Repaying Your Federal Student Loans

PICKING A STUDENT LOAN REPAYMENT PLAN

Federal student loans come with eight student loan repayment options. It is important to know what these are so you can choose the best one for your wallet. To do so, you’ll need to figure out your needs. This includes understanding the amount of time and money you have each month to pay back your loan.

One online tool you can use to help you decide on a plan is the Department of Education’s Repayment Estimator. It will ask you to plug in your loan balances, interest rates, tax filing status, income, and family size. Based on your answers, the Repayment Estimator generates a list of:

  • Which repayment plans you are eligible for
  • The amount of your first and last monthly payments
  • Total amount paid
  • Any projected loan forgiveness
  • How long you have to repay your student debt

Since there are different plans and grace periods, it is crucial to get to know the features of each choice. Often, a student loan servicer can work with you, but it is a good idea to go into a meeting prepared. For quick reference, the main types of student loan repayment plans are as follows. Before you start, these differ from the ways you’d pay back a private loan, which we discuss further on in the article.

  • Standard Plan
  • Extended Plan
  • Graduated Plan
  • Income-Driven Plans
  • Income-Sensitive Plan

STANDARD REPAYMENT PLANS (SRP)

Standard plans are the default payment plan for Federal Direct Loans and Federal Family Education Loans (FFEL). They allow you to pay off your loan within 10 years, and you’ll have a monthly fixed amount to repay for this period. This amount depends on your balance and whatever it will take to pay it off in 10 years. That said, you may need to pay at least $50 per month through the life of your loan.

One of the draws of the Standard Repayment Plan is that it doesn’t lock you in. Should you start to struggle financially, you‘ll be able to switch out. Then again, if all goes according to plan, you’ll be student-debt free after 10 years. You can then move onto other financial goals.

There’s also the issue of interest fees. Compared with Income-Based Repayment Plans, which we discuss below, these will be lower. Reason being is that IRPs stretch out over a longer period and so may increase your interest fees. The down-side with this plan is that your monthly payments with an SRP may be higher than some other plans.

INCOME-DRIVEN REPAYMENT PLANS (IDR)

Income-driven repayment (IDR) plans may help you manage your student loan debt. They do this by reducing your monthly payment amount. As a result, in the short term these plans can help you with cash flow. Long-term though, you may have to deal with taxable income on forgiven loans, plus pay more in interest fees.

There are four income-driven repayment plans available to borrowers who qualify. These may suit students who struggle to make payments on their current salary. With IDRs, the money you have after expenses (discretionary income) becomes important as you’ll see in the synopsis below.

1. REVISED PAY AS YOU EARN REPAYMENT PLAN (REPAYE)


Monthly payments are generally equal to 10 percent of your discretionary income divided by 12. Any remaining balance is forgiven after 20 or 25 years.

2. PAY AS YOU EARN REPAYMENT PLAN (PAYE)


Monthly payments are generally equal to 10 percent of your discretionary income divided by 12. Any remaining balance is forgiven after 20 years.

3. INCOME-BASED REPAYMENT PLAN (IBR)


Monthly payments are generally equal to 15 percent of your discretionary income divided by 12. You pay 10 percent if you are a new borrower. Any remaining balance is forgiven after 20 or 25 years.

4. INCOME-CONTINGENT REPAYMENT PLAN (ICR)


Monthly payments are 20 percent of your discretionary income divided by 12. Or, however much your monthly payment would be over a fixed monthly payment plan of 12 years (longer than the 10-year SRP). Any remaining balance is forgiven after 25 years.

EXTENDED REPAYMENT PLAN (ERP)

The Extended Repayment Plan allows you to repay your loans over a longer period of time than the Standard and Income-driven plans. Unlike the 10-year SRP term, you’ll be able to make payments for up to 25 years. These payments are either fixed or graduated for up to 25 years. In general, this means lower payments than under the Standard and Graduate Repayment Plans. However, if you want to get your student debt out of the way to save for a house, retirement, travel or other goals, this may not work for you.

GRADUATED REPAYMENT PLAN (GRP)

The Graduated Repayment Plan starts you off with lower payments that increase every two years. This means, you’ll be on the same 10-year plan (or 30-year plan for consolidated loans), but your monthly payment starts out low and gets higher over time. This type of plan anticipates you’ll be able to make substantive payments once you are underway in a career.

UNDERSTANDING LOAN REPAYMENT

Your loan servicer takes care of your student loan billing and each has its own payment process. It is your duty to make direct payments to your servicer, though they can often work with you if you need help. If you don’t know who your servicer is, check your account in My Federal Student Aid .

How much will I need to pay? Your payment, which is usually made on a monthly basis, depends on four things:

  1. The type of loan you received
  2. How much money you borrowed
  3. Which repayment plan you use
  4. Interest rate on your loan

WHAT IS A GRACE PERIOD ?

The time lapse after graduation and before you start making payments is a “grace period”. Usually it is a set time frame which gives you the space to settle your finances and select your repayment plan.

