A Complete Guide to Paying Off Student Loans

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  • Students can obtain loans from the federal government and private lenders like banks.
  • You can also choose from several private and federal loan repayment plans.
  • The right plan for you depends on many factors, including current and expected income.
  • Refinancing or consolidating debt can reduce monthly payments and lower interest rates.

Each year, millions of students take out loans to help pay for college.

According to EducationData.org, as of November 2021, student loan debt in the U.S. reached an all-time high of $1.75 trillion. The average undergraduate at a public university borrows $30,030 to earn their bachelor's degree. And it takes 20 years on average for students to pay off their loans.

On the plus side, loans can help you pursue an education you may not otherwise be able to afford. On the negative side, it often means starting adulthood steeped in debt.

This guide explains how student loans work, what repayment options you can choose from, and how to determine which plan may be right for you.

How Do Student Loans Work?

College students can take out student loans from two primary sources: the federal government and private lenders like banks and credit unions. All loans come with different repayment options and interest rates.

To qualify for federal loans, students must submit the Free Application for Federal Student Aid (FAFSA) each school year. Most of these loans come with a six-month grace period following graduation, and Direct Subsidized Loans do not charge interest until after the grace period ends.

With private loans, students apply directly to lenders. These loans typically come with more stringent requirements, such as a credit check and income review. Payments and terms can also vary, with some institutions offering a delayed payment option. As with most federal loans, interest starts accruing on private loans as soon as you get them.

Most college students prioritize taking out federal loans over private loans, as federal loans tend to offer better interest rates and more flexible repayment options.

How Does Interest Impact Student Loan Debt?

The interest rate is a percentage of the money borrowed that the lender charges. Most federal loans offer fixed interest rates, which means the interest rate remains the same over time.

Private lenders offer both fixed and variable rates. Variable interest rates can change over time, based on market conditions.

The amount you owe on a student loan is both the principal, or the amount borrowed, and the interest that accrues over time.

The amount of interest you pay depends on several factors, including the rate and loan term. For example, if you took out a $30,000 loan with a fixed interest rate of 5% and planned to pay it off in 10 years, you'd end up paying over $8,180 in interest. Monthly payments for this plan could amount to about $320, and the total amount paid would be over $38,180.

What Are Your Options for Federal Student Loan Repayment?

The federal government offers many student loan repayment options. Students can also change their repayment plan at any time at no charge. Options include standard 10-year repayment plans and graduated plans that let you pay more as your income increases.

The Loan Simulator tool can help you calculate payments and choose the best plan for you.

Standard Repayment Plan

  • Eligibility: All borrowers
  • Qualifying Loans: Direct, Direct PLUS, Direct Consolidation, Stafford, Federal Family Education Loan (FFEL) PLUS, FFEL Consolidation
  • Monthly Payment: Minimum $50

This is the basic repayment plan for the Direct Loan program. Borrowers pay loans off within 10 years and up to 30 years for consolidated loans. While you may pay slightly higher monthly payments compared to other plans, this results in faster loan payoffs and fewer interest charges.


Graduated Repayment Plan

  • Eligibility: All borrowers
  • Qualifying Loans: Direct, Direct PLUS, Direct Consolidation, Stafford, FFEL PLUS, FFEL Consolidation
  • Monthly Payment: Starts low and increases every two years

This payment plan works well for borrowers with a low income who expect it to increase over time. You start with a low payment that rises every two years, ultimately paying it back within 10 years. This payment period can extend to 30 years for consolidated loans.


Extended Repayment Plan

  • Eligibility: Borrowers with more than $30,000 in outstanding Direct Loans
  • Qualifying Loans: Direct, Direct PLUS, Direct Consolidation, Stafford, FFEL PLUS, FFEL Consolidation
  • Monthly Payment: Lower monthly payments for an extended period

This plan lowers monthly payments by extending the repayment plan up to 25 years. Borrowers may also qualify for graduated or fixed payments. If you have higher loan balances and need smaller monthly loan payments, you may benefit from this plan. Just note that you may end up paying more in interest.


