loan.

Federal Student Loan Repayment

The United States Department of Education (DOE) is the biggest lender to new college students. The federal government wants more students to receive the financial help they need to attend college, and the DOE’s student loans program helps thousands of prospective students make their educational dreams a reality.

There are four basic forms of student loans offered by the DOE:

  1. Direct Subsidized Loans: These go to undergraduate students seeking bachelor’s degrees, who demonstrate that they need financial aid to cover the costs of tuition, books, supplies, room and board, and other necessary fees. Subsidized loans also help students attend career schools.

    These loans start with a standard repayment plan of 10 years, a low fixed interest rate, and a six-month grace period before you begin receiving monthly bills to pay your loan. The grace period allows recent graduates time to apply for several jobs and find something that pays enough to support them. While you are in school and during the six-month grace period, the federal government covers the interest as it accrues on your loan.

    There are several student loan repayment options for direct subsidized loans, ranging from 10 to 25 years. The Department of Education’s loan servicers also work closely with their clients to ensure the repayment plan makes financial sense. 

    If you need to defer your loan for a few months or years, find ways to have the principal on the loan forgiven, or need to have your debt discharged due to injury or financial hardship, working with your loan servicer helps you manage these issues. Direct Subsidized Loans are very forgiving, as long as you stay in touch with the loan servicer and avoid defaulting on payments.

    For the 2019-2020 school year, the undergraduate subsidized loan interest rate is 4.53%.
  2. Direct Unsubsidized Loans: Like subsidized loans, these have a fixed interest rate, and provide better access to forgiveness, cancelation, discharge, forbearance, and deferment options than private loans.

    More students qualify for unsubsidized federal loans, as there is no requirement to demonstrate financial need, and both undergraduate and graduate students can apply for these loans. You are also responsible for the interest on the loan as soon as the money has been fully disbursed.

    Like subsidized loans, unsubsidized loans give you the option of adjusting some of the repayment terms as you need. Staying in contact with your loan servicer is a vital part of this process.

    For the 2019-2020 school year, the undergraduate unsubsidized loan interest rate is 4.53%. For graduate students and professional students, it is 6.08%.
  3. Direct PLUS Loans: Available to graduate students and parents of dependent undergraduate students, these loans are recommended to help you cover the cost of your education that is not covered by other financial aid. Typically, borrowers must have good credit to qualify for this loan, and the student loan repayment options are slimmer since the DOE expects the borrower to have some amount of part-time or full-time income.

    The 2019-2020 interest rate on Direct PLUS Loans is 7.08%.
  4. Direct Consolidation Loans: This is a loan that combines all of your current federal loans, both subsidized and unsubsidized, and creates one loan with an averaged fixed interest rate. People who turn to consolidated loans may want simpler monthly payments to one servicer rather than several, or they want to expand the student loan repayment period beyond 10 years. 

In addition to the standard repayment plan of 10 years with fixed interest, you can work with your loan servicer to adjust your student loan repayment schedule. The following are federal student loan repayment options

  • Graduated repayment: Available for subsidized, unsubsidized, PLUS, and consolidation loans, this looks a lot like the standard 10-year student loan repayment plan. However, the monthly payments start smaller and gradually increase every two years. This structure assumes that you need time after you graduate to work entry-level jobs in your career field, and then begin to work toward promotions or another, better-paying field.
  • Extended repayment: Like the standard and graduated student loan repayment options, extended repayment works for all types of federal loans. Monthly payments may be fixed or graduated, but you cannot have more than $30,000 of outstanding student loan debt.

    Rather than paying the loan off in 10 years, you will pay it off over 25 years. This allows you to make much smaller monthly payments, but over time, you will likely end up paying more in interest on the loan because it accrues for several more years.
  • Revised Pay As You Earn Repayment (REPAYE): This repayment option is available for all federal loans, except for parent PLUS loans and Direct Consolidation Loans that include a PLUS loan. You will be given 20 to 25 years to repay the loan, which will have monthly payments that cap out at 10% of your income.

    This option works well for those entering low-income fields or who struggle to maintain employment, so they can focus on paying basic needs. Payments will be recalculated each year, and if the loan has not been repaid after 20 to 25 years, the remainder will be forgiven.
  • Pay As You Earn Repayment (PAYE): This student loan repayment plan is available for all types of federal loans except parent PLUS loans and a Direct Consolidation Loan that includes a PLUS loan. To qualify for this loan, you must:
    • Be a new borrower on or after October 1, 2007, who received full disbursement of the loan by October 1, 2011.
    • Have high debt relative to your income.

Your loan payments will be no more than 10% of your discretionary income and not exceed what you would have paid under the standard repayment plan (if that amount is lower). What you pay each month will be reevaluated annually based on changes to your income and family size. After 20 years, if you have not repaid your student loans, whatever remains on the principal will be forgiven.

  • Income-based repayment (IBR): All federal loans except parent PLUS loans qualify for this form of student loan repayment. Like the PAYE and REPAYE loan schedules, you must have high debt compared to your income level, so your monthly payments will never exceed 10% to 15% of your income. These payments will never exceed the amount you would have paid on the standard repayment plan, but how much you pay will be recalculated every year based on your income and family size.

