Understanding Student Loan Repayment Options: A Comprehensive Guide
Federal student loan repayment resumed in October after a pause of roughly three and a half years. To help ease borrowers back into paying their loans, the Biden administration created an on-ramp program with safety nets for struggling borrowers, as well as a new income-driven repayment program which will go into full effect in July 2024.
As you get back into the habit of paying your student loans, here’s everything you need to know about student loan repayment options, new programs to help borrowers, how student loans affect your credit report, and more.
Student Loan Repayment Options
The U.S. Department of Education offers several different repayment options, giving borrowers a lot of flexibility with their budgets. Here’s a quick summary of what’s available:
Standard Repayment Plan
The standard repayment plan is the default plan for federal student loans. In most cases, you’ll pay fixed monthly payments over 10 years. However, if you consolidate your student loans, you may be able to extend that to up to 30 years.
Graduated Repayment Plan
As its name suggests, the graduated repayment plan starts out with lower monthly payments, which increase over time—usually every two years—so that your loans will be paid in full within 10 years (or 30 years with consolidation loans).
Extended Repayment Plan
If you have more than $30,000 in outstanding loans, you may qualify for an extended repayment plan. This option allows you to choose fixed or graduated monthly payments, ensuring that your debt will be paid off within 25 years.
Saving on a Valuable Education (SAVE) Plan
Formerly the Revised Pay As You Earn (REPAYE) plan, the SAVE plan can reduce your monthly payment to 10% of your discretionary income. Discretionary income is calculated as the difference between your income and 225% of the federal poverty guideline for your state of residence and family size.
If your income falls below the 225% threshold, your monthly payment will be $0. And if your monthly payment isn’t sufficient to cover accruing interest on your loans, your loan servicer won’t add the extra interest to your balance—some other income-driven repayment plans offer this feature, but only for a few years.
In July 2024, the payment amount will drop from 10% of your discretionary income to 5%. Additionally, if your original balance was $12,000 or less, you can receive loan forgiveness after 10 years’ worth of payments. That timeline increases by one year for each additional $1,000 borrowed, up to a maximum of 20 years for undergraduate loans and 25 years for graduate loans.
Pay As You Earn (PAYE) Plan
If your student loan balance is higher than your annual discretionary income or it represents a significant portion of your annual income, you may qualify for the PAYE plan.
This plan can cut your monthly payment to 10% of your discretionary income, calculated as the difference between your annual income and 150% of the federal poverty guideline. Your payment will never be more than the 10-year standard repayment plan amount.
If you still have a balance after 20 years, the remaining amount will be forgiven.
Income-Based Repayment (IBR) Plan
Like the PAYE plan, the IBR plan is designed for student loan borrowers who have a significant amount of student loan debt relative to their income. However, your payment may vary depending on when you took out your first student loan.
If it was on or after July 1, 2014, it’ll be 10% of your discretionary income, which is calculated the same way as with the PAYE plan. If you have a balance after 20 years, the remaining amount will be forgiven.
If you took out your first loan before July 1, 2014, your payment will be 15% of your discretionary income, and any remaining balance after 25 years will be forgiven.
Income-Contingent Repayment (ICR) Plan
The ICR plan calculates your monthly payment as the lesser of 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. That said, discretionary income is calculated as the difference between your annual income and 100% of the federal poverty guideline.
If you still have a balance after 25 years, the remaining amount will be forgiven. Note that if you have Parent PLUS loans, the ICR plan is the only income-driven repayment plan available to you, and you’ll need to consolidate your loans to take advantage of it.
Choosing the Best Student Loan Repayment Plan
Ultimately, the best option for you will depend on your situation. If you’re struggling to keep up with your monthly payments, the SAVE plan may be the best option because it offers the most generous calculation for your monthly payment, and it ensures that your balance won’t grow over time.
But if you have a high income relative to your student loan debt, an income-driven repayment plan may not reduce your monthly payment by much, or at all. In that case, it may make sense to stick with the standard repayment plan or look into a graduated or extended repayment plan.
If you’re a parent who has taken out federal loans to help your child pay for college, consider the ICR plan if you’re having trouble with monthly payments.
Impact of New Repayment Rules on Your Credit
In addition to a new income-driven repayment plan, the Biden administration also created an on-ramp program to help borrowers readjust after the yearslong payment pause.
After September 1, 2023, student loans started accruing interest again. As a result, loan balances and payments increased, and loan servicers began reporting those higher amounts to the credit bureaus. But through September 30, 2024, the following rules apply:
- Missed payments: Typically, if you miss a payment by 30 days or more, your loan is considered delinquent and reported to the credit bureaus as such, potentially damaging your credit score. Student loans are different: Late payments are not reported until they are 90 days delinquent. During the on-ramp period, however, delinquency reporting will be paused, and loan servicers will consider missed payments as being in forbearance. (Note that when the on-ramp period ends, 90-day-plus delinquencies will begin to be reported once again, and could appear on credit reports as early as December 2024 or January 2025.)
