Navigating Your Federal Student Loan Repayment Plans
Graduating from college is an accomplishment that comes with a mix of emotions—pride, excitement, and often, the anxiety of facing student loan debt. Understanding how to manage and repay your federal student loans can alleviate some of that financial stress and empower you to make informed decisions about your future. In this guide, we’ll explore the standard repayment plan and the SAVE plan (an income driven repayment plan), and analyze what these options mean for three different borrowers.
The Standard Repayment Plan
The standard repayment plan is straightforward. Under this plan, your payments are calculated based on your total loan amount, interest rate, and a term of 10 years. It's designed to pay off your debt quickly, reducing the amount of interest you pay over time.
SAVE Repayment Plan
The Save Plan is the most generous payment plan offered by the Federal Student Administration. Like other IDR plans, the SAVE Plan calculates your monthly payment amount based on your income and family size. In addition, the SAVE Plan has unique benefits that will lower payments for many borrowers.
Real-World Scenarios
To illustrate how these plans work in practice, consider three diverse professionals facing their own student loan challenges:
Borrower 1: The Engineer
Meet Alex, a highly skilled engineer with an annual income of $150,000. Like many professionals, Alex embarked on their career carrying $60,000 in student loan debt, a substantial but manageable amount given their lucrative salary. For Alex, strategizing repayment means finding a balance between maximizing their income's potential while efficiently clearing their debt. Given the relatively high income and manageable debt level, Alex might lean towards aggressive repayment plans to save on interest over time and achieve financial freedom sooner rather than later.
Borrower 2: The Teacher
Meet Jordan, a dedicated teacher shaping the minds of future generations, with an annual income of $75,000. Jordan’s commitment to education extended to their own, resulting in $45,000 in student loan debt. Teachers often work in roles that provide immense societal value but may not always be compensated to match—making the choice of a suitable repayment plan crucial. For Jordan, balancing a middle-income level with a moderate amount of debt means finding a repayment strategy that allows financial stability without sacrificing too much of their monthly earnings.
Borrower 3: The Doctor
Meet Laura, a dedicated physician whose career in medicine not only fulfills a lifelong passion but also incurs a significant financial commitment. With an annual income of $300,000, Sam's financial situation appears robust at first glance. However, the path to becoming a doctor often comes with a steep price tag, leaving Laura with $450,000 in student loan debt. This substantial debt, though daunting, is navigated with careful planning and a strategic approach to repayment. For Laura, exploring repayment options that account for high debt yet promising income trajectory is essential. Balancing such a hefty financial obligation with the potential for substantial earnings makes Laura's repayment strategy a critical aspect of their financial health and overall wellbeing.
Exploring Repayment Options
For borrowers examining their repayment options, the FSA Student Loan Simulator offers a personalized analysis to help envision how each plan affects their financial future. By inputting personal and financial information, borrowers can explore different scenarios, providing insights into monthly payments, total repayment amounts, and potential loan forgiveness.
We use this to explore the various repayment options for these borrowers. For the purposes of these calculations I use a standard 3% income growth rate, and 8.05% interest rate which represents the Plus Rate Parent or Graduate Student rates. Most people are likely to have multiple federal student loans or different loan types which might include lower interest rates or subsidies.
Under the standard repayment plan, their respective projected payments and outcomes would be as follows:
Alex, the Engineer would pay $730 monthly, totaling $87,546.
Jordan, the Teacher would have monthly payments of $443, totaling $60,720, with $9,117 forgiven at the end.
Laura, the Doctor faces a steeper scenario with monthly payments of $5,472, totaling $656,597, without any forgiveness.
Switching to the SAVE Plan changes their perspectives significantly:
The Engineer's payments increase slightly to $977 a month but leads to paying off the loan by May 2030, totaling $76,483 which is less than they would pay under the Standard Repayment Plan.
The Teacher benefits greatly, with monthly payments dropping to $352 and a total repayment of $49,445, including a forgiveness of $26,475 under the Public Service Loan Forgiveness Program.
The Doctor’s monthly payment decreases to $2,227, resulting in a total repayment of $307,382, with over $450,000 forgiven.
I want to highlight a couple of things here. Alex under the Save plan is able to pay off their loan earlier because their income is high enough to justify doing so. With a shorter Repayment period Alex is able to save money in the long run.
They're spending a comparable amount per month as their counterparts even though a regular loan repayment would be smaller.
The Public Service Loan Program is obviously a great deal for Jordan and Laura if they can get it. However, 10 years is a long time and to date many people have not gotten their loans forgiven.
There are many good reasons why someone might leave public service, they might decide to raise a family, take a job in the private sector or in some cases switch employers who might not be eligible despite doing the same thing. My wife actually had this issue, while we were able to resolve it because a) she's married to me, someone who works on this stuff and b) she was profiled in the Wall Street journal, not everyone is going to be so lucky.
President Biden has implemented several reforms to the PSLF program which has resulted in higher forgiveness rates, but it's unclear and uncertain if these will persist going forward.
When imagining these options without forgiveness, the scenarios alter dramatically:
The Engineer sees no change, as they were not depending on forgiveness anyway.
The Teacher would face a significant burden, with total repayments increasing to $82,017, extending their payoff date to June 2039.
The Doctor would end up paying a staggering $983,430 over time, extending the loan term till April 2049. At the end of this team, they do have another $250, 596 "forgiven"
The Public Service Loan Forgiveness Program is obviously a great deal if you can get it. However, before depending on it I would think long and hard about the downsides of pursuing that pathway without seeing it through.
This should give you a sense of the long-term trade offs of reducing your student loan repayment over an extended period of time.
For these reasons I remain highly skeptical about the benefits of the long-tail forgiveness of these programs. If you are struggling to make payments for a period of time, then these are great options. However, on the long term you might end up paying substantially more than you would have done otherwise.
Saying you'll be "forgiven" $250,596 AFTER you've paid an additional $326,833 over another 15 years doesn't really strike me as very valuable.
Conclusion
Choosing the right repayment plan for your federal student loans is a critical decision that can affect your financial well-being for years to come. Whether you’re the engineer, the teacher, or the doctor in our examples, or you find yourself with a different set of circumstances, understanding each plan’s nuances and how they apply to your particular situation is key.
Armed with knowledge and the right tools, you can create a strategy that not only manages your debt effectively but also supports your broader financial goals. Remember, there’s support available, and taking the time to explore your options today can lead to a healthier financial future.
Note: The specific values for monthly payment, total amount paid, and total forgiven can vary significantly based on individual income, family size, and total debt. The Date Debt is Paid Off for income-driven repayment plans also depends on when the borrower first took out their loans. This table is designed as an overview; borrowers should consult the Federal Student Aid website or a financial advisor for personalized calculations.