Understanding the Extended Repayment Plan

December 23, 2020 · 8 minute read

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Understanding the Extended Repayment Plan

Graduating from college and starting a career brings a host of exciting new freedoms. But for many, graduation also triggers new financial obligations—chief among them, paying off student loans. Among the options for doing so, if you have federally held student loans, is the Extended Repayment Plan, which gives eligible borrowers up to 25 years to pay off student debt.

As the costs of higher education mount, so, too, has the need for financial aid among students pursuing higher education. The total value of student loans held by Americans more than doubled through the 2010s, climbing from a total of $772 billion in 2009 to nearly $1.6 trillion in 2019.

Student loans are incredibly common. More than four in 10 people who have attended college —or nearly a third of all US adults—have some kind of student debt, with those under 30 years old among the most likely to have obtained a loan to help fund their education.

The good news? Those who have earned, at minimum, an associate degree or higher are more likely to say the benefits of their degree outweigh the costs. But even so, many have trouble staying on top of student loans.

According to 2019 data from the Federal Reserve, 17% of people with education debt were behind on student loan payments. The problem is intensified among individuals who didn’t graduate and those who attended for-profit colleges and universities.

Fortunately just like education itself, student loan repayment plans are not one size fits all.

There are a number of options for those with federal student loans, including the Standard Repayment Plan, which gives borrowers up to 10 years to pay off their student debt, and the Extended Repayment Plan, which lengthens the repayment term for eligible borrowers up to 25 years.

Extended Repayment Plans reduce the dollar amount of monthly payments because they spread the cost out over a much longer time period.

For some individuals, these longer-term loans might be a helpful way to balance the financial obligations associated with higher education with cash flow requirements for other essential and non-essential expenditures including rent or mortgage, food, discretionary spending, and savings.

How Does the Extended Repayment Plan Work?

Under the Extended Repayment Plan, eligible borrowers can spread out the repayment of their federal student loans over a 25-year period, compared to the Standard Repayment Plan’s 10 years.

Because student loans are subject to interest, the borrower will also pay more interest on their loan over a longer period of time. So the monthly payments may be lower, but the borrower will end up paying more over the full term of the student loan.

To see what this looks like in action, compare the costs of two repayment plans for paying back a hypothetical, but typical, federal student loan after receiving a four-year degree from a for-profit private college.

According to the US Department of Education’s repayment estimator, the average amount borrowed in obtaining such a degree is $34,722 at an average interest rate of 3.9%.

•   Under the Standard Repayment Plan, monthly payments would total $350 over a 10-year term, for a total cost of $41,988.
•   Under the Extended Repayment Plan, the borrower would only have to repay $181 a month—but over a 25-year term, the total cost would be $54,409.

There is also an Extended Graduated Repayment Plan in which monthly payments start low after the borrower leaves school but then gradually increase every two years over the lifetime of the loan.

Like the Extended Repayment Plan, the loan payments are spread out over up to 25 years instead of 10. Using the above loan example, payments would start at $143 a month in the first two years after graduation and slowly increase to $251 by the end of the loan term. The total amount paid back would add up to $57,026.

Eligibility for Extended Repayment Plans

If the reduced monthly cost of an Extended Repayment Plan sounds appealing, the first step is to assess eligibility. Not all student loans or borrowers qualify for the program.

The federal student loans eligible for the Extended Repayment Plan are:

•   Direct Subsidized Loans
•   Direct Unsubsidized Loans
•   Direct PLUS Loans
•   Direct Consolidation Loans
•   Subsidized Federal Stafford Loans
•   Unsubsidized Federal Stafford Loans
•   FFEL PLUS Loans
•   FFEL Consolidation Loans

Qualifying loans must have been obtained after October 7, 1998, and the outstanding loan balance must be more than $30,000 in either Direct Loans or FFEL program loans to be eligible.

Eligibility can’t be pooled across loan types, so if, for example, a student has $35,000 in Direct Loans and an additional $10,000 in FFEL program loans, the Direct Loan portion would qualify for the Extended Repayment Plan but the FFEL loan would not.

