By Ryan Lane / NerdWallet
Those who graduate college with student loans owe close to $30,000 on average, according to the most recent data from the Institute for College Access & Success.
But they’ll likely repay thousands more than that because of interest. One key to limiting interest cost is choosing the right repayment plan. The bottom line? Opting for lower payments will cost you more overall.
Using a tool like the Education Department’s Repayment Estimator can help you better understand potential costs. Here’s how much $30,000 in unsubsidized federal student loans would cost under different plans at the 2019-2020 undergraduate rate of 4.53%.
Standard repayment
Total repaid: $37,311
Monthly payment: $311
Repayment term: 120 months
The standard plan splits loans into 120 equal payments over 10 years. Federal borrowers automatically start repayment under this plan, unless they choose a different option.
Standard repayment adds more than $7,000 to the loan’s balance in this example, but that’s less than most other options.
Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling, says to stick with the standard plan if payments aren’t more than 10% to 15% of your monthly income.
“The monthly payment would be higher, but in the long run (you) would save more in interest charges,” Coleman says.
Graduated repayment
Total repaid: $39,161
Monthly payment: $175 to $525
Repayment term: 120 months
Graduated plans start with low payments that increase every two years to complete repayment in 10 years. Despite having the same repayment term as the standard plan, graduated repayment costs $1,850 more overall due to additional interest costs.
Cathy Mueller, executive director of Mapping Your Future , a nonprofit located in Sugar Land, Texas, that helps college students manage debt, says graduated repayment may be a good option for those who expect their earnings to increase in the future.
However, those doing well careerwise should try to make the standard plan work because of its lower interest costs.
“It’s not going to be a huge difference, but every penny counts,” she says.
Extended repayment
Total repaid: $50,027
Monthly payment: $167
Repayment term: 300 months
The extended plan stretches repayment to 25 years, with payments either fixed or graduated. Fixed payments add more than $20,000 to the example $30,000 balance; graduated payments would inflate your balance even more.
“(Extended repayment) is not going to be best for a lot of people,” Mueller says. “But it is an option.”
You must owe more than $30,000 in federal student loans to use extended repayment.
Income-driven repayment
Total repaid: $37,356
Monthly payment: $261 to $454
Repayment term: 110 months
The government offers four income-driven repayment plans that base payments on your income and family size.
This example uses the Revised Pay As You Earn plan, a family size of zero and an income of $50,004, based on starting salary estimates from the National Association of Colleges and Employers. It also assumes annual income growth of 5%.
Income-driven repayment costs about the same as standard repayment under these circumstances. But these plans are typically a safeguard for borrowers who can’t afford their loans, as payments can be as small as $0 and balances are forgiven after 20 or 25 years of payments.
Lindsay Ahlman, senior policy analyst for the Institute of College Access & Success, says to think long-term before choosing an income-driven plan.
“A lot of things are going to happen over the course of repayment — your earnings trajectory, your life decisions like marriage and children — that affect” your income-driven payment, Ahlman says. You may pay more overall under these plans as a result, she says.
Ways to save
Even the least expensive repayment plan could add $7,000 to your loans. If you just graduated and want to shave down that amount, you have options.
Coleman suggests making payments during the six-month grace period and paying off interest before it’s added to your balance when loans enter repayment, if possible.
Other ways to cut costs include letting your servicer automatically deduct payments from your bank account, which can reduce your interest rate, and paying loans twice a month instead of once. You can always prepay student loans without penalty.
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