Revised Pay As You Earn Repayment Plan

  • Eligibility: Direct Loan borrowers
  • Qualifying Loans: Direct, Direct PLUS made to students, Direct or FFEL Consolidation Loans without PLUS loans made to parents
  • Monthly Payment: 10% of discretionary income

This income-driven payment plan recalculates your monthly payment each year based on your income and family size. The plan also considers your spouse's income and loan debt if married. Ideal for students seeking loan forgiveness, this plan forgives any outstanding balance after 20 years for undergraduate loans and 25 years for graduate school loans.


Pay As You Earn Repayment Plan

  • Eligibility: New borrowers on or after Oct. 1, 2007, who received a Direct Loan disbursement on or after Oct. 1, 2011
  • Qualifying Loans: Direct, Direct PLUS made to students, Direct or FFEL Consolidation Loans without PLUS loans made to parents
  • Monthly Payment: 10% of discretionary income

Another income-driven repayment plan, the Pay As You Earn Plan does not consider a spouse's income if you file taxes separately. Additionally, payments can never be more than you would pay on the Standard Plan. It also includes a 20-year repayment period and loan forgiveness for outstanding balances.


Income-Based Repayment Plan

  • Eligibility: Borrowers with high debt relative to their income
  • Qualifying Loans: Direct, Direct PLUS made to students, Stafford, Direct or FFEL Consolidation Loans without PLUS loans made to parents
  • Monthly Payment: 10-15% of discretionary income

To get an income-based repayment plan, borrowers must show a high debt-to-income ratio. If you took out a loan before July 1, 2014, you'd pay 15% of your discretionary income on a 25-year payment plan. After this time, you'd pay 10% on a 20-year plan. This option also provides loan forgiveness at the end of the term.


Income-Contingent Repayment Plan

  • Eligibility: Direct Loan borrower
  • Qualifying Loans: Direct, Direct PLUS made to students, Direct Consolidated Loans
  • Monthly Payment: 20% of discretionary income

This repayment plan caps payments at 20% of your discretionary income and forgives loans after 25 years. As with other income-driven repayment plans, payments are recalculated every year. While more expensive, this is the only income-based repayment plan available to parent borrowers who consolidate Parent PLUS Loans into a direct consolidation loan.


Income-Sensitive Repayment Plan

  • Eligibility: FFEL Program Loans not eligible for Public Service Loan Forgiveness
  • Qualifying Loans: Stafford, FFEL PLUS, FFEL Consolidation Loans
  • Monthly Payment: 4-25% of gross monthly income

Targeting borrowers with Federal Family Education Loans who need to reduce their monthly payments, this repayment plan caps monthly payments at 4-25% of your gross monthly income, depending on the lender's formula for determining monthly payments. The maximum term is 10 years, and it does not offer loan forgiveness.

What Private Student Loan Repayment Options Are There?

Private lenders' policies for student loan repayment vary widely. Most offer less flexibility and fewer choices for paying off student loans than federal loans do.

Here are some of the standard options for private loan repayment.

Immediate Repayment

Immediate repayment means making payments on both the interest and the principal while in school. For students who can afford the expense, this approach saves a considerable amount of money in interest and means carrying less debt after graduation. Many students, however, may find this approach difficult.

Interest-Only Repayment

Interest-only repayment plans allow you to make just the interest payments while in school. After graduation — or if you drop below half-time enrollment — you begin making payments on the principal and interest.

Many students find this payment plan more manageable. It also keeps them from owing more than they borrowed after graduation.

Fixed or Partial Interest Repayment

A partial interest repayment plan lets you make a low fixed payment while in school. While this amount only covers part of the accruing interest, it does stop your loan balance from growing as fast as it would if you made no payments.

Deferred Repayment

A deferred repayment plan means that you pay nothing while in school. Some private lenders also offer a grace period, usually up to six months, that allows you to extend your time to make payments further.

This can be a good option for students with no or limited income. That said, the interest charges continue to add up, and you will owe substantially more money in the long run.

What About Student Loan Refinancing and Consolidation?

Student loan refinancing and consolidation lets borrowers consolidate their loans into one easier-to-manage loan with a single monthly payment. When you consolidate loans through a private lender, it's called refinancing. The benefits include lower interest rates and possibly lower payments.

There are drawbacks to refinancing, however. For example, if you refinance your federal loans with a private lender, you'll lose the protection and flexibility many federal loans offer.

