The average starting salary for a college graduate is $52,569, according to the National Association of Colleges and Employers. Although that might sound like a lot of money when you’re fresh out of school and get your first job offer, that income can be stretched thin by taxes, the high cost of rent, and student loan payments.
When your grace period is over and your loan payments are due, you might find yourself struggling to pay your bills and keep your refrigerator stocked. If that’s the case, one way to reduce the burden and avoid student loan default is to switch your repayment plan.
If you have federal loans, signing up for a different repayment plan can reduce your monthly payment. You’ll likely pay more in interest over time, but you’ll have more wiggle room in your budget.
However, there are several different plans to choose from, and deciding between them can be confusing. Here’s an overview of your repayment plan options and how much you’ll pay back with each one.
Available repayment plans
When you graduate, you’re automatically placed on the Standard Repayment Plan, where you have a fixed payment and will pay off your loan within 10 years. If you’re struggling with your payments, you can change your loan repayment plan anytime, for free, to one of the following:
- Graduated Repayment Plan: Payments start low and increase over time. You’ll still pay off the loan within 10 years, but you’ll pay more in interest.
- Extended Repayment Plan: Changes your payment period from 10 to 25 years. You’ll have much lower monthly payments, but you’ll pay back more over the length of your repayment.
- Income-Driven Repayment Plan (IDR): The government extends your repayment term to 20 or 25 years and caps your payments at a percentage of your income. If your income increases, so do your monthly payments. There are four IDR plans: Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Contingent Repayment (ICR), and Income-Based Repayment (IBR).
How switching repayment plans affects the cost of your loans
Although reducing your monthly payment sounds attractive, alternative repayment plans can cost you thousands in the long run. Extending your repayment period will cause more interest to accrue, adding to your loan balance.
Even though switching payment plans can help you stay on top of your bills, it’s important to understand just how much more you’ll pay back.
For example, let’s say you’re single, live in Texas, and your discretionary income is $40,000 a year. You have the average student loan balance of $37,172 at 4.5% interest.
Under the Standard Repayment Plan, your payment would be $418 a month and you would pay back $45,144 in total.
By comparison, if you signed up for the Extended Repayment Plan, your monthly payment would be just $205 for 300 months. However, by the time you finished repaying your loan, you will have paid $61,353 — that’s an additional $16,000 in interest compared to a Standard Repayment Plan.
Here’s what you would pay back in total under the other repayment plans:
In the end, the amount you pay back can vary widely, depending on the type of repayment plan you choose. While opting for the lowest monthly payment can help you right now, it can add significantly to your total cost.
|Repayment Plan||Total Cost of Loan||Monthly Payment|
|Graduated||$48,243||$216 (first), $646 (last)|
|IBR||$47,941||$274 (first), $383 (last)|
|ICR||$49,989||$281 (first), $331 (last)|
|PAYE||$53,441||$183 (first), $383 (last)|
|REPAYE||$53,369||$183 (first), $450 (last)|
You can also see how your repayment plan affects your monthly payments. Though some plans offer fixed monthly payments, your bill on income-driven plans can change based on your income. In our example, we assumed a 5 percent annual increase in your discretionary income, making your last payment much larger than your first.
How to switch plans
Before switching your plan, use the Federal Student Aid Repayment Estimator tool to calculate your payments under each option. Once you’ve found one that works for your budget, contact your loan servicer by phone or email to see if you’re eligible. Depending on your income, you might only qualify for select plans.
Some plans require you to complete paperwork before they go into effect. Your loan servicer will tell you what forms you need to complete.
If you qualify for an income-driven repayment plan, you’ll have to submit an application each year re-certifying your income and family size.
Stay on track
Changing your repayment plan is not ideal since it can cost you thousands more over the length of your repayment. But sometimes, an alternative repayment plan is the difference between defaulting on your loans and staying current. If that’s the case, changing your student loan repayment plan can be a wise decision.
Before applying for a plan, do your homework to choose a plan that meets your needs. Doing so can help you protect your credit and stay on track with your loans.
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