Learn

Personal Resource Center

Making a plan to repay student loans

Calculator icon
Several income-driven repayment plans are available to federal student loan borrowers who can't afford their payments on the standard payment plan.

 

Make extra payments if possible

The last thing you probably want to do is pay more toward your student loans than you have to. But if you can swing it, making extra payments will save you a ton of money in the long run.

Consider this: If you have $20,000 in student loans with an interest rate of 5% and 10 years to pay it off, your monthly payments would be $212 and you'd spend a total of $5,456 in interest over the life of the loan.

Now let's say you got a $1,000 bonus at work and decided to put it toward your debt. You'd not only save $626 in interest, but you'd also end up paying off the loan eight months early.

 

Look into alternative payment plans

Of course, not everyone is lucky enough to have extra cash lying around. In fact, you might find that you run into trouble fitting student loan payments into your monthly budget, especially if you're new in your career.

If that's the case, you don't need to worry. Several income-driven repayment (IDR) plans are available to federal student loan borrowers who can't afford their payments on the standard payment plan.

There are four IDR plans:2 Income-Based Repayment (IBR), IncomeContingent Repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Depending on the plan, your repayment term will be extended to 20 to 25 years and your payments will be reduced to 10% to 20% of your income. Each year, you submit paperwork to recertify your income, and payments will adjust as your income changes. In fact, it's possible to qualify for payments of $0 if your income falls below a certain threshold. If you have any debt leftover at the end of the 20 to 25 year term, it will be forgiven (though you'll have to pay income taxes on the forgiven amount).

If you have private student loans, you can look into refinancing them to a lower interest rate. Currently, private student loan interest rates can be as low as 1.20% for borrowers with good credit.3

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. “What's in my FICO scores?" myFICO, https://www.myfico.com/crediteducation/whats-in-your-credit-score, accessed January 25, 2020. Back
  2. “Income-Driven Repayment Plans," StudentAid.gov, https://studentaid.gov/manage-loans/repayment/plans/income-driven, accessed January 25, 2020. Back
  3. Anna Helhoski, “Current Student Loan Interest Rates and How They Work," Nerdwallet, https://www.nerdwallet.com/article/loans/studentloans/student-loan-interest-rates, published September 3, 2020, accessed January 25, 2021. Back