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As debt on student loans continues to climb, it’s more important than ever that you choose an efficient repayment plan for your situation.
The right student loan repayment plan for one person could be the wrong plan for you. That’s because income, family size, employment, and credit all need to be considered.
Introduction To Student Loans and Student Loan Calculators
But picking the right repayment strategies could literally save you hundreds of thousands of dollars. At Student Loan Planner, we’ve created a student loan calculator that makes it easy to compare repayment plans to find the best fit.
In this article, we’ll look at the repayment options for a female lawyer who’s a single parent, makes $100,000 a year and owes $150,000 worth of federal student loans at 7%.
We’ll use the calculator to find the pros and cons of each choice.
Option #1: Follow the 10-Year Standard Repayment Plan
The most straightforward student loan repayment strategy and the one that requires the least amount of work is to simply follow the 10-Year Standard Repayment Plan.
Although this may be the most convenient choice, it may not always be the best for your pocketbook. And even when it is the most affordable choice, the high monthly payments may limit cash flow.
Let’s take at how much the Standard Repayment Plan would cost our lawyer according to the full version of the student loan calculator.
As you can see, our lawyer’s monthly payments would be $1,742 and the total overall cost would be $208.995.
As a single parent, that $1,742 payment could really make it difficult to keep up with the bills. If a lower monthly payment is the top priority than our lawyer should consider applying for an income-driven repayment plan.
Option #2: Use an Income-Driven Repayment Plan
Currently, there are four main income-driven repayment (IDR) plans:
- REPAYE (Revised Pay As You Earn) Plan
- PAYE (Pay As You Earn) Plan
- IBR (Income-Based Repayment) Plan
- ICR (Income-Contingent) Plan
With these plans, your payment will generally be 10% to 20% of your discretionary income. But every income-driven repayment (IDR) plan has its own share of pros and cons.
Depending on your situation, one plan could cost you significantly more than another. In fact, that’s exactly what we see with our lawyer’s case.
For our lawyer’s situation, PAYE would by far be her most affordable choice. In fact, the cost difference between the IBR and PAYE plans is nearly $111,000!
The difference between PAYE and REPAYE isn’t as wide of a gap, but it’s still significant — over $70,000. That’s a huge amount of money that could be spent or saved just based on which IDR plan you choose.
Option #3: Refinance into a 10-year private loan
For some borrowers, freeing up cash flow may be the main goal when it comes to picking their student loan repayment strategy. But for others, cash flow may not be as big of a worry. Instead, their primary concern may be the total cost.
In that case, you should also take a look at the student loan refinance offers that are available to you. If you have a high income and good credit, you may be able to qualify for a great rate.
For example, let’s imagine that our lawyer can qualify for a 10-year student loan refinance at 4.5%. Let’s see how that would compare to the Standard Repayment Plan as well as all three IDR plans.
First, let’s compare private refinancing to the Standard 10-Year Repayment Plan. Taking a look at the student loan calculator results, we can see that refinancing would decrease our lawyer’s monthly payment by $187 and her overall cost by about $22,000.
At first glance, that’s a great deal. But when we compare the private refinancing to the PAYE income-driven repayment plan, things get a bit murky.
Yes, you’d save $2,606 over the life of the loan. But take a look at the monthly payments. With private refinancing your monthly payment would be more than double what you’d pay on the PAYE plan!
And keep in mind that when you refinance into a private loan, you can’t ever go back to an IDR plan. Plus you’ll lose out on other federal benefits like federal student loan deferment and forbearance and eligibility for Public Service Loan Forgiveness (PSLF).
In my opinion, a $2,600 difference is nearly enough to make refinancing into a 10-year loan the right choice in this situation.
Option #4: Refinance into a 5-year private loan
But let’s change the situation again. This time let’s imagine that our lawyer is highly motivated to pay her student loan off as soon as possible.
In fact, she plans to pay extra each month on the Standard Repayment Plan so that she can have all her student loans paid off in five years. As you can see below, to make that happen, our lawyer would need to pay an extra $1,228 per month, for a total monthly payment of $2,970.
In this situation, a student loan refinance may be a better option. Private lenders can offer more competitive rates on loans with smaller repayment periods. So, for sake of example, let’s say that our lawyer could get her student loans refinanced into a private 5-year loan at 3%.
Let’s take a look at what our lawyer’s monthly payment and total cost would be on that repayment plan.
So we see that her monthly payment with a private loan would be $275 cheaper than she would need to pay in order to pay her federal loans off in 5 years. And her overall cost would be over $20,000 cheaper than the PAYE income-driven repayment plan.
So we see a general rule here. If cash flow is your primary objective, federal income-driven repayment plans are often going to be your best bet. However, if you want to pay your loans down fast, refinancing your student loans could help you save a lot of money.
Option #5: Apply for Public Service Loan Forgiveness (PSLF)
We still have one more scenario to consider with our lawyer. If she worked for an employer that qualified for Public Service Loan Forgiveness, that could change the game completely.
While it may not be as easy to find public service jobs as a lawyer as it would be for a doctor, several jobs qualify — including legal aid attorney, public defender, and prosecutor.
PSLF is an amazing program in two regards. First, you can qualify for forgiveness after 120 qualifying payments. Second, you do not have to pay income tax on the forgiven amount (unlike income-driven repayment forgiveness).
Let’s take a look at how much our lawyer if she applied for and received PSLF. And let’s compare PSLF to all the other repayment options that we’ve discussed.
Incredibly, our lawyer’s total cost on PSLF would be $76,000! When compared with every other option, there’s simply no contest here.
If you work in a public service profession and have student loans, you need to look into PSLF. It could literally save you hundreds of thousands of dollars.
The bottom line on Student Loans
Take a closer look at the screenshot above and you’ll notice that there’s over a $223,000 difference between the least expensive (PSLF) and most expensive (IBR) student loan repayment options for our sample lawyer.
This example illustrates perfectly why you need to think carefully about your student loan repayment strategy and why a student loan calculator could be the key to your student loan woes.
About the author
Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $650 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He’s helped over 2,500 clients save over $120 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.