Here’s Why a Student Loan Repayment Plan Matters

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Student Debt Averages $36,900

Many college graduates are entering the workforce with student loan debt. For the class of 2021, it averages $36,900. Paying it off can mean shelling out $400 or more each month, depending on the interest rate and terms. Managing repayments at the same time new graduates are juggling rent and other expenses can be difficult. This is why it is a good idea for recent graduates to create a student debt repayment plan.

A repayment plan maps out how long a borrower will take to pay off the debt. It begins at different times depending on the type of student loan. For Direct Unsubsidized and Direct Subsidized loans, there is a six-month grace period, though there is a pandemic pause on repayments and interest for federal loans through Aug. 31, 2022. Private loans are different, so check with your loan provider to see what repayment plans are available, and if they offer a grace period or not.

Types of Repayment Plans

If you have federal student loans, the Standard Repayment Plan is essentially the default repayment plan. Payments are a fixed amount and made for up to 10 years at the interest rate you received when you first took out your loan(s). One of the benefits of the Standard Repayment plan is that it saves money in interest over the life of your loan because, generally, the loan is paid back in the shortest amount of time (10 years) compared to the other federal repayment plans (20 to 30 years).

If payments are too high to manage on the standard 10-year repayment plan, see if you are eligible for the Extended Repayment Plan for federal loans, where the term is up to 25 years and monthly payments are generally lower. This can help keep you out of default (which is important!). But it is important to remember that lengthening the loan term usually means significantly more interest will be paid over the life of the loan—because it will take longer to pay off the loan.

With the Graduated Repayment Plan, you would still pay your federal student loans back over a 10- to 30-year period, with lower payments at the beginning of the term that gradually increase every two years. The idea is that a borrower’s income will likely increase over time, but may not be much to start out (which makes sense, since you’re fresh out of school).

There are also Income-Driven Repayment Plans. To be eligible, borrowers need to go through a recertification process each year and, each year, your monthly payment could change (increase or decrease) based upon current income and family size.

Finding the Repayment Plan for You

Student loan debt is a fact of life for many college graduates but it does not have to hold them back. Creating a repayment plan can make the debt much more manageable. You can take this quiz to get a better understanding of each repayment plan option and see examples of scenarios that could be similar to yours.

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ABOUT Meg Richardson Meg Richardson is a writer specializing in markets, technology, and personal finance. She loves breaking down seemingly complex ideas and making them readable and interesting for everyone. She holds an MFA in writing from Columbia University. When she is not writing about finance, she enjoys running in Central Park and drawing cartoons.

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