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Your Options for Paying Back Federal Student Loan Debt

So you’ve graduated from college or graduate school and – like the vast majority of students – borrowed money to get your degree. Now what?

Fortunately, most federal loans have a six-month grace period. You won’t have to start paying on them until six months after you graduate, withdraw, or drop below half-time. The grace period gives you a chance to find a job and begin earning an income before you have to start worrying about repaying your loans. Regardless, those bills will eventually come due.

If you financed your education with federal student loans, there are a wide variety of repayment options. As a result of changes in federal policy over the course of decades, new loans have replaced discontinued ones, and new repayment plans have been hobbled alongside old ones. The differences between plans can be confusing at best and cost you a ton of money at worst. And even the best-sounding perks, like loan forgiveness, can turn out not to be much benefit at all. So how do you choose?

If you’re confused about which repayment plan will work best for you, the place to start is with your loan servicer, the company that manages your student loans. They can crunch the numbers for you and help you choose a plan that best fits your current situation. But it helps to be well informed about what each plan will mean for your financial future. So, we’ve put together a short guide to help you compare the options.

Your Options for Repaying Your Federal Student Loans

Options to repay your federal student loans include everything from the standard repayment plan to the variety of income-driven (IDR) plans, among a number of others. Which plan is right for you will depend on your own unique situation including how much you’ve borrowed, how much you’re currently making or could make in the future, what career you’ve chosen to pursue, and even the size of your family.

Standard Repayment Plan

The default plan for repaying your student loans is the “standard” plan. So, if you do nothing else with your loans, one or more bills – depending on how many loans you have – will come due six months after you graduate. The timeframe for repaying your loans on the standard plan is 10 years. How much you have to pay every month is determined by calculating your principal and accrued interest over the course of 120 payments. Payments are fixed, meaning they’ll be exactly the same every month for the full 10 years.

Advantages

  • You’ll save time. The biggest advantage of the standard repayment plan is you’ll have your loans paid off in the shortest time frame. Almost every other repayment option – except the graduated plan – is a method for lowering your monthly payment by extending the loan term. But quick pay-off means freeing up your money for other things, like buying a house or starting a family.
  • You’ll save money. Even though your monthly payments will be higher on a standard plan than any other, you’ll end up saving money over the long run. The longer you take to repay a loan, the more time it has to accrue interest. So a fast pay-off means less interest paid over time, and, therefore, repaying less overall.

Disadvantages

  • Your monthly bill will be higher. As long as you borrowed less than your annual salary, a higher monthly payment than you’d have on a different plan shouldn’t be a problem, depending on your other expenses. Most likely you can handle the monthly payment even if it pinches a little. But if you have a low income relative to your debt, your monthly payment might be more than you can handle.
  • You’ll have to juggle a lot of bills. Many students aren’t aware that even if they borrowed money for all their years in school through the same servicer, they actually have several loans and not one. Each annual disbursement is for a different loan. More, federal student loans come in types – such as subsidized and unsubsidized. There are also PLUS loans, including Parent PLUS and Grad PLUS. So, unless you consolidate all of them together, you’ll end up with several monthly bills. This can get hard to keep track of.

Consolidation

When you consolidate your student loans, you combine them all into one. Technically, you’re issued one large loan that pays off all the others. You then have only one bill to worry about. Most federal student loans are eligible for consolidation, but you can’t combine Parent PLUS loans that were borrowed to pay for a child’s education along with that child’s loans. Nor can you consolidate private student loans with a Federal Direct Consolidation Loan. Private loans can only be consolidated through refinancing.

Once you consolidate your loans, you can put them on a 10-year repayment schedule. It will be just like following the standard plan, except you won’t have to juggle multiple bills. You can also opt to extend the repayment term to as many as 30 years. However, the choice isn’t entirely up to you. How long you can extend the term is directly related to how much you borrowed. You can find a table of allowable repayment terms by amount borrowed at Federal Student Aid.

