When the time comes to repay your federal student loans, the standard repayment plan might be the most economical choice. It is also the default repayment method for most loans. This program is available for several types of Direct and Federal Family Education Loan (FFEL) program loans, including:
- Subsidized and Unsubsidized Direct Loans
- Direct PLUS Loans
- Direct Consolidation Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
Your monthly payments are fixed, meaning that they will remain the same throughout the repayment period, which can last as long as ten years. Monthly payments are a minimum of $50 each month, but your payments could be higher depending on how much money you borrowed. Although your monthly payments will be higher, you will pay off your loan faster and, consequently, owe far less interest than you would with most other repayment plans.
Because there is no penalty for prepayment on federal loans, this is an excellent way to lower the overall cost of the standard repayment method. Even making just one extra payment each year can dramatically reduce the total amount of interest you pay. If you make a prepayment that is equal to or more than the amount of your monthly payments, include a note explaining that you want the amount applied to your principal. Make sure you’re clear about your intentions regarding prepayment; otherwise, your lender might consider the amount as an early regular payment. You can look up your lender(s) and other information regarding federal student loans using the National Student Loan Data System.
To illustrate these points, let’s assume you took out a loan for $32,000 with an interest rate of 5.0%. Using the standard repayment plan, with 120 payments, your monthly payments would be $339.41 – $206.08 being principle (the money you borrowed) and $133.33 being interest. Over the lifetime of the loan, you would pay $8,729.16 in interest alone, meaning that you would ultimately pay $40,729.16.
Assuming the same loan information, here’s what you would pay if you chose a different repayment plan:
- An extended repayment plan with 300 fixed payments would give you monthly payments of $187.07, for a total cost of $56,120.64, with $24,120.64 being interest.
- An extended repayment plan with 300 graduated payments would start you off with monthly payments of $169.70, eventually using to $218.51 per month. The total cost of this program is $57,645.54, with $25,645.54 being interest.
- A graduated repayment plan with 120 payments would initially result in monthly payments of $225.95, which would grow to $509.11. The total cost for this plan is $42,398.70, with $10,398.70 being interest.
Clearly, the standard repayment plan is one of the quickest and most cost-effective programs for federal student loan repayment if you can afford the monthly payments. The above examples also show how helpful prepayments can be in eliminating your debt. These loan calculators might help you decide if the standard repayment plan is right for you:
- Federal Student Aid Loan Calculator – lets you compare repayment methods
- Adventures in Education Loan Calculator – has an amortization table, which shows you how each loan payment reduces your debt
- USA Funds Student Loan Calculator – lets you enter multiple loans with different interest rates
Remember that you can change repayment plans once per year, and if you experience financial problems, talk to your lender. Not making payments can cause your loan to default, which will negatively affect your credit score for years to come.