No grace period – PLUS Loans (possible eligibility for deferment)
6-month grace period – Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans
9-month grace period – Federal Perkins Loans
Up to 3-year extension – Military service members

Caveat: While it may sound great to have this breathing room, interest will mount up if you have unsubsidized loans. It’s the same when you don’t pay a credit card balance on time.

In contrast, Perkins loans, direct subsidized loans, and subsidized Stafford loans don’t accrue interest during the grace period. You can, however, use your grace period to make interest payments. If this is easy for you to do, it’ll put you one step ahead when your grace period is up.

DEFERMENT OR FORBEARANCE ON FEDERAL STUDENT LOANS

Do you need to postpone your payments? In some cases, one may be eligible to receive a deferment or forbearance. These are temporary pauses which allow you to stop making payments. Or, reduce your monthly payment amount for a specified period.

For instance, there’s a provision in the Department of Education Appropriations Act, 2019 which allows cancer patients to get deferments while they are in treatment. Part-time students, military persons and others may also be eligible for a deferment.

One thing to remember is that with a deferment, you may not be responsible for paying the interest your loan amasses. This applies only to specific types of loans. During a forbearance though, you are responsible for paying the interest that accrues on all types of federal student loans.

LOAN CONSOLIDATION

Do you have many federal student loans? You may be able to merge them into one loan with a fixed interest rate. The amount of the loan depends on the average of all the joined interest rates and there is no cost to you. To do so, you need to file a Federal Direct Consolidation Loan Application and Promissory Note. Overall, this may simplify your repayment process.

PUBLIC SERVICE LOAN FORGIVENESS (PSLF)

The Public Service Loan Forgiveness Program is a federal program. It forgives the remaining balance on Direct Loans for eligible student loan debt holders. How do you qualify for public service loan forgiveness? To be eligible for PSLF, you’ll need to meet several criteria:

  • Where you work matters. Qualifying employers include the government or not-for-profit organizations.
  • You must first enroll in a qualifying repayment plan. Examples include REPAYE, PAYE, IBR, ICR and SRPs.
  • You need to be a full-time employee. This means more than 30 hours per week.
  • Under one of these plans, you’ll have to make 120 qualifying monthly payments.

UNDERSTANDING FEDERAL INCOME-DRIVEN REPAYMENT PLANS

Are your federal student loan payments high compared to your income? If so, you may want to repay your loans under an income-driven repayment plan. Most federal student loans are eligible for at least one (of the four) income-driven repayment plans.

If your income is low enough, your payment could be all of $0 per month. Remember though, you’ll need to make calculations using your discretionary income as a guide. To calculate your discretionary income, find the difference between your adjusted gross income and 150 percent of the annual poverty line for a family of your size and in your state.

You may also want to familiarize yourself with the different repayment periods and payments. The table below is an overview of this information.

Income-driven Plan NameTerm LengthMonthly Payment CapDescription
Income-based repayment (IBR)20 years if you’re a new borrower on or after July 1, 2014
OR
25 yearns if you’re not a new borrower
After July 1, 2014
10% of discretionary income (for new borrowers) on or after July 1,2014 but never more than the 10-year Standard Repayment Plan amount
OR
15% of discretionary income if you’re not a new borrower on/or after
July 1,2014
  • Low monthly payments
  • Loans eligible for forgiveness after repayment period
  • Possibility of higher interest fees
  • If your loans are forgiven, the balance may be taxable
Income-contingent repayment12 yearsThe lesser of either 20% of your discretionary income
OR
what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
  • No income eligibility requirement may make it easier to qualify
  • You may be eligible for loan forgiveness
  • Parents with PARENT PLUS Loans can qualify once they consolidate their loans into a Direct Loan
  • Highest potential payment amount of all 4 plans
  • If your loans are forgiven, the balance may be taxable
Pay as you Earn20 years10% of discretionary income
  • Lowest payment amount for eligible borrowers
  • Loans eligible for forgiveness after repayment term
  • Only new borrowers can qualify
  • If your loans are forgiven, the balance may be taxable n qualify
Revised Pay as you Earn (REPAYE)20 years if the loans are for undergraduate study
OR
25 years if the loans are for professional or graduate study
10% of discretionary income
  • Lowest payment amount for eligible borrowers
  • Loan forgiveness terms depend on whether you’re an undergraduate or graduate student
  • Monthly payments factor in your spouse’s income regardless of filing status
  • If your loans are forgiven, the balance may be taxable

APPLYING FOR INCOME-DRIVEN REPAYMENT

To apply for one of the Income-driven Repayment Plans, there are some easy steps to follow. You won’t need an application fee, but the process requires you to complete it in one session. If you’re nervous about filling out official forms, you can download a PDF version of the Request and do it manually. Otherwise, here’s how to prepare.

  1. Create an FSA ID (or have your ID number handy)
  2. If you are married, make sure you have your spouse’s SSN and information
  3. Have your personal information and income figures handy
  4. Set aside at least 10 minutes
  5. Go to StudentLoans.gov
  6. Log in to start the application
  7. Complete the Income-Driven Repayment Plan Request

Each year you’ll need to recertify, in order to remain eligible for the lowest possible monthly payment amount.