Weighing the Pros and Cons of Extended Repayments

The Extended Repayment Plan might be appealing to some federal student loan borrowers. After all, who wouldn’t want to have a lower payment each month? But it’s not actually that simple. There are benefits and drawbacks to longer student loan repayment terms.

Pros of the Extended Repayment Plan

One benefit of the Extended Repayment Plan is an obvious one—lower monthly payments. According to data from the Federal Reserve, difficulties paying off student loans aren’t uncommon—they affect 17% of those with outstanding loans. But these challenges aren’t spread out universally.

Forty percent of adults who still owe money on student loans, but are not currently enrolled in school and who have less than an associate degree are behind on student debt payments.

Those with $15,000 or more in outstanding loans are less likely to be delinquent on payments. In this group, two-thirds are likely to have a bachelor’s degree and one-third likely to have a graduate degree. This isn’t surprising considering that those with more education tend to have higher incomes and amassed wealth .

Typical monthly student loan payments, which are between $200 and $300 on average, can eat up a significant amount of take-home pay for lower earners. The lower monthly loan payments associated with the Extended Repayment Plan might free up vital funds for other essential expenditures.

This benefit can be even more pronounced with the Extended Graduated Repayment Plan, in which monthly payments slowly increase over the life of the loan. This means borrowers pay the least in the first years after graduating, corresponding with lower entry-level salaries, and more later on when they may be better able to afford it.

Cons of the Extended Repayment Plan

Although monthly payments may be lower, there are some cons to the Extended Repayment Plan.

For starters, the loan term can be more than twice as long as the Standard Repayment Plan, meaning borrowers have to keep making monthly payments for 15 years longer.

Not only does the Extended Repayment Plan mean more years of making student loan payments, those payments will also add up to more money paid over the lifetime of the loan term.

For example, based on the example described above, for a $34,722 student loan at 3.9% annual interest, the borrower would pay an additional $12,421 over the lifetime of the student loan under the 25-year Extended Repayment Plan than they would on the 10-year Standard Repayment Plan.

The Extended Graduated Repayment Plan costs even more over the life of the loan. Deferring the bulk of repayment to later on in the loan term in order to allow for lower payments earlier on means borrowers carry a higher level of educational debt for a longer period of time.

Alternatives to Extended Repayment Plans

While the monthly savings may make the Extended Repayment Plan sound appealing, for some borrowers the added total cost may outweigh this benefit. But there are alternatives that can help meet various financial needs.

Income-Driven Repayment Plans

Monthly payments for income-driven repayment plans are based on a percentage of the federal student loan borrower’s discretionary income, and the amount increases or decreases as their income and family size changes during the lifetime of the student loan. This helps to ensure that payments remain affordable, even as the borrower’s income changes.

Some income-driven repayment plans have slightly shorter terms than the Extended Repayment Plan (20 years vs. 25), which may also reduce the total interest paid over the life of the loan. Borrowers who plan to apply for the Public Service Loan Forgiveness Program (PSLF) will want to consider income-driven repayment plans, as they are one of the requirements for qualifying for the program.

Student Loan Refinancing

Some borrowers may choose to refinance student loans with a new loan from a private lender. Eligible student loan borrowers may qualify for lower interest rates than they may have on federal student loans, such as unsubsidized Direct loans or Graduate PLUS loans.

This could reduce monthly payments for the duration of the loan or the total cost of the student debt as long as the loan term is not extended. Refinancing with a private lender, though, means forfeiting benefits and protections that come with federal student loans—like the repayment options described above, along with deferment and forbearance options.

The Takeaway

With potentially lower rates and flexible repayment terms, refinancing your student loan can be an attractive option that could save you money each month—or allow you to pay off your loan faster. SoFi is the industry leader in student loan refinancing, offering flexible terms, low rates, and access to member benefits like career coaching and referral bonuses. Checking your rate takes just 2 minutes and won’t affect your credit score.✝

Learn more about student loan refinancing with SoFi.

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