Student loan repayment plans: How to pick the best one for you

Many graduates struggle under the burden of student loan repayments, although some graduates face more debt than others.

If you're one of the millions of Americans with federal student loans, private student loans, or both, it's important to understand all your repayment options. While they vary for federal versus private loans, the best student loan repayment plan is always one that's affordable on a monthly basis while keeping total borrowing costs as low as possible.

What are your student loan repayment options?

Repayment options for federal student loans are determined by the type of loan; the total balance; and whether the loans have been consolidated with the Department of Education. You are allowed to change your repayment plan and can pick from the following options:

Standard repayment plan. This offers fixed monthly payments and is designed to ensure your loan is repaid within 10 years -- or 10 to 30 years if you have a Direct Consolidation Loan.

Graduated repayment plan. Payments slowly increase with this plan -- usually every two years -- and it's also designed to ensure you'll repay your loan within 10 years or 10-30 years for consolidated loans.

WHICH STUDENT LOANS SHOULD YOU PAY OFF FIRST?

Extended repayment plan. This is open to borrowers with at least $30,000 in outstanding loans and designed so loans are repaid over 25 years with either fixed or graduated payments.

Income-driven plans. These options -- including Pay as You Earn, Revised Pay as You Earn, Income-Based Repayment, and Income-Contingent Repayment -- are open only to borrowers with Direct Loans, student PLUS Loans, and certain Direct Consolidation Loans. They cap payments at a percent of income and allow loan forgiveness after 20 or 25 years of payments, depending on the plan chosen and amount borrowed.

If you have private student loans, you have less flexibility. You must repay them based on terms agreed upon when you borrowed. Your loans may have a fixed rate, which means payments won't change, or a variable rate so payments move with a financial index. Regardless, to change your repayment timeline or monthly payment amount, you'll have to refinance, taking out a new loan with a different private lender offering the desired repayment terms.

How to pick the best student loan repayment plan

Because you have so many options for federal student loan repayment, it can be overwhelming to determine the right one. But there are a few key factors to consider, including the following:

Whether you qualify for Public Service Loan Forgiveness. If you work for the government or a nonprofit, you can have some of your loans forgiven after making 10 years of qualifying payments on an eligible repayment plan. These include Income-Based Repayment; Pay As You Earn Repayment, and Income Contingent Repayment. If you don't choose one of these plans, you'll lose out on this benefit of public service work.

Unfortunately, private student loans are not eligible for loan forgiveness so this won't be a factor in determining the right repayment approach for them.

WHAT IS A STUDENT LOAN INCOME-DRIVEN REPAYMENT PLAN?

The amount you can afford to pay each month. Missing student loan payments can have serious consequences, including damaged credit, so you need to choose a payment plan that fits your budget.

If you're struggling to pay federal loans, an income-driven, extended, or graduated repayment plan might be the right option. These provide breathing room by keeping payments low. And in the case of an income-driven plan, you could even end up with part of your loan balance being forgiven if you pay over a long enough period.

If you're worried about making payments on private loans, you may want to explore refinancing to see if you could lower your interest rate or make your repayment time longer; both would lower your monthly payment.

While you can also refinance federal loans to change their terms, doing so usually isn't advisable because this would mean giving up important borrower protections.

The total costs of borrowing. An affordable monthly payment is only part of the picture. If you lower your monthly payments on federal or private loans by extending your repayment timeline, the total cost of borrowing goes up because you pay interest over a longer time.

WHAT QUALIFIES YOU FOR STUDENT LOAN FORGIVENESS?

If you have a $10,000 private loan at a 7 percent interest rate that you were scheduled to repay in five years and you refinance to a new loan at the same rate but with a 10-year repayment timeline, your monthly payment would drop from $198 to $116. But the total loan cost rises from $11,881 to $13,993. Your loan would cost over $2,000 more, depriving you of funds for other purposes.

To keep costs down, it's a good idea to pay as much as you can afford each month without compromising other important financial goals.

The level of risk you're willing to accept. With federal student loans, your interest rate never changes during repayment, even if you consolidate your debt with a Direct Consolidation loan. But if you have private student loans and opt for a variable rate loan -- either when borrowing initially or if you refinance -- your interest rate can change over time.

Variable-rate loans often have lower initial interest costs and monthly payments than fixed-rate loans. But they're riskier because your payment could rise. If you're willing to take that risk -- or think interest rates will fall -- a variable rate loan may be right for you. If you don't currently have one, you could refinance into one -- perhaps lowering your monthly payment for the time being.

Always research your student loan repayment options. With so many repayment options, every borrower should research carefully to avoid falling victim to student loan repayment scam calls or bad advice. Remember, there are always trade-offs and a loan with lower monthly payments will almost always mean higher total costs over time.