The average Class of 2016 graduate entered the workforce with $37,172 in student loan debt, but how much they actually end up paying back is something else entirely. The true cost of a student loan comes down to the interest.
The repayment plan a new grad chooses will ultimately decide their average student loan payment and total interest paid. So if you’re concerned about keeping costs down, take a look at how different repayment plans can affect the average student loan payment.
The average student loan payment on different repayment plans
The first thing to understand in this discussion is one simple concept:
Lower monthly payments = longer repayment period =
higher total costs
Of course, no two student loan borrowers are the same. One may need a lower monthly payment while they work their way up the career ladder. Another may be graduating into a six-figure salary and immediately have the cash for a larger monthly payment.
This is why different repayment plans exist.
So while federal loans are assigned a 10-year term under the Standard Repayment Plan, borrowers can change plans at any time and at no cost. However, changing your repayment plan can affect your monthly payment and total loan cost.
To better explain how a repayment plan affects monthly payments and your total cost for a loan, let’s walk through some examples.
Ex. 1: $37,172 in Direct Loans @ 3.80%
The Department of Education (DOE) currently offers eight different repayment plans. For this example, we’re going to look at three of them using the DOE’s repayment estimator.
A couple of common denominators: For each loan type, we’re assuming the borrower earns an adjusted gross income of $56,937 (the average in Michigan, according to 2014 tax returns). The federal government assumes a 5 percent annual growth in that salary over the life of the loan.
You can also use our payment calculator to enter in personal characteristics and find your average student loan payment per month.
1. Standard Repayment Plan
The most basic of all plans, this one has you making fixed monthly payments for a decade. The 10-year repayment period is the one of the shortest of all the plans we’ll review.
Monthly payment: $378
Total interest owed: $7,677
Total payout: $45,389
2. Graduated Repayment Plan
Monthly payments under this plan progressively increase, ticking up every two years. They start lower and end higher, making this a good option for entry-level professionals expecting to earn more money over the life of their loans.
Monthly payment: $211 (first) and $634 (last)
Total interest owed: $9,568
Total payout: $47,280
The benefit of a lower monthly payment at the beginning ends up costing the borrower almost $2,000 more than the Standard Repayment Plan.
3. Extended Repayment Plan
Whereas the Standard and Graduated plans assume a 10-year term, the Extended Repayment Plan does just that — extends your loan term. You can spread your payments out for up to 25 years.
Monthly payments: $195
Total interest owed: $20,763
Total payout: $58,475
The monthly payment is nearly half the amount you would pay under the Standard Repayment Plan. This gives young professionals much more breathing room on a month-to-month basis. However, the borrower would have to decide if that’s worth paying about $13,000 more over the life of the loan.
Ex. 2: $37,172 in Direct PLUS loans @ 6.31%
The Direct PLUS Loan is common among graduate and professional students and parents.
For this example, we’re going to use the same average Michiganian salary, but we’re going to assume a 3.5 percent pay increase year over year. That’s closer to the historical average.
The amount a borrower earns can significantly affect which repayment plan is the most cost-effective choice. According to the Bureau of Labor Statistics, the median pay for high school teachers is $58,030. For dentists, the median pay is $159,770. With very different salaries, a teacher and dentist are liable to make different decisions when choosing a repayment plan.
Below we cover three repayment plans that offer loan forgiveness after 20 or 25 years. With low monthly payments, these plans could be good options for those seeking eventual Public Service Loan Forgiveness.
1. Revised Pay As You Earn (REPAYE)
Under REPAYE, your monthly payments would be 10 percent of your discretionary income, which is recalculated annually to reflect your salary and family size.
Monthly payment: $324 (first) to $498 (last)
Total interest owed: $15,970
Total payout: $53,142
Compared to the Standard Repayment Plan, your monthly payments will be around $80 to $90 lower. However, you will pay an additional $2,674 in interest over the life of your loan.
2. Income-Based Repayment (IBR)
On the Income-Based Repayment plan, your monthly student loan payments are capped at 10 or 15 percent of your discretionary income, depending on when the loans were disbursed. Your student loans will also have a 20- or 25-year repayment term.
Monthly payment: $324 (first) to $419 (last)
Total interest owed: $16,156
Total payout: $53,328
With this plan, your monthly payment would be smaller than on the Standard Repayment Plan. However, a longer repayment period means you’ll pay $2,860 more in interest.
3. Income-Contingent Repayment (ICR)
The payment for ICR would be either: a) 20 percent of your discretionary income or b) the payment on a fixed, 12-year payment term — whichever is most cost-effective. In this example, the borrower has a $369 monthly payment.
Monthly payment: $369
Total interest owed: $15,926
Total payout: $53,098
While the borrower’s total payout is about the same as it would be under the previous two income-driven repayment plans, the sub-$400 monthly payment may make it more attractive.
Additional savings with a higher salary
But what if the borrower instead entered the ICR plan with the national average salary of $65,685, as reported by USA Today? They would start with a $369 monthly payment and end with a $397 payment.
As a result, they would pay $52,577 total, saving $521 more than the total payout of the lower salary-earner above. This goes to show you how salary drives the cost (or savings) of these income-driven plans.
As you can see, there’s very little variation in the total payouts for each of these three income-driven repayment plans. What sticks out like a sore thumb? The monthly payment. What’s even more glaring is the final monthly payment, when the borrower ostensibly is at their peak earning potential.
- REPAYE: $498
- IBR: $419
- ICR: $369
As you’re considering income-driven plans, consider your earnings potential to make sure you can stomach the most expensive of these options.
Find the right repayment plan for you
Whether you have public or private loans, the same is true: What you owe after receiving your diploma is less than what you’ll actually pay by your 10-year reunion.
See how large of an average student loan payment you can make now and during the loan term. That, plus some toying with calculators, is the key to choosing the right student loan repayment plan.
Want to see how your specific loans could be affected by different repayment plans? Use our suite of calculators to find out.
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