You can consolidate most federal loans by completing the Federal Direct Consolidation Loan Application. This approach provides a single monthly payment with a fixed interest rate based on the average rate of all consolidated loans.

Which Student Loan Repayment Plan Is Right for You?

Every student's financial situation is different. The best student loan repayment plan for you is one that you can afford each month and that offers the lowest interest rate. Factors to consider include your current income and other financial obligations. Creating a budget can help you determine how much you can realistically pay.

For students who can't afford payments on a standard 10-year payment plan but expect their income to increase, a graduated payment plan may be best. In contrast, those needing to lower their monthly payments based on income may prefer an income-driven payment plan.

For private loans, choose a repayment option you can afford and keep an eye on the interest rates. Consider refinancing when rates drop or your income or credit improves. Also, remember that you can always change your repayment plan as needed.

What If You're Having Trouble Paying Off Student Loans?

If you're struggling to make your monthly payments, contact your loan servicer right away. They can discuss changing your repayment plan to one that lowers your monthly payment, such as an income-driven repayment plan.

If you recently lost your job or are returning to school, you might consider applying for deferment or forbearance on your loans.

The federal deferment program lets you stop student loan payments for up to three years. Depending on the type of loan you have, you may or may not accrue interest during the deferment period.

Forbearance allows you to stop making payments for up to 12 months. While interest continues to accrue, a forbearance can offer critical help for those experiencing a job loss or other life emergencies.

Frequently Asked Questions About Paying Off Student Loans

How long does it take to pay off student loans?

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How much time it takes you to pay off your student loans depends on the types of loans you have, the loan amounts, your repayment plan, and the interest rates. For example, the federal standard repayment plan offers a 10-year term, while income-driven repayment plans can take up to 25 years to pay off. Private lenders also offer various terms ranging from 5-20 years.

According to EducationData.org, the projected student loan repayment period for those who graduated in 2021 with a bachelor's degree is about 4-12-plus years. A few ways to pay off your loans faster includes making payments while in school or during your grace period and paying a little extra each month.

Is it good to pay off student loans in full?

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There's no issue with paying off your student loans in full. Federal law prohibits private or federal student loan lenders from charging a prepayment penalty. However, whether you should pay off your student loans in full depends on your overall financial picture.

For example, if you have a balance on higher interest rate credit cards, it's usually a good idea to pay those off first. Additionally, if your employer offers a 401(k) match, starting your retirement savings may be a smart move. Conversely, paying student loans off early can save a considerable amount of money in interest.

Is it worth paying off a student loan early?

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Whether it's worth paying off a student loan early depends on your circumstances. By paying your student loan off early, you can significantly reduce the interest you pay over time and save a substantial amount of money. You can also improve your debt-to-income ratio, which helps gain approval from lenders should you want to buy a home or car.

Before you decide to pay off your student loans, make sure you have any higher-interest items paid off first, like credit card debt. You should also have an emergency fund stockpiled. Most financial experts recommend keeping enough money in your fund to cover 3-6 months of expenses.

Can you begin paying off student loans while still in school?

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Yes, you can start paying off student loans while still in school. One of the biggest benefits of starting to pay off your loans before you graduate is that you'll reduce the amount of interest you'll pay over time.

Get in touch with your loan servicer before making payments. Generally, you can pay any amount at any time. You can make one-time payments or set up automatic payments if you have steady income to contribute to your loan. Autopay may also help you qualify for an interest rate discount.

What is the best way to pay off student loans?

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If you can, start making student loan payments while you're still in school or during the grace period. If you can pay at least enough to cover the accrued interest each month, you'll leave school owing what you borrowed.

Paying more than the minimum payment each month can also significantly impact your student loan debt because extra payments go directly toward reducing the principal. For example, the U.S. Department of Education's office of Federal Student Aid reports that if you paid an extra $60 per month on a $15,000, 10-year loan with an interest rate of 4.29%, you could save $1,174 and pay off that loan at least three years earlier.

DISCLAIMER: The information provided on this website does not, and is not intended to, constitute professional financial advice; instead, all information, content, and materials available on this site are for general informational purposes only. Readers of this website should contact a professional advisor before making decisions about financial issues.


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