Is Your Minimum Student Loan Payment Enough?
April 3, 2024Federal student loan interest accrual and payments were paused due to the COVID-19 pandemic, but both resumed in fall 2023. As a result, millions of federal student loan borrowers are now managing an extra monthly payment. While budgeting for this extra payment can be challenging after a long pause, there are a few benefits of making more than the minimum payments on your student loans.
Here’s what to know about student loan minimum payments, different federal loan repayment plans and their requirements, and the advantages of making extra payments toward your student loans.
Understanding Minimum Payments on Student Loans
When you make a minimum monthly payment on your student loans, your payment typically includes part of your principal, interest, and any fees. These payments are the smallest amount you can put toward your loans monthly without incurring fees or penalties. Your minimum payment can vary depending on your federal student loan repayment plan, but making just the minimum monthly payments could mean you’re stuck paying off your student loans for a longer time period.
Different Repayment Plans and Their Minimum Payments
Minimum payments are structured differently depending on your federal student loan repayment plan. Repayment plans include the standard Plan, PAYE plan, income-based repayment plan, and others.
Standard Repayment Plan
Under the standard repayment plan, minimum payments start at $50, and loan repayment periods are 10 years for most loans. For consolidation loans, repayment periods can be as long as 30 years.
Saving on a Valuable Education (SAVE) Plan
The Biden Administration created the SAVE plan, and it replaced the former Revised Pay as You Earn (REPAYE) income-driven repayment (IDR) plan. IDR plans base your monthly student loan payments on your total income and family size.
Under SAVE, minimum monthly student loan payments could be as low as $0 if your individual income is below $32,800 or your income as a family of four is $67,000 or less. Other borrowers who fall outside these income guidelines can save up to $1,000 each year relative to the former REPAYE plan. Repayment terms are up to 25 years.
Pay As You Earn (PAYE) Plan
Under the PAYE IDR plan, borrowers generally pay monthly student loan payments equivalent to 10% of their annual discretionary income. Payments are never higher than what you’d pay with a standard repayment plan, and PAYE repayment terms are typically 20 years. Monthly payments can be as low as $0 per month.
Income-Based Repayment Plan
Income-based repayment (IBR) is also a type of income-driven repayment plan. With IBR plans, monthly student loan payments generally range from 10% to 15% of your annual discretionary income. As with a PAYE plan, your monthly payments won’t exceed the amount you’d pay with a standard plan. Repayment terms vary from 20 to 25 years, depending on when your federal student loans originated. Minimum IBR payments are $0 per month.
Income-Contingent Repayment Plan
Income-contingent repayment (ICR) plans are another type of IDR plan. Under this plan, your monthly federal student loan payments are either 20% of your discretionary income or a 12-year fixed payment plan amount adjusted for income, whichever is less. ICR plans come with repayment terms of 25 years. Minimum ICR payments are $0 per month.
In addition to qualifying student borrowers, those with Parent PLUS loans can opt to consolidate with a Direct Consolidation Loan to qualify for ICR. It’s the only IDR plan available for parent borrowers.
Graduated Repayment Plan
A graduated repayment plan isn’t an IDR plan, meaning your monthly payments won’t be based on your income or family size. Under this plan, you benefit from low initial payment amounts that increase every two years. Payments are made for up to ten years on most loans, excluding consolidation loans. Monthly payment amounts will vary based on loan size and timeframe.
Extended Repayment Plan
The extended repayment plan isn’t an IDR plan either, and your monthly payments will be fixed or graduated over a 25-year repayment term. Monthly payment amounts under the extended plan are lower than you’d get with a standard or graduated plan due to the longer term.
The Benefits of Paying More Than the Minimum
Paying more than the lowest monthly payment on your student loans can have several advantages. It helps you save on interest charges and reduces your overall loan costs. Federal and private student loans don’t come with prepayment penalties, meaning you can make early payments without worrying about added costs.
Here are some additional benefits of putting more than the minimum toward your student loans.
Pay Off Interest Sooner
Interest on your student loans accrues for your entire loan term, with limited exceptions. For instance, if you qualify for a deferment and have subsidized loans, interest may not accrue. But in most cases, it does, and while up to $2,500 in student loan interest is tax-deductible each year, deductions begin phasing out once your modified adjusted gross income exceeds $70,000 annually.
Since accrued interest is a major setback for many when it comes to paying off student loans, making more than the minimum payment can help you stay ahead of interest charges.
Lower Debt-to-Income Ratio
Your student loan balance impacts your total debt-to-income (DTI) ratio. Your DTI ratio is a percentage-based measure of your monthly earnings relative to your total monthly debt. This ratio is a major factor lenders consider when determining if borrowers are approved for new loans or credit lines. Generally, the lower your DTI, the better.
Paying down your student loan balances can improve your DTI ratio, making it easier for you to qualify for new financing.
Boost Your Credit Score
Besides improving your DTI ratio, making more than the minimum payments on your student loans could help boost your credit score. A good credit score has several benefits, including lower rates on credit lines and loans, more opportunities to borrow, and better rates on insurance.
Save More Money
Making more than the minimum payments could help you repay your student loan balances early. Paying off your student loans more quickly can help you direct the funds you’d normally apply toward your monthly payment to other savings goals, whether you want to build an emergency fund or save for a home down payment.
Calculating Your Repayment: Tools and Simulators
Certain tools are available to determine the best repayment strategy for your situation if you’re considering making more than the minimum monthly payments on your student loans. One of the best options for those with federal loans is the Federal Student Aid office’s loan simulator tool, which can help formulate a repayment plan that aligns with your goals.
Refinance Your Student Loans with ELFI
Refinancing could be an option worth considering if you’re struggling to manage your monthly student loan payments. Student loan refinancing may help reduce your monthly payment amount or lower your interest rate, making payments more manageable. Just be sure to weigh the pros and cons of refinancing if you have federal student loans, as you’ll sacrifice potential benefits like future loan forgiveness when refinancing with a private lender.