Many student debt borrowers have a variety of repayment plans they can choose from when repaying their student debt. Indeed, most student loan borrowers are put on a default repayment plan that usually requires them to pay off their student loans on a ten-year schedule. However, borrowers can sometimes choose to repay their student loans over twenty or even twenty-five years in certain situations. In addition, some repayment plans alter the amount of money owed each month based on the income of a borrower. As a result, picking a repayment plan requires borrowers to evaluate several different considerations.
This website has previously advised that borrowers stick with the standard, ten-year repayment plan when picking a repayment plan. Repaying student loans over a short horizon will ensure that student loans occupy the least amount of time possible in your life. Moreover, selecting a shorter repayment plan will challenge you and force you to spend less frivolously, since shorter repayment plans often have higher monthly payments. For this reason, I chose the standard ten-year repayment plan when paying off my student loans, and I feel that this decision helped me stay on track towards student loan repayment.
However, some student debt borrowers do not have the resources to feasibly pay off their student loans with a short repayment plan. When picking a repayment plan, some individuals simply cannot pay for housing costs, food expenses, and other costs while shelling out money for higher monthly student loan payments. Many student debt borrowers must decide what time horizon for repayment is acceptable and unacceptable for them to pay off their student loans.
I think most people can agree that a thirty-year repayment plan is too long, since this is the time it typically takes to pay off a mortgage (although student loan debt is often as massive as a mortgage!). Twenty years also seems like a long time to be paying off student loans. In my opinion, student debt borrowers should strive to pay off their loans over a fifteen year time period or less if they are capable of doing so.
There are a few reasons why picking a repayment plan with this consideration in mind is useful. For one, if you begin paying off your student loans after graduating from college or graduate school in your early 20s, you will still be in your 30s when you pay off student loans if you pay off your debt no later than fifteen years after you started. In addition, paying off student loans over this period will still enable you to prioritize retirement savings and buying a home during the time in your life when this should be your priority (assuming again you start paying off your debt in your early twenties). Moreover, fifteen years is a short enough time horizon so that people can see their progress and know that they will be debt free while they are still relatively young and are able to pivot to other financial goals.
If there is no way that you can reasonably pay off your student loans on a fifteen-year repayment plan, picking a repayment plan is a little more complicated. As discussed on this website in several prior articles, income-driven repayment plans allow borrowers to pay off their student loans according to how much they earn rather than a predetermined amount of money. With income-driven repayment plans, borrowers typically need to devote ten to fifteen percent of their discretionary income to their debt for around twenty to twenty-five years (unless they work in a public-interest field, then the time that payments need to be made is shorter).
Most people have a difficult time stomaching the reality that they may be paying off their student loans for multiple decades, and indeed, the thought that I might be saddled with student loans for one decade was unpleasant. The good news for borrowers on income-driven repayment plans is that if borrowers make appropriate payments for the set time period, the amount left over at the end of the repayment period will be forgiven. As already discussed, public servants are entitled to debt forgiveness on a shortened time frame, normally ten years, so if you are in a public interest field it definitely makes sense to pick an income-driven repayment plan.
The main consideration with income-driven repayment plans is that they should ideally be chosen early in one’s career. This is because it takes a while for debt forgiveness to occur, and if you repay student loans on another repayment plan for a time, you may “waste” time that could be counted toward income-driven repayment. As a result, all graduating students should carefully evaluate picking a repayment plan, and consider whether an income-driven repayment plan makes sense for them. If income-driven repayment is the right way to go, borrowers need to ensure that they do not miss payments so that they are on track to obtain debt forgiveness once the time period involved in the income-driven repayment plan has been fulfilled.
In the end, picking a repayment plan can be an easy decision if borrowers keep a few things in mind. Most people should try to stick to a shorter repayment plan to challenge themselves, especially if they can reasonably repay their debt in under fifteen years. If not, income-driven repayment plans may be a better option.