Student Loan Repayment Options for Every Budget
The relief program extended to holders of several types of federal student loans during the COVID-19 pandemic has now expired and borrowers are required to restart repayments soon.
That means a major monthly expense is about to reappear on many people’s budgets. We take a look at the repayment options you now have if you have outstanding federal student loan debt.
WHAT WAS COVID-19 STUDENT LOAN RELIEF?
As part of its response to the outbreak of COVID-19 mandates in the CARES Act of 2023, the federal government suspended payments and eliminated interest charges on many federal student loans.
The measure was intended to help American families navigate the challenges of the pandemic including job layoffs, loss of income due to sickness, and additional childcare needs as schools across the country shifted to remote learning.
After several delays, on September 1, 2023, interest charges were “unfrozen” on federal student loans with repayments on these loans set to resume in October.
WHAT LOANS QUALIFIED FOR DEBT RELIEF?
The debt relief extended to borrowers during the pandemic covered several types of federal student loans, including:
Loans extended directly by the Department of Education, including undergraduate and graduate loans, and parent and graduate PLUS loans
Federal Family Education Loan Program (FFEL), and subsidized and unsubsidized Stafford loans owned directly by the Department of Education
The program also covered some defaulted FFEL loans held by private lenders, as well as Health Education Assistance Loans (HEAL) and Perkins loans originally offered by schools and private lenders, respectively, and since taken over by the federal government.
Loans offered by private lenders and schools were generally excluded from this benefit.
TYPES OF STUDENT LOAN REPAYMENT PLANS
Borrowers who have been repaying the Department of Education directly now have several ways to repay their debts, depending on their income, outstanding debt, and other obligations. These include:
Standard Repayment Plan: A simple plan that aims to keep total loan cost low with fixed monthly payments over a 10-year period
Graduated Repayment Plan: Payments start low and increase every two years, with your loan paid down within a 10-year term
Extended Repayment Plan: Smaller monthly payments but over a longer period (up to 25 years), meaning you will pay more in interest over the full term of your loan
Income-Based Repayment (IBR): Monthly payments capped at a percentage of your discretionary income, recalculated annually
Income-Contingent Repayment (ICR): Payments are calculated based on your adjusted gross income, family size, and total loan amount
Pay As You Earn (PAYE): An income-based repayment plan for recent borrowers that offers lower monthly payments but with stricter eligibility requirements
Saving on a Valuable Education (SAVE): An expanded version of the PAYE plan with adjustments for income, family size, and outstanding loan amount
WHAT’S THE BEST REPAYMENT PLAN FOR YOU?
Let’s consider which of these repayment options might be best for you going forward based on your income, outstanding loan balance, or other debt obligations—as well as repayment assistance programs that might help you pay off your debts sooner.
Income Level
If you're earning a steady income with good job advancement prospects, the standard or extended repayment plans allow for predictable, fixed payments that save you money on interest and allow you to clear your debt within 10 years.
If your income is lower or less secure, an income-based repayment or PAYE plan may offer lower payments and more flexibility, allowing you to adjust your payments according to your income each year.
Loan Amount
If you owe a significant amount on your loans, an extended payment plan or an income-driven plan like SAVE might be a better fit. These plans spread payments out over a longer term, reducing the monthly burden.
On the other hand, for smaller loans, a Standard Repayment Plan could help clear your debt faster and you would pay less in interest over time.
Multiple Debts
If you’re juggling other obligations, like a mortgage or car loan, a graduated or extended repayment plan could help you manage multiple financial commitments. These plans offer lower initial payments, giving you room to tackle other debts simultaneously.
Repayment Assistance Programs
The federal government and many entities offer repayment assistance programs for workers in public service. If you work for a federal, state, local, or tribal government entity or a certain type of nonprofit organization, you may qualify for Public Service Loan Forgiveness (PSLF).
Repayment assistance like this can make income-linked plans such as IBR or PAYE particularly beneficial over time.
FOUR WAYS TO PAY OFF YOUR STUDENT DEBT
Now let’s take a look at how to approach student debt with four real-world scenarios in mind, including paying off a significant amount quickly, managing an average loan sensibly, and tackling challenges like a low income or several competing debts.
1. FAST AND FURIOUS
If you’re determined to get rid of what you own on your loans quickly (say, $300,000 in 5 years) because you don’t want to be held back by long-term debt, then you need to commit to making heavy monthly payments from the start of your career.
You will need the income to support this, and, while a standard repayment plan won’t meet your deadline, it still offers the biggest savings on interest. You’ll need to make additional payments at the same time, which is allowed with no penalty for all federal student loans.
Alternatively, you may be able to refinance the loan for a shorter term with a lower interest rate, but only if you have a stable, high income and excellent credit. You might also miss out on federal loan repayment deferrals or any future loan forgiveness initiatives.
2. STEADY AND SENSIBLE
Average student loan debt hovers around $50,000. While this may seem like a lot, it can be managed over 10 years with a steady income and consistent payments using the standard repayment plan.
If you are starting out on a very low salary but expect your prospects to improve steadily as you work, consider the graduated repayment plan. Your payments will start lower and gradually increase, ideally matching your rising income.
3. THE LONG GAME
If you’re a teacher, caregiver, or service professional, or you failed to complete your degree, you may be facing the prospect of earning a relatively low salary for some time. Additionally, if you’re responsible for children or other family members, this situation might be further compounded.
In these situations, income-driven plans like IBR, PAYE, or SAVE are worth considering—no matter the size of your debt.
These plans adjust your monthly payments based on your income and family size. You'll need to recertify your income each year, but these plans also offer some breathing room and potential loan forgiveness after 20-25 years of payments.
4. JUGGLING ACT
If you are managing multiple debts like credit cards, a car loan, or a mortgage on top of your student loans, then the extended or graduated repayment plans may offer more manageable monthly payments initially.
This gives you the space to allocate funds toward paying off your higher-interest debts first. Once those are taken care of, you can make extra payments toward your student loans to finish paying them off faster.
5. CHANGE IT UP
Remember also that, unlike other lenders, the federal government allows you to change your repayment plan whenever you like and for free.
This can be useful if your financial situation changes, allowing you to increase payments if your income rises or lower your monthly payments if your family obligations increase.
Consider talking to a qualified financial counselor to help you understand how your changing financial situation might affect the way you are managing your student debt.
GHS FCU: SMART ADVICE FOR SMART PEOPLE
At GHS Federal Credit Union, we know how hard you work to get ahead. If you’ve invested in yourself and your future by taking out student loans, you deserve all the help you need to pay them off in a sustainable way, so you can afford the things you need while continuing to build your future.
That’s why we offer all our members access to our certified financial counseling services as part of our focus on overall financial wellness.
Financial counseling from GHS is customized to your exact situation. If you need help managing out-of-control student debt, or you need good personalized advice on the best repayment plan for your outstanding student loans as repayments begin—we’re here to help.
We’ll take a look at your full financial situation, as well as your money goals and personal dreams, and connect you to the planning resources and financial tools you need to get where you’re going.
Contact us today, or click below to find out more.