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Nov. 21, 2015, 8:38 a.m. EST

The best way to pay off your student loans

A guide to paying back your college debt

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By Jillian Berman

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Few things will make the real world more real for a new college graduate than that first student loan bill. And for many in the class of 2015, that reality check is fast approaching as the six-month grace period available to federal student loan borrowers runs out.

At least 1 million federal student loan borrowers will receive their first bill this month, according to Department of Education data cited by Sen. Elizabeth Warren (D-Mass.) at an October forum. The government offers borrowers with federal loans a variety of ways to pay them off to help ensure that even the recent college graduate with a minimum wage job can afford to stay in repayment on her loans. But that doesn’t necessarily mean that borrowers are choosing wisely—or even making a choice at all.

If you’re a borrower with a federal Direct Loan -- that’s the case for most recent college graduates with federal debt -- you can use this chart as guide to finding the repayment plan that’s best for you. Borrowers with Federal Family Education Loans may not qualify for some of the income-driven repayment programs listed below unless they consolidate their debts into Direct Loans.

As of September 2014, just 19% of borrowers who were actively repaying their loans were using one of the government’s programs that cap payments at a percentage of a borrower’s income, according to a recent report from the Government Accountability Office. Less than 1% of borrowers taking advantage of those programs defaulted on their loans between 2010 and 2014, compared to 14% of borrowers who use the standard repayment program -- the payment plan borrowers are automatically enrolled in if they don’t make a selection. The higher share of borrowers defaulting in standard repayment indicates that there are probably borrowers in this payment program who could benefit from a different plan.

There are many reasons why borrowers may not choose the payment program that benefits them the most, said Lauren Asher, the president of the Institute for College Access & Success, a nonprofit focused on expanding access to higher education. For one, borrowers may not be getting enough or the right information from their servicers, a problem highlighted by a recent report from the Consumer Financial Protection Bureau. The report noted that servicers may not always have enough of a financial incentive to spend the time it takes to enroll borrowers in income-drive plans.

“Borrowers don’t always know that they have a choice, not just when they first enter repayment, but also through the life of their loan,” Asher said. In addition, the sheer volume of choices means that making sense of them “can be hard even for experts to figure out.”

But some servicers do help students with choosing a repayment plan. Cameron Diggs, a 22-year-old recent Georgetown graduate, said she was able to find descriptions of the different types of repayment plans pretty easily on her servicer’s website when she started researching the plans in August. “I knew essentially I was looking for something that would work with my income and that wouldn’t be breaking the bank every month,” said Diggs, who lives in Washington, D.C. and works for a company that manages advertising and conference sales for nonprofit groups.

Diggs ultimately found a plan that she thinks will make the payments on her approximately $26,000 in loans manageable when they come due in December. Still, she said it was hard to parse through the different repayment programs to figure out which types of borrowers qualified for each one. “I was still a little confused about the subtle differences between them,” Diggs said.

Cameron Diggs
Cameron Diggs recently graduated from college and is preparing to pay back her student loans.

Right now, the government offers several different repayment programs for borrowers with federal student loans with another on the way that will take effect in December. Borrowers with private student loans aren’t eligible for these programs. The standard repayment program, which allows borrowers to pay off their loans in 10 years will typically require the highest monthly payments, but costs the borrower the least over the lifetime of the loan.

The other plans offer varying alternatives, ranging from the option to still pay off the loan in 10 years, but start off with low payments that grow over the lifetime of the loan to plans that cap payments at 10% of your discretionary income and wipe away the remaining loan balance after 20 years. Borrowers of Parent PLUS loans, federal loans issued to parents to help their kids pay for school, aren’t eligible for almost all of the plans that allow borrowers to make payments tied to their income.

Borrowers who have loans issued through the Federal Family Education Loan Program, which ended in 2010, may have to consolidate their debts into Direct Loans to take advantage of some of the income-driven repayment programs.

What’s more, borrowers who plan to work for a nonprofit or the government can also take advantage of the Public Service Loan Forgiveness program, which wipes away the balance of the loan after 10 years of payments. This program is only beneficial when combined with an income-driven plan because borrowers won’t have paid off the whole loan in 10 years.

(For more information on the repayment plans visit this Department of Education page .)

Before making a decision on a repayment plan, borrowers should get a sense of what their monthly payments would look like under each plan and ideally what percentage of their income each payment would be, said Mark Kantrowitz, a financial-aid expert. Borrowers can use the Department of Education’s repayment estimator , which pulls their loan data from the government’s database, to figure out their monthly payments under each plan.

“You should pick the repayment plan that has the highest monthly payment you can afford, because that will save you the most money in the long run,” Kantrowitz said.

The smaller the monthly payments, the more a borrower will typically have to pay over the lifetime of the loan. That’s because minimal payments only go toward paying down interest, so even though borrowers are making payments they may not be paying down their debt balance, allowing interest to continue to accrue and the loan to build up. The income-driven plans forgive the balance of the loan after 20 or 25 years in repayment, but the debt-forgiveness is counted as income for tax purposes, meaning borrowers could still be hit with a bill.

Making things more complicated is the fact that borrowers may just simply feel overwhelmed and freeze up when they first realize how much money they owe, says Kevin Fudge, the manager of government relations and community affairs at American Student Assistance.

Michael Curry
Michael Curry recently graduated from college and his preparing to pay back his student loans.

“It all comes down to being aware that you have options,” he said. To help sort through those options, Fudge suggests borrowers familiarize themselves with the Department’s repayment estimator even while they’re in school. The Consumer Financial Protection Bureau also offers an interactive tool that can help borrowers get a sense of the kind of repayment programs they qualify for.

Despite the wealth of options and information -- which has only increased in recent years, according to Asher -- Michael Curry, a 22-year-old 2015 graduate of Champlain College in Vermont, said he hasn’t had any “epiphanies” about the best strategy for paying off his approximately $30,000 in federal loans. “I’m the first person from my family to go to school so we’re not all that familiar with the process,” said Curry, who is currently working as a freelance cinematographer and videographer in New Haven, Conn. “It’s to some degree been a little bit of Internet searching through panic.”

Jillian Berman covers student debt and millennial finance. You can follow her on Twitter @JillianBerman.

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