    If your student loans have not been repaid on this plan after 20 or 25 years, depending on the loan repayment schedule, the remainder will be forgiven. Like other loans, any forgiven amount is considered taxable income, so you will need to claim that the year it is forgiven.
  • Income-contingent repayment (ICR): This is the only form of income-driven student loan repayment available for parent PLUS loans. It is also an option for subsidized, unsubsidized, and student Direct PLUS Loans, and consolidation loans. Your monthly payments will be adjusted either:
    • To 20% of your discretionary income.
    • To the amount you would pay on a 12-year repayment schedule, adjusted for your income.

Payments are recalculated annually, and the remainder of the loan is forgiven after 25 years if you have not paid it off. You will need to claim the forgiven amount as taxable income in that tax year. 

  • Income-sensitive repayment (ISR): Available for subsidized, unsubsidized, and Federal Family Education Loans (FFEL), your loan servicer will look at your current income and cap monthly payments at no more than 15% of your current earnings. However, your loan must be paid within 15 years. The formula for determining each monthly payment varies from lender to lender. 

When you first accept a federal student loan, you can choose which student loan repayment plan you think will work best. If you do not pick one, you will be automatically signed up for the standard repayment plan.

While the 10-year option works for many people, it can be hard to predict your income once you graduate, so you can also speak with your loan servicer to have your repayment plan adjusted. This is especially important for those struggling to make enough money to pay their regular monthly bills along with their student loan bills.

To adjust your student loan repayment schedule, contact your loan servicer. If you do not know which company to contact, you can log into your Federal Student Loans account online for contact information.

If you, like many other students, have several federal student loans, you can consolidate these under the Direct Consolidation Loan. This allows you to pay your loans through one monthly payment to one loan servicer, rather than several scattered payments to multiple lenders. You will also get a fixed interest rate, so any variable interest rate federal loans you took out will be converted.

While the federal government sets the interest rates on student loans every year, the Direct Consolidation Loan interest rate is the weighted rate of all your loans combined.

Payments on your Direct Consolidation Loan begin 60 days (two months) after you first set it up. Subsidized loans offer a six-month grace period, while unsubsidized loans often require repayment after the loan is disbursed. 

Private Student Loan Repayment

Private student loans act similarly to unsubsidized federal student loans. You will be responsible for the interest once the loan is disbursed, with payments on the principal beginning once you graduate.

The standard private student loan repayment plan is 10 years, but some private loans may adjust this period. You can use a process called refinancing to combine private loans and make one monthly payment to one lender, over a period of 20 to 25 years, if you want to simplify your payments and get an adjusted interest rate.

Unlike federal loans, private loans may have variable interest rates. You could start with a rate lower than the federal rates, but the interest rate will likely increase over several years.

Private loans may also penalize you for paying more than the required monthly payments or for repaying your loan faster. This depends on the terms of your loan contract, so be sure to read these carefully.

There are fewer options for adjusting your repayment schedule with private loans, and there is no option based on income. You can defer or ask for forbearance on private loans, but you will not have the same leeway if you are employed but struggle to pay your regular bills and student loan payments.

The best way to pay off your private student loans is to examine the terms in your contract before you sign it. Work with the loan servicer to refinance if you need to adjust your payments. 

How to Pay Off Your Student Loans Faster Than Your Repayment Plan

Federal loans do not penalize you for repaying them sooner than your scheduled payment plan. Some private loans will not charge you service fees or penalties for this, either.

If you want to repay your student loans faster once you have the student loan repayment schedule that works best for you, here are some options

  • Create a monthly budget based on your current income and see how much money you have remaining.
  • Set some of the remainder aside in a savings account as an emergency fund, in case you need additional money to pay bills.
  • If you have money remaining after putting a good amount in savings, use the remainder to pay more on your monthly student loan payment.
  • Double-check with your loan servicer that the monthly payment covers part of the principal. This may not be true for PAYE, REPAYE, and other income-based repayments.
  • Split your monthly loan payment into biweekly payments, which means you will make one or two additional small payments on your loan by the end of the year.
  • Set up automatic payments because many lenders will adjust your interest rate lower if you pay at the same time each month.
  • Take cash windfalls and put them toward your student loan bill.
  • Refinance or consolidate your loan to make paying simpler, so you do not miss payments.
  • If your income goes up, adjust your budget, so you pay more on your student loans.

There are three potential debt repayment methods you can adopt, once you have your student loan repayment schedule in place. 

  • Debt avalanche: Using this approach to student loan repayment, you focus on paying off the loan with the highest interest rate first. This will likely be a private student loan, but not necessarily.

    Be sure that you will not be penalized for repaying a private loan faster. Then, focus any extra income, bonuses, or windfalls on paying off this loan while paying the monthly minimum on your other loans. Once you have paid off this high-interest loan, find the next highest-interest loan and focus on that one in a similar fashion.
  • Debt snowball: This approach to student loan repayment starts with the lowest balance first, regardless of the interest rate. Since you can repay the smaller loan very quickly with extra money, you will soon eliminate that loan.

    Move on to the next smallest loan, and begin to sweep your loans out of your way before the repayment plan ends.
  • Debt snowflake: You can add the debt snowflake approach to either the avalanche or the snowball approach. Basically, whenever you have a small amount of extra money, you add this to one or more of your monthly loan payments.

    For example, if you find that you have an additional $10 at the end of one workweek, you can send that as a micropayment to the loan of your choice. It can slow down interest accumulation, which can help you pay off your loans much faster.

Regardless of which method you choose, paying more than the monthly minimum on your repayment plan will help you pay off your loans faster. Focus on how much you pay each month and how quickly you can pay off your loans. This can help you choose the student loan repayment type that suits your financial needs best.