It is easy to get lost when it comes to choosing a repayment plan for your student loans. New graduates may not even know where their loans are held. If you are one of these, feel free to check out this guide.
Otherwise, let’s move on to determining the best plan to pay off your student loans in your given situation.
Common Repayment Plan Options:
- Standard Repayment Plan
- Income Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Visit here for details of each plan and more
Which Plan Is Best For You?
I have had the opportunity to help a few new graduates navigate their student loan repayment options and have found the process much easier once I found mindebt.com
They offer a comparison cost of each plan based on your salary, anticipated annual pay raise, family size, tax filing status, and monthly budget.
Prior to this, I found myself having to use multiple calculators to compare each type of repayment plan but this calculator simplifies the process greatly.
Step 1: Sign up
To get started, I recommend signing up for a FREE account so you can revisit this site without needing to re-enter your data. You also get access to additional features as described in the image below.
Step 2: Import your loan details
Signing into your federal student aid account through the secured platform. Alternatively, you can manually input your Student Loan Data.
Congrats! Your student loan data is now imported! No need to type each loan balance and interest rate individually.
We can see the total amount this individual owes is $73,023 at a weighted average interest rate of 5.53%. We will be using this individual’s loan data to work through examples in step 4.
Step 3: Input Data
Go through each screen with special attention to the amount you input for your budget. This is the amount you can consistently and realistically contribute to your student loans. This information will be key in helping the calculator determine your best plan.
When you get here, the calculator automatically selects common refinancing rates and terms. As of now, there is no way to skip this option. However, it is helpful to see, especially if you are considering to refinance.
On the final screen below, you will see a summary for each plan. This calculator highlights the most affordable plans based on the estimated total paid during the repayment period.
You are able to scroll up to the inputs section to change factors such as budget, family size, and income to determine how it may change your results.
Step 4: Analysis of True Costs and considerations
Let’s take a look at the Pay As You Earn (PAYE) & Income Based Repayment (IBR) as they are highlighted in green in the above example.
For each of these plans, the borrower pays $223 – $259 per month which does not sound bad. This person needs to make these payments for 20 years, which totals to be $58,005.
The most important thing to consider here is that the forgiven balance of $95,778 is taxable. Meaning this option is much more costly than initially anticipated.
To dig deeper, let’s say the individual in the above example earns $60,000 per year from their employer in the same year that their loans are forgiven.
The individual will be taxed on their income ($60,000) + their forgiven balance ($95,778) = $155,778.
How much this individual will pay in taxes will depend on their tax filing status. As there is no way of predicting how the marginalized tax bracket system will change in 20 years, I will use the 2018 tax bracket as a common reference point for each filing status.
|Income through employment||Forgiven balance||Total Taxable Income||Approximate income tax with the Standard Deduction *||20 years of payments from example above ($58,005) in addition to tax on forgiven balance.|
|Married filing separately||$60,000||$95,778||$155,778||$29,073 (not including what your spouse would have to pay)||$87,078|
|Married filing Jointly (Assuming spouse earns the same amount through employment)||$120,000||$95,778||$210,778||$33,406||$91,411|
*Calculated by marginal tax rate calculator
The PAYE or IBR option would be the best plans for this person based on their individual’s monthly budget of $425, current household size of 1, and income.
However, the PAYE/IBR options may become less affordable as factors change such as:
- Increased income, which would increase monthly payments
- Increased household members, which would decrease monthly payments
- Married filing jointly, which would increase monthly payments if your spouse also earns an income
- Tax filing status when loans are forgiven
If the individual decided to adjust their budget to increase the amount they are able to contribute to their student loans from $425/month to $1300/month, they would finish paying their loans in 5 years and pay an estimated $77,758 refinanced at 2.5% for 5 years
Income driven repayment plans are more common as more students are graduating with debt the size of a mortgage. If you do not want to be burdened with student loans for 20 years only to pay a large tax at the end, see if you are eligible for the Public Service Loan Forgiveness (PSLF) program where your loans are forgiven tax free after 120 qualified payments. If you are considering PSLF, please refer to my article where I discuss the PSLF and why I decided against it.
The student loan data imported into mindebt.com’s repayment calculator was a real life consultation with my younger sister. After discussing her career goals, financial goals and concerns, we decided the best plan for her was to aggressively pay off her loans. That night, we developed a plan for her to pay off her original principal $73,023 and the $4,500 of accrued interest (Repayment calculator does not import the accrued interest). She is now on track to pay off her entire student loan balance within 2.5 years! If you are planning to get rid of your student loans or any debt ASAP, view my tips to pay them off as quickly as possible.