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Which Student Loan Repayment Plan Should You Choose?

Abby Hayes

Whether you're just beginning to pay back your federal student loans or you've been making payments for years, you likely have a plethora of repayment options. And each repayment option has its pros and cons.

If you're thinking about switching from a standard repayment option, here are some different ways you can opt to repay your student loans and choose the repayment option that works best for your needs.

Repayment Plans: An Overview

The following repayment plans can be used for Federal Direct Loans and Federal Family Education Loans, including the Parent PLUS Loan and Stafford Loans. (Perkins Loans and private loans operate under different rules, so you'll have to contact your school or lender to determine your repayment options for those.)

--Standard Repayment: This plan is what you'll start with, unless you switch to another repayment option right off the bat. Standard repayment plan payments are at least $50 per month and will have your loan paid off within 10 years.

--Graduated Repayment Plan: Based on the assumption that you start with a lower-paying career but gradually increase your income, this plan begins with lower student loan payments, which increase about every two years. You'll have your loans paid off within 10 years.

--Extended Repayment Plan: If you can't manage standard or graduated payments, the extended plan allows smaller fixed or graduated payments that let you pay off your loan in up to 25 years.

--Income-Based, Pay As You Earn, Income-Contingent and Income-Sensitive Plans: Although each of these plans differs slightly and applies to different loans, they're all meant to make student loan payments more affordable based on your income. You can find out more about the specifics of these programs from the Federal Student Aid website.

--Deferment and Forbearance: If you're really struggling to make student loan payments, especially due to a short-term financial crisis, a deferment or forbearance allows you to put off your loan payments entirely for a short period of time.

Which Plan is Right for You?

The first step in choosing the right student loan repayment option for your situation is to see which options you qualify for. Most options are available only for certain types of loans or only if you have a very high loan balance or very low income. You can talk with your lender (or check its website) to see which plans you might qualify for.

While you're at it, take time to consider how a different repayment plan might affect you financially in the long term. It's all too easy to fall into the trap of opting for a smaller student loan payment simply because you'll qualify for one. But remember, the longer you take to pay off your loan, the more interest you'll pay over time.

The Federal Student Aid repayment estimator is a helpful tool, since it can show you how much you'd expect to pay under different repayment plans.However, you may qualify for several repayment options.

Let's say you have about $25,400 in student loans and are paying 6.1 percent interest. If you're married with one child and making $50,000 of joint adjusted gross income each year, you'll have a few options.

Under the standard plan, you'd pay about $283 a month, pay off your loans in 10 years and pay $8,500 in interest.

Move to the graduated plan, and your payments will start around $162 and end around $486. You'll still pay your loans within 10 years, but you'll pay about $10,800 in interest.

If you switched to the income-based repayment plan, you'd pay your loans off in just over 10 years, with a monthly payment between $259 and $283. Your total interest would be around $8,700. With the income-contingent plan, it would take you 11.5 years to pay off your loans, making payments of $245 to $282 per month. You'd pay a total interest of $10,300.

In this situation, the best option for repaying your student loans is the standard repayment plan. Yes, it comes with higher monthly payments, but it also has you paying between $200 and $4,000 less in total interest.

If you're really struggling to make those minimum payments, it's better to switch to a lower-payment plan than it is to make late payments or miss payments altogether.

Abby Hayes is freelance blogger and journalist who writes about personal finance for the Dough Roller.

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