What Is the Standard Repayment Plan for Student Loans?

The freedom of post-graduation life is satisfying. But every stage of life has its unique challenges, and post-graduation is no exception. After you leave school, one of the first things you’ll need to do is figure out how you’re going to repay your student loan debt. 

When it comes to repaying your federal student loans, you’re not limited to a single repayment option; in fact, there are several different repayment plans. Borrowers are automatically placed on the default 10-year repayment plan if they don't choose one of the alternatives available to them. 

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Federal Student Loan Repayment Plans

Based on your annual income, your loan type(s), financial goals, and various other factors, one repayment plan may suit your situation better than the others. Some of the options that may be available to you include:

• Standard Repayment Plan: This option involves standard/fixed monthly payments for a decade. The main advantage of this repayment option is the interest rate, which is generally lower than the rates attached to other options. If you can’t afford the standard repayment plan, you can explore some alternative approaches. 

• Income-Driven Repayment Plans (IDR): These repayment options have gained popularity in recent years. From 2010-2017, the percentage of borrowers enrolled in income-driven repayment plans increased significantly in the United States. There are four income-driven repayment plans, including Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Revised Pay As You Earn (REPAYE). These options allow you to adjust your monthly payment based on your family size and annual income. 

• Graduated and Extended Plans: A graduated repayment plan involves making small monthly payments that gradually increase over time, with payments ending after ten years. Per the extended option, you can pay off your federal student loan debt over a repayment period of 20-25 years. At the end of the term, the remaining loan balance will receive forgiveness. You may have to pay taxes on the remaining balance.   

Federal vs. Private Student Loan Repayment Plans

The options noted above are generally only available for federal student loans. If you have private student debt, it is possible to find a suitable repayment plan offered by a private financial institution that features lower monthly payment amounts than the lender’s standard repayment expectations. The terms of your private loan repayment are detailed in your lending agreement. You should contact your private lending institution to learn about your options, if you can’t afford the standard repayment terms you agreed to when you took out your private loan(s). 

You can also refinance your existing private student loan if you meet specific lender requirements. By changing your payment plans, you may be able to save money and pay off your student loan debt at lower interest rates than those offered by your original lender.

Contact your loan servicer to discuss options if you are having trouble making your monthly payments. Keep in mind that not all loans are eligible for every repayment plan but push them to make sure they tell you about all repayment plans for which your loans are eligible.

The Standard Repayment Plan: All You Need to Know

The standard repayment option requires borrowers to make 120 equal monthly payments over ten years. The monthly payments are set in advance and don’t change over a loan’s lifetime.

Within 45 days of being notified by the lender, this plan will be assigned to a post-grad student loan borrower by default unless they choose a different option. Meaning, that after the six-month grace period has expired post-graduation, if you don’t choose an alternative to the standard repayment plan, you’ll be entered into the standard plan automatically. 

Major Federal Student Loans

There are three types of major federal student loans:

• Direct Unsubsidized Loans (Federal Stafford Loans): Regardless of financial need, Direct Unsubsidized Loans are available to all borrowers, including undergraduate, graduate, and professional students. Even if you’re still in school, you may still be responsible for paying interest on your unsubsidized loans.

• Direct Subsidized Loans (Federal Stafford Loans): Only students with financial need are considered eligible borrowers for this type of loan. The Department of Education will pay the interest on subsidized loans while you’re in school, during grace periods, deferment, or forbearance of the loan. Financial need is the gap between the total amount you can reasonably expect to receive from your family and the estimated expenses for attending school.

• Direct PLUS Loans: Parents, graduates, and professional students qualify for Direct PLUS Loans. These types of federal student aid have higher interest rates than many other kinds of federal student loans. These loan programs are also called Parent PLUS Loans when a student’s parents are the borrowers.

