If you have federal student loans, there are several options to choose from when considering repayment. The option you choose will depend on your own financial situation and what will personally work best for you.
For me, it was a no-brainer that I would pick the traditional level repayment plan. I will also apply every extra cent I have monthly as extra payments in order to pay off my loans as quickly as possible. This post will break down why I’ve chosen to pay my student loans off in this way. I’ve included screen shots from my actual student loan account as demonstrations.
As you can see below, there are four options for student loans with large balances: Level, Graduated, Extended Level, and Extended Graduated. The loan I’m using to demonstrate currently has a balance of $72,125. I also have a smaller loan with a balance of $4,762, which only has Level and Graduated plan options; I am enrolled in the level plan for that loan as well.
The above chart provided by my student loan servicer, Great Lakes, demonstrates monthly payment costs for each option, as well as the estimated total amount that will be paid (based on principal + interest that will be paid on each plan). While the level plan has the highest monthly cost, the overall savings on interest are worth it by a landslide to me. All of the other payment options allow for more interest to accrue.
Let’s take a closer look at each payment plan.
LEVEL AND GRADUATED PLANS
The level plan consists of 120 equal payments (10 years) of $778 per month. If I followed this plan exactly, paying only $778 per month for 120 months, I would end up paying $21,235 in interest, and $93,200 total, on my loan that has a balance of $72,125 today.
The graduated plan also consists of 120 monthly payments (10 years), but the monthly payment amount increases every two years. This plan is marketed toward people who cannot afford a higher payment right now, but will be able to in the future. For the reduced monthly cost during the first four years, you also have an increased cost the last four years, compared with the level plan. If I followed this plan exactly, I would end up making increasingly larger monthly payments every two years for ten years. I would pay $25,140 in interest, and $97,264 total on my loan that has a balance of $72,125 today. This cost is $4,064 more in total than the level plan.
EXTENDED LEVEL AND EXTENDED GRADUATED PLANS
The extended level plan consists of 300 equal monthly payments (25 years) of $436. If I followed this plan exactly, I would pay $436 per month for 25 years and end up paying $58,587 in interest and $130,711 total on my loan that has a balance of $72,125 today. That means that for a monthly payment that is $342 lower than the level plan, I have to pay for 15 years longer, and will end up paying $37,511 more than I would on the level plan. I could get another graduate or undergraduate degree for that price, and do it in much fewer than 25 years.
The extended graduated plan also consists of 300 monthly payments (25 years), and the monthly payment amount increases every two years. If I followed this plan exactly, I would end up making increasingly larger monthly payments every two years for 25 years. I would pay $70,498 in interest and pay $142,622 in total on my loan that has a balance of $72,125 today. Essentially, I would double the amount of my loan. I would end up paying $49,422 more than I would pay on the level repayment plan, and I would be paying off my loan for an additional 15 years.
According to Student Loan Hero (an awesome resource for all things student-loan related), currently in 2017, the level plan is the most popular by far (11.26 million borrowers use this plan), followed by income based repayment (3.10 million borrowers). Where I have seen income-based plans be beneficial are cases in which you plan on using student loan forgiveness after a certain period of time (most programs I’ve seen you must typically work in your industry/workplace/etc. full time for 5-10 years) and will have the remainder of your loans forgiven after the allotted time. I could have done this in theory, through the public service loan forgiveness program as a therapist working full time for a non-profit, but I wanted the freedom to be able to NOT work full time if I chose, and to be able to work somewhere other than a non-profit for ten years of my life.
There is no way to avoid the fact that no matter how I do it, I will be paying interest on my loan. My goal is to minimize the amount of interest I pay by paying off my loan much sooner than 10 years from now, which I am doing by paying substantially more than the minimum payment. Right now, I am paying more than double the minimum payment of the level repayment plan every month. Fortunately, I have the finances to be able to do this. If I did not, I could always choose another plan, or even go with an income-based repayment plan, until I could afford to get back on track with a level payment option and pay off my loan aggressively.
I understand that not everyone is able to afford a level plan and not everyone can afford to pay extra; no judgement here! This is just how I am doing things right now in order to save as much money as possible in the long run and become financially free as soon as possible.