- Default and collections: Federal student loans are normally placed in default after roughly nine months of delinquency. Default can damage your credit score and result in costly collection fees. During the student loan on-ramp period, however, no federal loans will be placed in default status or referred to a collection agency.
- Interest: Whether or not you make payments on your loans during the on-ramp period, interest will continue to accrue, and the balance reported to the credit bureaus will reflect that. You’ll also continue to see a scheduled payment on your credit reports based on your amount due.
Note that you don’t need to take any action to qualify for these relief provisions. However, if your account continues to be delinquent after September 2024, it could eventually damage your credit.
If you’d like to see how your student loans are being reported on your credit reports from the three credit bureaus (Experian, TransUnion, and Equifax), you can request a free copy of your credit reports through AnnualCreditReport.com. You can also get your free Experian credit report anytime.
Budgeting for Student Loan Repayment
Restarting student loan payments after a few years can impact your financial situation, even if you can afford it. Depending on your circumstances, you may need to make adjustments to your investing and savings goals, debt payoff plan, or lifestyle spending.
Here are some tips to help you make room in your budget for student loan payments:
Evaluate Your Income and Expenses
Take a look at your income and expenses for the past few months to get a general idea of how much you earn and where your money is going. Categorizing your expenses can give you an even better look at how you’re spending your money, so you can decide your next steps.
Look for Opportunities to Cut Spending
As you evaluate your expenses, consider ways you can reduce your spending. For example, you may consider canceling subscriptions you don’t use or sharing subscriptions with a family member or friend to reduce your cost. You can also minimize eating out and entertainment and even evaluate your necessary expenses—such as utilities, insurance premiums, and groceries—to see if you can save.
Consider Ways to Increase Your Income
Earning more money may be difficult if you have special demands on your time outside of work, or you’re subject to other circumstances outside of your control. But if you do have the time and capacity, consider ways to increase your income, such as working overtime hours, asking for a raise, switching jobs, or adding a second job or side hustle.
Look at Other Financial Goals
If you were able to take advantage of the student loan payment pause to put more money toward other financial goals, such as retirement, education, emergency savings, or paying off high-interest debt, consider adjusting some of those contributions to make room for student loans.
What to Do if You Can’t Afford to Repay Your Loan
If your budget is tight, and your options for earning more or spending less are limited, there are several different options to consider:
Get on an Income-Driven Repayment Plan
Because these plans tie your monthly payment to your income, you may be able to enjoy a much lower payment, or even not have a payment at all.
Request Deferment or Forbearance
You don’t need to worry about missed payments being reported to the credit bureaus during the 12-month on-ramp period. But after that, consider talking to your student loan servicer about deferment and forbearance options.
Look into Student Loan Forgiveness Programs
The federal government offers several different student loan forgiveness programs. Research the different options and determine whether you’re eligible and what you need to do to get some or all of your loans canceled.
Get Help from Your Employer
Many employers offer student loan repayment assistance as an employee benefit. In fact, the IRS allows employers to provide up to $5,250 in student loan payments each year through 2025 with no tax consequences for the employee. Check with your employer to see if it’s an option and whether there are requirements to receive the help.
Should You Refinance Your Student Loans?
If you have an excellent credit score and a high income, student loan refinancing can potentially help you secure a lower interest rate than what you’re currently paying. You could also shorten your repayment term to as little as five years with some lenders, which can be helpful if you can afford a higher monthly payment and want to pay down your debt faster.
However, most federal student loan borrowers won’t benefit from refinancing their loans with a private lender. Doing so would cause you to lose access to federal loan benefits, including forgiveness programs, income-driven repayment plans, and generous forbearance and deferment options.
What’s more, the provisions for the on-ramp period don’t apply to loans held by private companies. If you’re considering refinancing, think carefully about your situation and needs, as well as the benefits and drawbacks of moving your loans from a federal servicer to a private lender, to determine whether it’s the right move.
Frequently Asked Questions
Where Do You Make Student Loan Payments?
Student loan payments are typically made through your loan servicer’s website. Make sure to log in to your account to set up payments and manage your repayment plan.
Do You Need to Re-Enroll in Autopay?
If you were enrolled in autopay before the payment pause, you may need to re-enroll. Check with your loan servicer to confirm your autopay status and ensure your payments are set up correctly.
What Happens if You Don’t Pay Student Loans?
Missing student loan payments can lead to delinquency and default, which can damage your credit score and result in additional fees. It’s important to stay on top of your payments and explore repayment options if you’re struggling.
Monitor Your Credit Regularly to Build and Maintain Good Credit
While missing a student loan payment during the on-ramp period won’t damage your credit score, on-time payments can help you build and maintain a good credit score.
With Experian’s free credit monitoring service, you’ll get access to your Experian credit report and FICO® Score☉ powered by Experian data. These resources will give you the information you need to understand which factors are impacting your score and the steps you can take to improve your credit score.
You’ll also get real-time alerts when changes are made to your credit report, making it easier to address developments as they happen.
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