Figure 1. 2020-2021 interest rates for Direct Subsidized & Unsubsidized loans (studentaid.gov)

Eligibility of Borrowers

As a borrower, you will need to meet specific criteria to be recognized as eligible to receive federal student loans. Criteria may include:

U.S. Citizenship: All federal student loan borrowers must be U.S. citizens or permanent residents. You’ll need a valid Social Security number, except for residents of some U.S. territories.

Qualifications: A high school diploma or its equivalent - such as a homeschool program or GED - is required. You must also attend an accredited collegiate or graduate program and make satisfactory academic progress to remain eligible for federal student loan assistance.

Standard Repayment Plan - Monthly Payments

If you remain enrolled in the standard repayment plan, your debt will be divided into 120 fixed monthly payments; you will pay the same amount throughout the loan's duration. Installments will likely be more than $50. The Department of Education offers aLoan Simulator that calculates your final student loan debt amount, factoring in interest that will accrue over the life of your repayment plan. 

Let's say that you have a $40K federal student loan with an interest rate of 4.3 percent. In this case, under the standard repayment plan, you would pay $410.7 per month and $49.3K total.

Figure 2. Aggregate loan limits for Direct Subsidized & Unsubsidized Stafford Loans (studentaid.gov)

When You Can't Afford Your Monthly Payment

Unexpected medical expenses, sudden unemployment, and similar unplanned scenarios can become significant hurdles to repaying your student loan debt. If you miss a payment date because of financial hardship, your loan account will be considered delinquent.

Delinquent accounts are reported to credit bureaus after 90 days or more. After 270 days of non-payment, the borrower will go into loan default. Defaulting on federal student loans is a serious matter; your credit score will be severely affected and lenders could send your loans to collection or take legal action.

If you’re experiencing financial hardship, contact your loan servicer. Your lender can make your student loan payments more manageable by placing your account in one of the income driven repayment plans.  Be careful about extending your loan term, though, as you'll likely end up paying more in the long run due to accrued interest. If you extend the term of the loan, you’ll encounter a higher interest rate and more interest will accrue generally over the life of the loan.

Consolidation of Federal Student Loans

Consolidating your federal student loans involves combining your student loans into a new, single loan account. Since this Direct Consolidation Loan is a new line of credit, it will feature a different interest rate and repayment period than those attached to your existing loans. Consolidating your loans can help to make repayment of your student debt more manageable. However, as consolidating your loans is a big step to take, you’ll want to carefully consider the potential benefits and adverse impact it may have on your financial transactions before moving forward.

It's not advisable to consolidate federal loans with a private loan because introducing a private loan into your process will mean that you can’t take advantage of federal consolidation options. Instead, you’ll have to consolidate all of these loans with a private lender, which will mean losing access to federal repayment options, the ability to receive public service loan forgiveness, and will probably mean that you’ll be saddled with a higher interest rate than you’d be given if you consolidated your federal loans together and left your private loans out of this equation. Advantages of Student Loan Consolidation

Things to consider when thinking about consolidating your federal student loans:

• Simplicity: A consolidated loan is much easier to manage. You’ll only have one monthly payment to make.

• Default Avoidance: By consolidating, you can modify the loan and its terms. This can help you save money and avoid defaulting on your monthly payments.

• Fixed Interest Rate: Each loan has its specific interest rate. Based on the loan’s average rate, you will receive a new fixed interest for its duration.

• Loss of Grace Period: You’ll lose the six-month grace period if you decide to consolidate your federal student loans right away, so you’ll need to time the consolidation of your loans with care. 

Let's Summarize...

All federal student loan borrowers are automatically assigned to the standard repayment plan unless they choose to be entered into alternative repayment plans. Per the standard repayment option, you will pay off your debt over a ten-year repayment period via 120 equal installments. 

Paying off student loans can become a headache for many borrowers. The good news is that multiple repayment plans are available for federal student loans. These options are sufficiently flexible and based on your income and ability to pay. Borrowers can choose to extend the term of their loan and lower monthly payments, even down to $0. Exploring your options is a good idea before committing to a plan of action, as the standard repayment plan isn’t the best option for everyone.