Federal Student Loan Repayment Plans

By Mark Kantrowitz

Federal student loans provide several repayment plans, including standard 10-year repayment, two types of extended repayment, graduated repayment, and four types of income-driven repayment. The standard and extended repayment plans have a $50 minimum monthly payment.

Generally, borrowers should choose the repayment plan with the highest monthly payment they can afford. Increasing the repayment term may yield a lower monthly payment, but it will also increase the total interest paid over the life of the loan.

Borrowers who are experiencing long-term financial difficulty, such as limited prospects for increasing income, should choose either an extended repayment plan or an income-driven repayment plan. These repayment plans will yield the lowest monthly loan payments.

Both standard repayment and extended repayment involve level amortization, where each payment is the same as all the other payments. They differ only in the length of the repayment term.

Standard repayment is based on a 10-year repayment term.

There are two types of extended repayment. One version does not require consolidation, but provides a 25-year repayment term if the borrower has more than $30,000 in federal student loan debt. The other version requires consolidation and provides a repayment term of 12-30 years depending on the amount of debt, as shown in this table.

Extended Repayment Term on Federal Consolidation Loans
Loan Balance	Maximum Repayment Term
Less than $7,500	10 years
$7,500 to $9,999	12 years
$10,000 to $19,999	15 years
$20,000 to $39,999	20 years
$40,000 to $59,999	25 years
$60,000 or more	30 years

Graduated repayment starts with monthly payments that are barely above interest-only, and steps up the monthly payments every 2 years. Graduated repayment is also subject to the three-times rule, where no payment can be more than three times the lowest monthly payment.

There are four income-driven repayment plans. These repayment plans base the monthly payment on a percentage of the borrower's discretionary income, as opposed to the amount the borrower owes. Generally, if the borrower's debt at graduation exceeds the borrower's annual income, the borrower will qualify for an income-driven repayment plan. The remaining debt is forgiven after a number of monthly loan payments in one of the income-driven repayment plans, not necessarily consecutive. This forgiveness is taxable under current law. It is possible to be negatively amortized in the income-driven repayment plans. If the calculated monthly payment is zero, as can occur when income is below 100% or 150% of the poverty line, it still counts as a payment toward loan forgiveness. Some of the income-driven repayment plans cap the monthly payment at the monthly payment under standard 10-year repayment. Others allow the monthly payment to increase as income increases.

This table summarizes the key differences between the income-driven repayment plans.

Income-Driven Repayment Plans
Repayment Plan	% of Discretionary Income	Definition of Discretionary Income	Forgiveness	Payment Cap
Income-Contingent Repayment (ICR)	20%	(AGI - 100% PL)	25 years	No
Income-Based Repayment (IBR)	15%	(AGI - 150% PL)	25 years	Yes
Pay-As-You-Earn Repayment (PAYER)	10%	(AGI - 150% PL)	20 years	Yes
Revised Pay-As-You-Earn Repayment (REPAYER) - Undergraduate Revised Pay-As-You-Earn Repayment (REPAYER) - Graduate	10%	(AGI - 150% PL)	20 years 25 years	No