Americans hold $1.5 trillion in student debt—here’s how to know which repayment plan is best for you

Three ways to pay off student loans - here's what's best for you

Paying off your student loans efficiently is most important than ever before.

According to most recent figures from the Federal Reserve, 44.5 million Americans collectively hold $1.5 trillion in student debt. Even though college graduates have a huge advantage in the current labor market, borrowers across the country are struggling to pay off their loans.

The Department of Education estimates that just over 10 percent of student loan borrowers are in default, and researchers at the Center for American Progress estimate that as many as 30 percent of student loan borrowers can’t keep up with debt just six years after graduation.

Americans have three main options for paying off student debt. CNBC Make It spoke with Charlie Javice, founder & CEO of online FAFSA platform Frank, to break down the costs and benefits of each option.

1. Regular monthly payments

The default option for most borrowers is to make fixed and regular monthly payments.

“You’re responsible for a minimum monthly payment,” says Javice, “and you need to pay it whether you’re trying to have a job, whether you’re not in a job — you’re responsible for that payment no matter what.”

If you are just out of college and still job hunting or if you’re in an industry where work can fluctuate, this option may not be the right one for you. But if you have a steady income, feel confident making a regular payment each month and prefer the stability of a regular payment, then this option may work.

One important factor that borrowers should take into consideration if they do select this option is interest. Even if you are making the regularly minimum monthly payments on your student loans, your debt will accrue interest. For that reason, it’s best to contribute as much as possible. Javice strongly suggests paying “the total balance, every single month.”

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2. Income-based repayment

The Income-Based Repayment (IBR) program, sponsored by the federal government, allows federal student loan borrowers to pay a percentage of their monthly income, as opposed to a set monthly amount.

“You’re not responsible for paying it back if you have below $50,000 in salary, and you’re also not responsible if you have no salary at all,” explains Javice. “Definitely something to consider.”

This is a huge perk for people with flexible working arrangements, like freelancers or entrepreneurs who may be able to make a significant contribution to their student loans one month but not the next. This can also be a good option for people who are job hunting, people who make less than $50,000 a year or workers in industries like entertainment, where short-term employment is common.

One thing to keep in mind is that even if you are using an IBR, interest will still accrue on your students loans. To avoid compounding interest, borrowers may want to pay more than the minimum graduated payment each month.

The federal government also offers three other income-driven repayment (IDR) options, including the Revised Pay As You Earn Repayment Plan (REPAYE Plan), the Pay As You Earn Repayment Plan (PAYE Plan) and the Income-Contingent Repayment Plan (ICR Plan).

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3. Refinancing

The final option that student loan borrowers have is to refinance their student loans with a private loan provider. This may help some borrowers achieve a lower monthly interest rate.

Refinancing may be a good options for parents who have taken on federal Direct PLUS Loans (these loans are not eligible for income-driven repayment options) or for people who have taken on private loans to finance their education.

The benefits of refinancing your student loans depend on how good your credit score is and how easily you can make student loan payments. The drawbacks of refinancing federal student loans into private student loans is that you forgo consumer protections, flexibility and income-based repayment options associated with federal student loans.