Advantages

  • You’ll have only one bill. You won’t have to juggle multiple bills for multiple loans. This means you also won’t need to worry about whether you remembered to pay them all.
  • You can reduce the interest on your loans. The interest rate for your new Federal Direct Consolidation Loan is calculated as the weighted average of the loans being consolidated, rounded up to the nearest eighth of a percent. That means the interest rate on some of your loans will be lower after consolidation. Others will be higher, though. So whether you’re paying less interest overall depends on how much you originally owed at the higher rate. Regardless, you’ll get a fixed rate, which means it won’t go up over time as it could with some other loans or repayment plans.
  • Your monthly payment could be lower. If you opt for extending your repayment term, you’ll pay less every month than you would on a standard 10-year plan.
  • Your previously ineligible loans will become eligible for IDR. If you have any FFEL Loans, which include subsidized and unsubsidized Stafford Loans, they aren’t eligible for IDR. Only Federal Direct Loans are eligible. But if you consolidate them with a Federal Direct Consolidation Loan, you’ll gain access to these repayment options.

Disadvantages

  • Payments might still be too high. If you owe very high student loan debt – in excess of six-figures – even extending the repayment term to 30 years may not be enough to make your monthly payments manageable. If this is the case for you, look into IDR.
  • You can’t consolidate private loans along with your federal loans. Refinancing is the only way to consolidate private and federal loans together.
  • You could end up paying back more overall. Any time you extend the length of time it takes to repay a loan, you accrue more interest. That interest becomes part of the total you’ll have to repay. So a longer repayment term always means paying back more in the long run.
  • You might lose some borrower benefits. Certain types of loans, like Perkins Loans, come with perks like cancellation for specified professions. But if you consolidate a Perkins Loan, it will no longer be a Perkins Loan, so you’ll lose access to those benefits. Same goes for any loans where you’ve been working toward a benefit. For example, if you were working on Public Service Loan Forgiveness (PSLF), and then consolidate your loans, the clock will reset. You’ll have to start all over. And, if you consolidate a parent PLUS loan along with other student loans, you won’t be able to participate in any of the IDR programs except income-contingent repayment (ICR). However, you never have to consolidate all of your loans. You can always exclude from consolidation whichever loans on which you don’t want to lose the benefits.

Refinancing

If you have excellent credit and good career prospects, you might be able to qualify for refinancing. This is the best way to lower your interest rate and reduce the overall amount you’ll have to repay, if you have private loans. You can refinance federal loans as well. But keep in mind that if you refinance your federal loans you’ll lose access to federal programs. Refinancing is like consolidation in that several loans can be paid off with one new loan that has a lower interest rate. But, unlike with consolidation, the loan is issued by a private bank and not the federal government.

Every bank has their own terms and conditions as well as eligibility requirements, so be sure to shop around for the best lender for you. A good place to start is with LendKey or SoFi.

Advantages

  • You’ll save money. When you refinance your student loans, you save on two fronts. First, you’ll get a lower interest rate, which will result in less money you have to repay over the long term. Second, the lower interest rate will also lower your monthly payment.
  • You can consolidate all your loans together. Unlike with a Federal Direct Consolidation Loan, you can combine both federal and private debt into one new loan.

Disadvantages

  • You’ll lose access to federal programs. Unfortunately, life is unpredictable. Even if you don’t foresee needing access to programs like deferment, forbearance, cancellation, forgiveness, or IDR, there may come a time you do. But if you’ve transferred your debt to a private lender, you no longer have access to these tools. Worse, you don’t have the option of bankruptcy with student loans. Neither federal nor private student loan debt can be discharged in bankruptcy except under the most extreme of circumstances.
  • It’s difficult to qualify. Your credit has to be excellent – typically 700 or higher – to qualify for student loan refinancing. More, most lenders expect you to either have a well-paying job or be directly on the path to one, such being in a medical residency.

