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The Ultimate Guide to Student Loan Repayment

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Ultimate Guide to Student Loan RepaymentThis guide shares the various student loan repayment options available to you.

There are two main sources of student loans–federal and private– with federal being the primary source of financing for college. It’s important to understand the options so you can choose the best repayment strategy.

Federal student loans have repayment options that differ from those offered by private lenders. Federal student loan repayments are deferred while enrolled in school at least half-time.

With private student loans, repayment options vary from immediate repayment to full deferment until graduation. It’s best to consult with your private lender about repayment options and benefits.

Federal student loans: After graduating from college

After graduating from college or dropping below half-time enrollment status, you will have a six-month grace period before repayment of your federal student loans begins.

During the grace period, you’ll be notified by your loan servicer about your first payment date. Payments to federal student loans are due monthly. And if you decide to enroll back into school or increase your credit load to meet half-time enrollment status, you can temporarily postpone your payments.

Federal student loans: Repayment Options

All federal student loans are handled by a servicer contracted by the government. A student loan servicer is a company that collects payments, responds to customer service inquiries, and performs other administrative tasks associated with maintaining a federal student loan on behalf of a lender. A servicer may also perform the same services for private student loans.

When you first begin repaying your federal student loans, you can choose a repayment plan or it will be chosen for you if you have not done so. Keep in mind that you can change your repayment plan at any time for free.

You are automatically assigned Standard Repayment but you have other plan choices that include:

Standard Repayment

Standard Repayment is the most common repayment plan that spreads equal payments over your loan term. It’s generally considered the most economical repayment plan.

The Standard Plan qualifies for Public Service Loan Forgiveness (PSLF). You are required to make 120 payments for PSLF under an Income-Driven Repayment Plan to qualify for PSLF. Any payments you make under the Standard Plan plan count toward your required 120 payments. However, with full repayment required in 10 years, you might not have a loan balance left to forgive.

Time Frame: Up to 10 years (or within 10 – 30 years for consolidation loans)

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Subsidized and Unsubsidized Federal Stafford Loans
  •  Direct and FFEL PLUS Loans (made to parents and students)
  •  Direct and FFEL Consolidation Loans

Graduated Repayment

The Graduated Repayment plan starts with a low payment and gradually increases over the years. This can be a good choice if you expect your income to increase as you grow in your career. With this plan, payment amounts increase every 24 months until the loan is paid in full. You may end up paying more interest with this plan compared to Standard Repayment.

Time Frame: Up to 10 years (or within 10 – 30 years for consolidation loans)

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Subsidized and Unsubsidized Federal Stafford Loans
  •  Direct and FFEL PLUS Loans (made to parents and students)
  •  Direct and FFEL Consolidation Loans

Extended Repayment

The Extended Repayment Plan is for borrowers with over $30,000 in outstanding Direct Loans or FFEL. The plan can make payments more affordable but extends the repayment term causing you to pay more interest. Under the Extended Repayment Plan, you can choose standard payments that are equal over the payment term or graduated payments that increase every two years.

Time Frame: Up to 25 years

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Subsidized and Unsubsidized Federal Stafford Loans
  •  Direct and FFEL PLUS Loans (made to parents and students)
  •  Direct and FFEL Consolidation Loans

Income-Sensitive Repayment

Income Sensitive Repayment plan is for FFELP loans and offered only to low-income borrowers. If you need to make lower payments on your FFEL Program loans, this plan may be for you. Your monthly payment is based on annual income. Borrowers must reapply for income-sensitive repayment each year.

Time Frame: Up to 10 years

Eligible Loans

  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans

Income-Driven Repayment Options

Income-Driven Repayment plans offer borrowers more affordable monthly payments tailored to your income. To use IDR plans, you’ll need to apply and annually submit income and family size information to maintain eligibility. You can apply for income-driven repayment with your servicer or at studentaid.gov.

These plans include:

  • Income-Based Repayment (IBR) Plan is for both FFELP and Direct Loans
  • Income-Contingent Repayment (ICR) Plan
  • Pay As You Earn (PAYE) Repayment Plan
  • Revised Pay As You Earn (REPAYE) Repayment Plan is for Direct Loans only

Each of the four plans has unique eligibility qualifications. Your income and family size will affect your regular monthly payment amount in different ways.

Income-Based Repayment

Income-Based Repayment requires you to show partial financial hardship. Your monthly payments will be either 10 or 15 percent of discretionary income and based on a formula that includes your adjusted gross income, family size, state of residence.

You may qualify for forgiveness of outstanding balance after only 10 years but could pay income tax on the amount forgiven. Payments are lower than the Standard Plan but you will pay more for your loan over time.

Time Frame: Up to 25 years

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Direct and FFEL PLUS Loans (made to students)
  •  Subsidized and Unsubsidized Federal Stafford Loans
  •  Direct and FFEL Consolidation Loans (made to students)

Income-Contingent Repayment

Income-Contingent Repayment plan offers flexibility with low-income borrowers who may not be facing financial hardship. Payments are based on 20 percent of your discretionary income using a formula that includes your adjusted gross income, family size and state of residence.

Your outstanding balance can be forgiven after 10 years, based on certain qualifiers. Any amount forgiven could be subject to income tax.

