Choosing to pay less now will cost you more in the long run.
Just graduated? Done with the partying and ready to enter the workforce? Based on a recent study from the Institute for College Access and Success, graduates that have student debt owe about $30,000 on average.
But as a direct result of interest, they are likely to end up paying thousands more over the course of the loan. It all comes down to limiting the amount you pay in interest by choosing the right repayment plan for yourself.
With helpful tools like the Department of Education’s Repayment Estimator, recent graduates can better understand the potential costs of holding on to that student debt for longer than they have to.
For example, if you have $30,000 in unsubsidized federal student loans, at the current 2019-2020 average undergraduate interest rate of 4.53% this is how much you will end up owing.
Standard Repayment Plan
- Monthly Payment: $311
- Repayment Term: 120 months
- Total Amount Repaid: $37,311
The Standard Plan splits the loans into 120 equal payments over 10 years. Federal borrowers automatically start repayment upon graduation unless they choose a different option. This adds roughly more than $7,000 to the loans’s balance, but that’s still less than what they would accumulate under other plans.
The general rule is that borrowers should stick with the standard repayment plan if payments are not more than 10% to 15% of their monthly income. Sure, the monthly payment is higher than other plans, but you save more in interest charges.
Graduated Repayment Plan
- Monthly Payment: $175 to $525
- Repayment Term: 120 months
- Total Amount Repaid: $39,161
The Graduated Plan starts with low payments that increase every 2 years to complete repayment in 10 years. Despite the similar repayment term as the standard plan, graduated repayment costs $1,850 more as a result of accrued interest.
This might be more manageable for borrowers who expect their earnings to increase in the future, but those that start off well in their career should try to work with the standard plan because of the lower interest cost.
Extended Repayment Plan
- Monthly Payment: $167
- Repayment Term: 300 months
- Total Amount Repaid: $50,027
The Extended Plan is not going to be the best option for a lot of people, but it is available. Stretching the repayment period to 25 years, the payments can be adjusted to be either fixed or graduated. Fixed payments would add more than $20,000 to an initial balance of $30,000. Graduated payments will definitely inflate your balance even more.
Income-Driven Repayment Plan
- Monthly Payment: $261 to $454
- Repayment Term: 110 months
- Total Amount Repaid: $37,356
There are four income-driven repayment plans made available by the federal government. These are based on your income level and family size. The example above uses the Revised Pay As You Earn plan, taking into account a family size of zero and an income of $50,000.
IDRs usually cost about the same as standard repayments plans, but they are usually a safety net for borrowers who cannot afford their loans and are afraid of defaulting. Sometimes payments can be as small as $0 and any remaining balances are forgiven after 20 to 25 years of payments.
A lot of things can happen over the course of repayment, and IDRs are always available should you choose to switch plans when you hit the tough times. But keep in mind that while an IDR can reduce monthly payments, you may pay more overall because the repayment period is longer than the standard plan.
Looking to Save More?
The cheapest repayment plan still adds roughly $7,000 to your total loan amount. If you would like to save even more there are a couple of options available to you.
For one, you can start making payments during the six month grace period after graduating. You can also pay off interest before it’s included to your balance, or allow your loan servicer to set up automatic payments from your bank account which also lowers interest rates.
Another method would be to set up bi-monthly payments, or you can prepay your student loans without incurring any penalties.
If you’re looking for any financial advice on student loans or any other topic, feel free to reach out to the Financial Helpers. We are always ready to help.