Extended Repayment Plan

The extended plan, as it sounds, allows you to repay your loans over an extended period of time – up to 25 years. When you extend the repayment term, you get to lower your payments while keeping the amount either fixed or graduated. In order to qualify for the extended repayment plan, you must have no outstanding balance on any loan borrowed before October 7, 1998, and have a balance in excess of $30,000 on FFEL Loans or Federal Direct Loans.

Advantages

  • You get a lower monthly payment. Because you’re extending the repayment term, your monthly payment will be lower. This is the whole purpose of the extended plan.
  • You won’t end up with a hefty tax bill at the end. Extending the repayment term to 25 years looks suspiciously like IDR, but there is one key difference: Because your payments are linked to the length of the repayment term and not your income, you’ll have repaid the entire balance in 25 years. This means you won’t end up with a tax bill on any balance that’s forgiven at the end of the term, which is a pitfall with IDR.

Disadvantages

  • Your monthly payment could be higher than on an IDR plan. IDR ties your monthly payments to your income. This means your monthly payments could be lower than on the extended plan, even as low as $0 – see IDR below. On the other hand, they could also be higher. If your income grows under an IDR plan, you’ll have to make higher monthly payments. So it all depends on your unique situation.
  • You’ll end up paying back more in the long run. You’ll be extending the repayment term, which means more interest will accrue over time. So, you’ll pay back far more over the long run than you would on a standard plan.
  • It will take you longer to repay your loan. While you’re making payments over nearly three decades, you could miss out on other opportunities – like buying a home, starting a family, or saving for retirement.
  • You don’t have access to forgiveness. One of the benefits of IDR – potentially – is forgiveness of any remaining loan balance at the end of the repayment term. You won’t have access to this option on the extended plan. But, then, you also won’t have any remaining balance.

Graduated Repayment Plan

If you find yourself in a less than stellar-paying job on graduation but expect higher pay in the future, the graduated plan may be a good option for you. It allows you to start repayment with a lower monthly bill that increases over time. Payments are made over a standard 10 years unless you opt to consolidate your loans. In that case, you can choose a repayment term up to 30 years depending on how much you owe. Payments increase every two years and will never be less than the amount of monthly interest that accrues nor greater than three times the amount of any other payment.

Advantages

  • You start with lower payments. This plan better matches the career situations of most graduates by starting with lower payments and increasing as time goes on. This is not unlike the typical career trajectory where you start out earning a lower income, but your income rises over time.
  • You can follow a graduated plan with consolidation. Some repayment methods can be combined, and this is one of them. If you opt to consolidate your loans, you can set up graduated payments over a term of 10 to 30 years, depending on how much you owe.

Disadvantages

  • Your payments will end up significantly higher at the end. Although you start out with lower payments, that’s quickly made up for in periodic increases. More, if your repayment term is 10 years, your payments at the end of your term will be significantly higher than they would have been on the standard plan. So you have to hope you’ll earn the income to make up for it.
  • Your payments could still be too high. The lower payments at the beginning aren’t tied to your income. Instead, they’re linked to your repayment term. In other words, if your income at your first job is sufficiently low, your payments might still be too high for you to manage.

Income-Driven Repayment Plans (IDR)

There are four IDR plans and each has its own set of advantages and disadvantages. All of them tie your payment amount to your income, but each has a different method for calculating the amount. And three of them – PAYE, IBR, and ICR – place a cap on how much you have to pay each month, while REPAYE does not. Further, all four of them have different requirements for how long you need to make your monthly payments before any remaining balance can be forgiven. It could be anywhere from 20 to 25 years depending on your IDR plan and individual situation.

But you don’t have to worry too much about which plan is the best for you. When you apply for IDR, which you can do through your loan servicer, unless you request otherwise, you’ll be put on the plan you’re eligible for that gives you the lowest monthly payment.

Pay-As-You-Earn Plan (PAYE)

Under the PAYE plan, your monthly payment is set at 10% of your discretionary income, but never more than you would have to repay on a standard plan. For all IDR plans except ICR, “discretionary income” means the difference between your annual income and 150% of the current year’s poverty level in your state of residence for a family of your size. The repayment term for PAYE is 20 years.

