When you begin repaying your federal student loans, you will need to select a repayment option. In the past, the federal government offered only one option: a standard repayment plan where you paid a fixed amount each month for 10 years. Now, the federal government offers an assortment of flexible repayment options to help borrowers meet their increasingly large student loan obligations. Private lenders may or may not offer the same options; contact your specific lender for more information.
Choosing the right repayment plan can help you avoid defaulting on your student loans, a matter the government now takes very seriously and pursues aggressively.
Types of repayment plans
Standard repayment plan
A standard repayment plans is the original repayment plan. Under a standard repayment plan, you pay a fixed amount each month for up to 10 years. Your actual payment amount will depend on your loan balance. You can use an online loan repayment calculator to easily determine the monthly amount you’ll owe under a standard repayment plan.
Graduated repayment plan
Under a graduated plan, payments start out low in the early years of the loan but then increase in the later years of the loan. This plan is tailored to people with relatively low current incomes (e.g., young graduates just beginning their careers) who expect their incomes to increase in the future. Under a graduated plan, your initial payments may be as low as half what they would be under a standard plan.
With some graduated repayment plans, the initial lower payment includes both principal and interest, while under other plans, the initial lower payment includes interest only.
With any graduated repayment plan, you’ll pay more for your loan over time than you would under a standard plan. The reason is that interest charges are based on your unpaid balance each month, so the higher balance in the early years of your loan translates into higher interest charges. Also, if you extend your repayment option to keep your payments from becoming too high at the end of the loan, you’ll wind up paying more interest over the life of the loan.
Assume you owe $10,000 at 8% interest. Under a standard plan, you would pay approximately $14,559, including interest. Under a graduated plan, if you choose a four-year, interest-only plan, your payments would be approximately $67 per month for four years and $175 per month for the remaining six years, for a total of approximately $15,816.