Time Frame: Up to 25 years

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Direct PLUS Loans (made to students)
  •  Direct Consolidation Loans

Pay-As-You-Earn Plan

Pay-As-You-Earn plan is the lowest payment for borrowers facing financial hardship. Your monthly payments will be 10 percent of discretionary income, but never more than you would have paid under the 10-year Standard Repayment Plan. Your payments are recalculated each year.

With PAYE, any outstanding balance will be forgiven after 20 years. Any amount forgiven could be subject to income tax.

Time Frame: Up to 20 years

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Direct PLUS Loans (made to students)
  •  Direct Consolidation Loans (made to students)

Revised Pay-As-You-Earn Plan

Most borrowers are eligible for REPAYE which calculates your monthly payments as 10 percent of discretionary income. Payments are based on your updated income and family size and are recalculated each year.

With REPAYE, any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 years (if all loans were taken out for undergraduate study) or 25 years (if any loans were taken out for graduate or professional study). Any amount that’s forgiven under an income-driven repayment plan may be considered taxable income.

Time Frame: Up to 20-25 years

Eligible Loans

  •  Subsidized and Unsubsidized Direct Loans
  •  Direct PLUS Loans (made to students)
  •  Direct Consolidation Loans (made to students)

Contact your student loan servicer

Before you contact your loan servicer to discuss repayment plans, you can use the Department of Education’s Loan Simulator to get an early look at which plans you may be eligible for and see estimates for how much you would pay monthly and overall.

Learn more: How to find your student loan servicer

How to postpone repayment

If you are unable to make payments, then you have the option to apply for deferment or forbearance.

Deferment

Deferment allows you to temporarily stop making payments on your federal student loans. You are not charged interest on subsidized loans during deferment. Interest will continue to be charged on your unsubsidized loans and PLUS loans.

If you’re experiencing financial hardship, are unemployed, decide to go back to school, or are on active duty military service, postponing payments with deferment is an option.

Forbearance

Forbearance allows you to temporarily stop making payments or reduce your federal student loans’ monthly payment. If you work an internship, perform certain types of community service, or find yourself experiencing financial hardship, you may be qualified to postpone payments with forbearance.

During forbearance, principal payments are postponed but interest continues to accrue. Unpaid interest that accrues during the forbearance will be added to the principal balance (capitalized) of your loan(s), increasing the total amount you owe.

When in forbearance it’s smart to pay at least the monthly interest during this period to avoid interest capitalization. Forbearance also resolves any delinquency on the account.

Private Student Loans

There are four common repayment plans for private student loans, although not all lenders offer all of them:

  1. Immediate or Fixed repayment – make payments while in school
  2. Interest-only repayment – make interest-only payments while in school
  3. Partial interest repayment – make partial interest payments while in school
  4. Full deferment – make no payments while in school

Contact your private lender about your financial situation and want repayment options are available. Some lenders will consider a different repayment plan on a case-by-case.

Unfortunately, private student loans don’t usually come with income-based repayment options you find with federal loans. If you are facing hardship, ask about forbearance.

Want to lower your private student loan payments, consider refinancing your loan. Check your rate without impacting your score. Find your refinancing options >>>

Learn more: Best Student Loan Refinancing Marketplaces

Should I consider consolidating or refinancing?

Student loan consolidation is a process of combining one or more federal student loans into a single new federal consolidation loan. Consolidation can simplify the repayments by combining multiple payments into one. With a federal student loan consolidation, the average interest rate of all loans consolidated becomes your new interest rate.

  • You are still eligible for Income-Driven Repayment Plans with consolidated loans.
  • You cannot consolidate private student loans into a federal student loan consolidation program.

Although most people use refinancing and consolidation interchangeably, there is a difference. Choosing one option may cause you to lose some federal repayment benefits.

A private lender can “consolidate” both private and federal loans by refinancing into a new loan. The new loan will have new terms, interest rates, and conditions. Unlike the consolidation of federal loans into the federal consolidation program, private lender refinancing requires credit approval.

Typically, if you have federal student loans you want to consolidate and with private student loans, you may want to refinance. 

Learn more: The Ultimate Guide to Student Loan Refinancing

Can I make extra payments on my student loans?

By making extra payments, along with your regular monthly payments, you can reduce the total amount of interest you pay and expedite the repayments of student loans.

Unfortunately, making extra payments takes a few more steps. It’s not as simple as it should be. Without following the specific steps required by your servicer, your extra payments may not be applied correctly.

Learn more: How to Make Extra Payments to Pay Off Student Loans Faster

How can I repay my student loans while in school?

You don’t have to wait until after graduating to start repaying your student loans. In fact, the sooner you start repaying the loan, the less you’ll owe and the faster you’ll get out of debt.

Learn more: Strategies to Repay Student Loans for Current Students and Recent Graduates

Can I defer my payments for a year after graduation?

You can request a deferment or forbearance that allows you to temporarily postpone your federal student loan payments when unemployed or experiencing financial hardship. Postponing your payments may help you avoid default.  A loan servicer will decide if deferment or forbearance is right for your situation.

For private student loans, speak with your lender about deferment options that can extend the period for up to a year.

Learn more: How to apply for forbearance or deferments of student loans

How do I avoid a prepayment penalty?

All federal student loans do not charge prepayment penalties and can be paid off early. You can choose to pay off your loan entirely or make extra payments without penalty. To prepay your loan completely, request a payoff amount or letter from your student loan servicer.

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Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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