Revised Pay-As-You-Earn Plan (REPAYE)

Your monthly payment under REPAYE is also calculated as 10% of your discretionary income, but unlike PAYE, there is no cap. This means there’s no limit to how much your monthly payment could be. No matter how high your income rises, you’ll always pay 10% of your income until your loan is fully paid off. Your repayment term will be 20 years if you borrowed for undergraduate studies only, but 25 years if you also borrowed for graduate school.

Income-Based Repayment Plan (IBR)

With IBR, your monthly payment is also set at 10% of your discretionary income, unless you borrowed before July 1, 2014, in which case it’s 15%. But, as with PAYE, there’s a cap. No matter how high your income rises, you’ll never have to pay more than you would on the standard plan. How long you’ll have to repay on IBR also depends on when you borrowed. If you borrowed any of your loans before July 1, 2014, you’ll have to make payments for 25 years. But, if you borrowed after, it’s only 20.

Income-Contingent Plan (ICR)

This plan offers the least favorable terms, but it’s the only income-driven plan available to Parent PLUS borrowers. Your monthly payment on ICR is calculated as 20% of your discretionary income, which is higher than all the other plans. Worse, discretionary income for ICR is calculated differently. It’s the difference between your annual income and only 100% of the poverty level for your state of residence and a family of your size. There is a cap on ICR, but it’s slightly better than PAYE and IBR. You’ll never have to make a monthly payment higher than you’d have to pay if you were repaying your loans on a 12-year fixed schedule.

Advantages of IDR

  • Your payments are tied to your income. If you have a high amount of debt and a low income, IDR can be a lifesaver. Because the payments are tied to your income and not the repayment term, you’ll never have to pay more than a certain percentage of what you actually earn. Even better, if your income is low enough, such as during a period of unemployment, you could qualify for $0 repayments. This beats out deferment or forbearance because your $0 repayments will count toward your repayment clock. This is not the case with deferment or forbearance.
  • You qualify to have any remaining balance forgiven at the end of your repayment term. If your income is very low and your debt very high, it’s likely you won’t have finished paying on your loans at the end of 20 to 25 years. But, as long as you’ve made the required number of payments, any remaining balance at the end of the term could be forgiven.

Disadvantages

  • You’ll be stuck making payments for a long time. You’ll be making payments on your student loans over the course of two or more decades. This means that even if you start immediately after you graduate, you’ll be repaying your student loans well into your 40s. Worse, while your money is tied up making loan payments, you won’t be able to use that money toward other things, like saving for retirement.
  • You’re likely to end up repaying more in the long run. Even though IDR lowers your monthly payment by tying it to your income, you could still end up repaying significantly more than you would have on a standard plan thanks to the magic of compounding interest over the course of two decades. Be sure to do the math before you sign up for IDR.
  • Forgiveness may not be a worthwhile benefit. There are many reasons why forgiveness might never be a helpful benefit for you. First, depending on how much you owe and how your income grows over the course of the repayment term, you might not have a balance remaining to be forgiven. Second, even if you do have a balance remaining, it’s likely you’ll have repaid your original debt several times over by the time you get there. And, third, you could wind up with a sizeable tax bill depending on your remaining balance. The IRS considers the amount of income forgiven and taxes it accordingly. So, you could end up with a tax bill of thousands or even tens of thousands of dollars.

Income-Sensitive Repayment Plan

This plan is only available to those with FFEL Loans, a program that discontinued in 2010. If you have any of these loans, though, you can opt to have your payments tied to your income. This is like IDR but doesn’t come with the forgiveness benefit or the extended repayment term. With the income-sensitive plan, your payments will increase or decrease according to your income, but you won’t be able to extend your payments beyond 10 years. So, rather than calculate your monthly payment based on a percentage of your monthly income, payments are tied to both your income and the repayment term.