BASIC FEDERAL STUDENT LOAN REPAYMENT PLANS

Basic Federal Student Loan Repayment Plans often balance a monthly payment you can afford today and a lesser total amount overall than income-driven plans. That said, an IDR may lower your payments today even though in the long run, you may be paying more.

Basic Repayment Plan NameTerm LengthDescription
Standard Repayment10 yearsFixed Monthly Costs
Graduated Repayment10 or 30 years for consolidated loansMonthly payment starts out low and gets higher over time
Extended Repayment25 yearsYour payments are either fixed or graduated for the term of the loan

PRIVATE STUDENT LOAN REPAYMENT OPTIONS

Private Student Loans do not qualify for federal income-driven repayment plans. Or forgiveness programs. Yes, a debt is a debt, but Federal Student Loans begin with the U.S. Department of Education. They also come with standard benefits and protections.

The reason for this is that to get a private student loan, you’ll usually deal with a bank. Or, you’ll borrow from a private financial institution. In general, neither comes with either income-based repayment plans or forgiveness options.

Also, because these institutions don’t have to offer financial assistance to student borrowers, there aren’t as many ways to repay the loan. This limits the ways you can repay your loan, although may have a few options if you start to struggle.

To help you better grasp how to potentially lower your private student loan payments, check out some suggestions below. These may give you some food for thought on how to better manage your monthly payments.

LOWER YOUR PAYMENTS YOURSELF

If you are up for giving it the ‘old college try’, setting a budget that covers your needs rather than wants is a good place to start. Some loan lenders also suggest that you make auto-debit payments which may lower your interest rate. This is useful if you can count on your income (and can generate more money). Not so good if you think you might be hit with overdraft fees.

LOAN REFINANCING

You do need to go through hoops (credit scores for e.g.) set by your financial institution. Yet refinancing student loans may help you manage any flux in your budget. This is where you’ll have to shop around for lenders to see what terms they offer – 5, 7,10, 15 and 20 are common. Some also allow you to merge private and student loans. As such, you may be able to find a lower interest rate, decrease your monthly payment, or both.

LENDER-SPECIFIC REPAYMENT PLANS

Some lenders may offer Repayment Assistance Options to help students manage their loan repayments. Some of these are similar to federal loans, only you’ll have to qualify with a
Lender such as Discover.

  • Deferment – A temporary postponement of payments
  • Forbearance – postpones your loan payments for up to 12 months during the entire term of your loan, though there are stipulations
  • Hardship – A temporary reduction of interest rates for up to 12 months, subject to stipulations
  • Early Repayment Assistance Program – A 3-month postponement of payments
  • Payment Extension –Allows students to bring their loan current by making 3 minimum monthly payments (or the equivalent amount of 3 minimum monthly payments) within a 90-day period
  • Reduced Payment – The Minimum Monthly Payment is reduced, subject to a $50.00 minimum, for an initial period of six months.


5 WAYS YOU COULD PAY OFF STUDENT LOANS FASTER

If you don’t have trouble paying off your debt but what bothers you is that it seems to drag on forever, there are some ways to pay off student loans faster. To begin, you should know what your payoff date is. Then, strive to bring this date closer. Does one of these options feel like an opportunity to reach this goal?

1. MAKE AN EXTRA STUDENT LOAN PAYMENT

Yes, it’s tempting to spend but you if you come into some money, let’s say through overtime, commission or a tax refund, bank it towards an additional or lump-sum payment. Remember, any amount brings the goal in focus.

2. PAY MORE THAN THE MINIMUM PAYMENT

If you can free up some cash, make more than the minimum payment either weekly or monthly. It’s easy enough to do and you’re in control of how much you pay above the minimum payment. Or, set up a slightly higher amount than the minimum in auto-pay. Even foregoing 5 coffees a week adds up.

3. APPLY FOR LOAN FORGIVENESS

If you enter a career like teaching or public service, as we’ve seen above, you may be eligible to apply for loan forgiveness. Some states also offer Loan Repayment Assistance Programs (LRAPs). Naturally you’ll have to qualify. But it is one way to get money toward paying off your federal (or in some cases, private) student loans.

4.CALCULATE YOUR DEDUCTIONS

Make sure you make use of any tax credits and deductions where eligible. If you’re paying off student loans, you may be eligible for the student loan interest deduction on your federal taxes. Now, assuming you get a huge refund, stick to your plan and see numbers 1 and 2.

5. REFINANCE YOUR STUDENT LOANS

Refinancing is one way to get rid of debt faster while you lock in lower interest and monthly payments. To do this, you’ll want to compare refinance terms and see which lines up with your goals. For instance, when you refinance, it will change your monthly payments. Make sure they will be more manageable. If you’re financially in trouble, this may only add to your troubles, but if you have good credit and income stability do some research, shop around and see if it is a viable option.

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