How I chose my repayment plan

Shortly after college, I started making student loan payments. At first it was like paying any bill, and I barely noticed the financial drain amidst my new job, new city and new adult life. But eventually, I started to realize just how much these loans were holding me back.

I couldn’t save. I couldn’t travel. I couldn’t treat myself to an impulse purchase. Even if I never missed a payment, I was still going to be in debt for another decade. So I decided to go all in on my loans.

I resolved to pay off my loans in three years, no matter what it took. That meant cutting every unnecessary expense, making as much money on the side as I could and, most importantly, choosing the right repayment plan. By buckling down and keeping my eye on the prize, I was able to make my last payment three years after graduating.

I went with the standard plan, but that’s not the best option for everybody. Read ahead for an explanation of each plan, and how to pick the right one for you.

Types of student loan repayment plans

Standard

There’s a reason why the standard plan is so popular. It charges the least amount of interest overall and payments stay the same throughout the life of the loan, no matter your income.

If you can easily afford your monthly payments and want to repay your loans quickly, the standard plan is best for you.

Graduated

The graduated plan works as a ladder where the payments start low and increase every two years. The graduated plan is on a 10-year term, but still comes with a higher total amount of interest paid than the standard plan.

This plan is great for people who are in industries where entry-level salaries are low, but steadily increase as you gain knowledge and experience.

Extended

The extended plan allows graduates to choose between regular or graduated payments and has a term of up to 25 years. Monthly payments will be lower than on any other non income-based plan, and the overall interest paid will be higher.

This plan is best for those who have a high amount of debt compared to their salary and are wary of choosing a plan with a large monthly bill.

Because the term could last up to 25 years, graduates could be in their 40s when they’re done paying off their loans.

Be very wary of choosing this plan unless you absolutely need to.

I had a friend who only found out she was on the extended plan after I asked her what repayment plan she was using. At that point she was five years into repayment, and almost all her payments had been going towards interest. If she had chosen the standard plan, which she could afford to do, she would have already been halfway through the life of the loan.

Income-driven plans

Income-based plans have become more popular as student loan totals have gotten higher and more burdensome. There are four main types of income-driven plans: the pay-as-you-earn plan, the revised-pay-as-you-earn plan, the income-based-repayment plan and the income-contingent plan.

There are minor differences between each of these plans, but most ensure that your monthly payment will never be more than 10-20% of your discretionary income.

These loans are best for those who have loans that are much higher than they ever hope to earn.

If you owe $100,000 and are living on a teacher’s salary, you should consider picking an income-based plan.

Many of these plans also offer loan forgiveness if the term ends before you pay off the total. You’ll owe taxes on that amount, but it could still be a great deal if you plan accordingly.

Public Service Loan Forgiveness

The Public Service Loan Forgiveness Program has been around for almost 10 years, and the first graduates of the program are expected to come in fall 2017.

The PSLF is a program designed to encourage students to work for nonprofits and the public sector, where salaries are often lower.

In exchange, students can get their loans forgiven after 10 years of regular payments.

The PSLF has stringent rules, such as that the student must always be working for a qualified company or agency and make at least 120 consecutive payments. Taxes are not charged on any amount forgiven, which makes this plan more favorable for anyone who might qualify.

How to choose a plan

Income-based plans offer something the standard repayment plan doesn’t: flexibility. Because many have such low minimum payments, they give you the option of paying a lower amount than you would otherwise. But federal student loans have no prepayment penalty, so if you pay more than the minimum, you won’t be penalized.

When you’re flush with cash, you can pay more than the minimum and when you’re broke, you can stick to the regular payment.

Some people love the flexibility of income-based plans, but many choose them because they want more money for other priorities, such as travel or living in a luxury residence.

Look at your budget and see if you can afford to make the standard payment. Are you choosing a cheaper monthly payment because you’re at risk of missing rent or do you just want more money to go out to eat?

Student loans are like bandaids – the sooner you get rid of them, the better. Putting them off until you’re older won’t make the process less painful. You’ll have other financial priorities at that time, and will regret not taking the opportunity to pay them off faster.

Deferment and forbearance

Only to be used in extreme cases, the federal government also allows people to defer their loans or put them into forbearance. That means you can temporarily stop making payments if you lose your job or have some other emergency come up.

Depending on the type of loan you have, you might not have to pay interest while your loans are deferred. However, if your loans are in forbearance, you will still owe interest on them every month. If you still can’t afford to cover the interest, you can have it added to your loan balance.

Deferment and forbearance

Deferring your loans or having them placed in forbearance is better than missing payments or defaulting on your loans, but it should be a last-resort option.

Most people defer their loans if they go back to school or if they have trouble finding a job. Some do it if they experience a financial hardship, such as a huge medical bill or other traumatic event. Some deferment periods can last up to three years while forbearance is generally available up to 12 months at one time.

Go here to learn about how to apply for deferment or forbearance and if you’re eligible.

What else to keep in mind

The longer your student loan term is, the more you’ll pay in interest overall, which is why many people don’t opt for the 20 or 25-year terms. They’d rather have a higher monthly payment now than pay more overall.

For example, if you owe $27,000 and earn $35,000, you’ll pay $32,000 total over 10 years, including interest. If you choose an income-based repayment plan, you’ll pay $35,934 total over the 13-year payment term.

When I was paying off my loans, I made a very deliberate decision to just get it over with as fast as I could – and it was one of the best decisions I’ve ever made. I had to live like a college student for a few years, but the relief of being debt-free just a few years out of college was worth it. Besides that, I saved thousands on interest – around $5,000 by my calculations – that immediately went into my emergency fund

The good news is that you can change your repayment plan at any time.

If you find out that you’re having trouble making ends meet on the standard plan, call your student loan provider to see if you need to switch to an income-based option.

Also, not every repayment option works for your particular loans. Each federal loan is different, so before you decide on the payment plan you should call the loan provider and ask them what you’re eligible for.

Rules also vary based on when you graduated. It’s best to call and talk to someone who can give you advice on your particular situation.

The bottom line

There are a lot of different options when it comes to paying back your student loans. If you don’t choose the right one, you could end up spending thousands of dollars more during the course of repayment.

Thankfully, you just need to have a decent handle on your current financial situation. Repayment plans are created for specific classes of consumers, and chances are you fit comfortably into one.

Working a low-wage entry position with lots of potential for salary growth? You’ll want the graduated plan. Paying off a large amount of debt but working in a low-paying career? The extended plan is probably best for you.

If you’re still having trouble figuring out the best option for you, consider scheduling a one-off consultation with a financial planner. They can take a more in-depth look at your financial situation in order to send you down the best path with confidence.

Remember that no matter what plan you choose, it’s generally a good idea to pay off the loan as quickly as you can afford to. Not only will you save on interest, but you’ll be out from under the weight of your debt faster. It may require living like a pauper for a few years, but you’ll be glad you made the sacrifice when you’re debt free and on the road to building your future.