Advantages

  • You make smaller or larger payments based on your income. When your income is low, your payments are adjusted accordingly, making them easier to manage.
  • You can make income-based payments on FFEL Loans. The IDR plans have several benefits above income-sensitive repayment. So why go with this option? Only Direct Loans qualify for IDR. You can get around this by consolidating your FFEL Loans with a Federal Direct Consolidation Loan. But if, for some reason, you want to keep them out of consolidation, income-sensitive repayment is another option.

Disadvantages

  • You can’t extend the repayment term. Although payments increase or decrease along with your income, because you have to repay the total amount within a maximum of 10 years, payments might still be too high for you to manage.
  • You don’t have access to the same benefits as IDR plans. Even though IDR plans can have you paying on your loans for more than two decades, because of program perks like forgiveness, you may never have to repay the full amount you borrowed. More, because you don’t have to repay your full loan within 10 years or even 20 or 25 years, your payments will never be higher than a certain percentage of your income.

Deferment and Forbearance

Both deferment and forbearance allow you to temporarily suspend payment on your loans during times of need. These could include returning to school, experiencing unemployment or financial hardship, being deployed, or undergoing certain medical treatments. The main difference between the two is that with deferment interest won’t accrue on any subsidized federal loans you have. You must also meet certain qualifications for deferment, such as financial hardship. Whereas forbearance is granted at the discretion of your loan servicer.

Advantages

  • You can temporarily suspend payments without enrolling in a repayment plan. If you’re facing a temporary situation like returning to school or being deployed, you may only need a temporary solution. While repayment plans like IDR are designed to manage an ongoing situation, like consistently low income, deferment and forbearance are meant to help you get through short-term situations.
  • Under certain conditions, your loan payments can be suspended without accruing interest. If you have subsidized loans and opt to defer them due to economic hardship, military deployment, academic enrollment, long-term cancer treatment, or disability rehabilitation, no interest will accrue on your loans during the deferment period.

Disadvantages

  • Neither deferment nor forbearance counts toward forgiveness. If you’re banking on forgiveness – whether through an IDR plan or PSLF – know that if you defer or forebear your loans, the period of deferment or forbearance won’t count toward your forgiveness clock. Qualifying for student loan forgiveness requires you to make a certain number of payments. While it’s often discussed as 10 years, 20 years, or 25 years, it’s actually the number of payments that count – 120, 240, or 300. If you’re in a period of forbearance or deferment, you aren’t making any payments, so the time doesn’t count.
  • Under most conditions, your loans continue to accrue interest during deferment and forbearance. Unless you deferred your loans for any of the above-mentioned reasons and you have subsidized loans, interest will continue to accrue on your loans during your deferment or forbearance period. Unsubsidized loans always continue to accrue interest regardless of deferment or forbearance.

Forgiveness, Cancellation, and Discharge

Under certain conditions, you can qualify to have your loans forgiven, canceled, or discharged.

Options to Get Your Loans Forgiven

  • IDR. If you enroll in any IDR plan and have a balance remaining at the end of your repayment term, you can have that balance forgiven.
  • Public Service Loan Forgiveness (PSLF). If you work full-time at a nonprofit or government agency, you can have any remaining balance forgiven after making 120 (10 years) of qualifying payments. These payments do not have to be consecutive, but they do have to be made while working for a nonprofit and while enrolled in an IDR plan.
  • Career-Specific Repayment. Although not technically “forgiveness,” a variety of careers qualify for loan repayment assistance plans (LRAPs). These are federal, state, or private programs that repay a portion or all of a qualifying candidate’s student loan debt. To find out if a program exists for your chosen career-field, speak with your school’s financial aid office.

Perkins Loan Cancellation

If you have a Perkins Loan, you can have it canceled if you meet certain conditions. Generally, these require working in a specific career field for a specified number of years in an underserved area. Perkins loans are forgiven gradually with a percentage canceled after each qualifying year of service. For a complete list of qualifying jobs and cancellation requirements, visit Federal Student Aid.

Circumstances for Loan Discharge

Under certain conditions, you can have your student loans discharged, meaning you aren’t required to repay them. Note that in each of these cases, you must meet certain eligibility criteria, and you must apply for the discharge. It isn’t granted automatically.

