Choosing a Student Loan Repayment Plan
It is important to understand how different payment plans will impact the total cost of your loan when selecting your student loan repayment plan. Rasmussen College Student Economics Business Analyst Angel Patel compares standard, graduated, and income-based repayment options in this brief video to help assist you in the process of choosing a student loan repayment plan.
Learn more about repaying your student loans.
Loans assumed to be unsubsidized loans issued from the federal Direct Loan program. Loan amount is $20,000, with a 6.8% interest rate and a 10 year loan term upon entering repayment.
Standard repayment: Total interest paid is $7,619.28. Monthly payment on amortized 10-year schedule is $230.16
Graduated repayment: Graduated term selected is 10 years. Initial monthly payment of $158.04 is interest-only, with election to increase payment amount every 2 years (48 months). Maximum monthly payment (final 2 years) is $345.25. Total interest paid over 10 year period is $9,111.11.
Income-based repayment (IBR): Initial monthly payment required is $171.94. Maximum payment under IBR is equal to standard repayment ($230.16). Based on assumptions below, the borrower is able to pay off the entirety of the loan in 12.4 years. Total interest paid over 12.4 year period is $10,346.32.
Income-based repayment assumptions:
- Initial Annual Gross Income: $30,000
- Salary growth: 2% per year
- Poverty level growth rate: 1.5% per year
- Family size: 1 (within the continental USA)
These calculations are based on estimates from the following online calculators:
When selecting your student loan repayment plan, it is important to understand how different payment plans will impact the total cost of your loan. Today I want to go over an example.
Jim, now let's say he has $30,000 he's making right out of college. He has about $20,000 he's taken out in federal loans. He's deciding between a standard repayment option, a graduated repayment option, or an income-based repayment option.
Now let's say he decides to go with the standard repayment option. He'll be making about $230 monthly payments. He'll have repaid his loans off within 10 years. He will have spent about $8,000 in interest, driving the total cost of his loan to about $28,000.
Now let's say he decides he wants to go into a graduated repayment option, where he'll start off with about $160 payments4, which will gradually increase every two years to about $350 his last two years in repayment. He wants to go ahead and pay it off as quick as possible, so he'll pay it off within 10 years. He'll have ended up spending about $9,000 in interest, driving the total cost of his loan to about $29,000.
Now let's say he decides, based on his family size, his debt, and his income level, that he wants to go into income-based repayment plan. That will mean that he'll start off at about $170 monthly payments, which will gradually increase to about $230 over the life of his loan. He'll take about 12.4 years to repay his loans. So, he'll have ended up spending about $10,000 in interest, driving the total cost of his loan to about $30,000.
So, as you can see in Jim's example, when you're considering student loan repayment plans to understand different options and different repayment plans' impact to the total cost of your loan.