  • Total and Permanent Disability. If you’re disabled to such an extent that you can no longer work, you can have your total student loan debt discharged.
  • Death. Federal student loan debt is discharged on death. This means your family won’t be responsible for repaying it, and it won’t count as a creditor against your estate. Death discharge includes Parent PLUS loans. They’re discharged if either the borrower or the student on whose behalf the money was borrowed dies.
  • Bankruptcy. Getting your student loans discharged in bankruptcy is excessively difficult. It requires proving “undue hardship.” The courts have interpreted this to mean that at your current level of education and ability there is no possible way you can ever repay the loan – not even with making income-based payments through an IDR program. Since IDR can calculate your monthly payments as low as $0, bankruptcy discharge borders on the impossible.
  • Closed School. If your school closes while you’re enrolled or within 120 days after you withdraw, you no longer owe the debt. If you were able to complete the program and graduate, however, you aren’t eligible for a discharge.
  • False Certification. If your school falsely certified your eligibility to receive your student loans or your ability to benefit from your educational program, you can have your debt discharged.
  • Unpaid Refund. If you withdrew from school after receiving a loan and your school failed to return the required amount to your loan servicer, you can have that amount discharged. Because it wasn’t your fault the money wasn’t returned, you won’t have to repay it.
  • Borrower Defense to Repayment. If your school misled you or violated state law directly related to your federal loans or the educational services provided by the school, you can apply to have your federal loans discharged.

Repaying Your Perkins Loan

The options for repaying Perkins Loans are not the same as for Federal Direct and FFEL loans. Under some circumstances you may be able to get them canceled – see above. If not, you’ll need to speak directly with your school or your loan servicer for repayment options.

Fortunately, you have a little extra time to repay Perkins Loans. If you’ve been attending school at least half-time, you have nine months after you graduate or stop attending to start repaying the loan. If you’re still attending school, but it’s less than half-time, check with your school to find out how long you have.

Note that the Federal Perkins Loan Program ended in September 2017, with final disbursements made through June 2018. So you may have some to repay, but it’s no longer possible to get new Perkins Loans.


Which Plan Is Right for You?

There are a lot of options when it comes to repaying your federal student loans. Which one is right for you depends on your own unique circumstances.

If you can manage your payments, even if it hurts a bit, your best bet is the standard repayment plan. You want to pay off your loans as quickly as possible because this frees up your money to work toward other life goals. In fact, CNBC reports that student loan debt can result in delaying buying a house, starting a family, and even saving for retirement.

But if life circumstances make paying your monthly bill excessively difficult, if not impossible, an IDR plan might be a better bet. Or, if you don’t make a lot now, but expect to make more in the future, a graduated plan could be the method for you.

To get the best picture of what your monthly payment could be under each plan, how much you’d ultimately have to repay, and if you’d have any balance remaining to be forgiven on an IDR plan, visit the Repayment Estimator at Federal Student Aid. It will enable you to compare the different plans using your own debt and income.

And keep in mind that no matter what repayment plan you decide on, you can change it at any time – for free. So, if your life circumstances change and the plan you selected no longer fits, you’re not stuck with it forever.


Final Word

Dealing with student loans is not fun. We all go to school in the hope that our degrees will result in a better future – a job we’re passionate about and a comfortable income. Unfortunately, the high cost of an education relative to the average family’s income means that more than two-thirds of Americans must borrow money to attend school. This can have the effect of making students feel their education wasn’t worth the expense.

In fact, according to Pew Research Center, more than double the number of college graduates with student loan debt feel their degree wasn’t worth the cost compared to those without debt. Yet Pew also found that college graduates are significantly more likely to have higher incomes, regardless of student debt amounts, than those with no degree.

So, as frustrating as dealing with the debt might be, for most students, borrowing it to get a higher paying job continues to be worth it.

Are you struggling with student loan debt? Which option seems like it might work best for you?

Sarah Graves
Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She's also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.

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