What are my options for student loans and how to repay them?
Most students don’t have the ability to attend college or grad school without borrowing student loans. In fact, two-thirds of students borrowed money to attend college in 2018, according to a 2019 report from the Institute for College Access and Success. And that percentage continues to steadily increase.
Unfortunately, almost as many may not understand what they’re getting into. According to Forbes, a 2017 NextGenVest survey of high school seniors deciding between college acceptances and financial aid packages found that 70% of respondents knew nothing about student loans. And that can have a severe impact on your future if you aren’t careful.
Borrowing too much can lead you to pursue a degree that never ends up paying off, keep you stuck in repayment for decades, or prevent you from meeting other financial goals like buying a house, saving for retirement, or starting a family. Thus, while borrowing remains a fact of life for most students, it’s crucial to be well-informed.
What Are Student Loans?
Student loans are a type of installment loan. You borrow money from the U.S. Department of Education (ED), a state government, or a private lender and pay it back in regular monthly installments over a fixed period. This makes them akin to a personal loan.
However, unlike a personal loan, which can be used to pay for almost anything, a student loan is borrowed specifically to cover education expenses. Thus, they’re subject to specific laws and regulations unique to student loans.
This includes the stipulation that student loans can only be used for expenses directly related to your education. However, that includes not only tuition and books, but anything related to the total cost of attending your school.
The total cost of attendance (COA) is the amount your school certifies that it costs to attend for one year, including expenses such as:
- Room and board
- Loan fees
- Miscellaneous expenses
This means it’s possible to borrow student loans to cover your rent, car payments, gas, and groceries.
And unlike any other form of personal debt, it’s excessively difficult to get rid of student loans — federal or private — in bankruptcy, thanks to special bankruptcy laws unique to student loans. More on that below.
Student Loan Interest Rates
The interest rates on student loans vary considerably depending on the type of loan and whether they’re federal or private.
Federal Student Loans
The interest rate on federal student loans depends on the loan type and the disbursement date of the loan. It’s determined annually for the 12-month period beginning on July 1 and ending on June 30. Additionally, it remains fixed for the life of the loan.
That means you could end up with a better or worse interest rate depending on when you borrow.
For example, the interest rate for subsidized and unsubsidized direct loans for undergraduate students disbursed after July 1, 2021, and before July 1, 2022, is 3.73%. But for loans disbursed the year before (July 1, 2020 to June 30, 2021) the interest rate was 2.75%.
So students who borrowed a year later are stuck paying a higher rate for the life of their loan than those who borrowed for the 2020-21 academic year.
Also, the interest rates are always higher for graduate students and PLUS loan borrowers than for undergraduate borrowers.
Fortunately, however, there are limits on how high the interest rate can go, which are determined by the Higher Education Act.
The maximum interest rate for direct subsidized and unsubsidized loans made to undergraduate students is 8.25%. For graduate and professional students, the interest rate on subsidized and unsubsidized direct loans cannot exceed 9.50%. And for direct PLUS loans, the interest rate is capped at 10.50%.
To find the interest rates for the current academic year, visit StudentAid.gov.
Private Student Loans
Private student loans typically have interest rates significantly higher than federal student loans. They’re determined by market forces (competition with other lenders), the current federal funds rate (the bank-to-bank lending rate determined by the Federal Reserve), and the borrower’s credit score and credit history.
Unlike the ED, which doesn’t lend student loans according to a borrower’s credit, private lenders require borrowers to have good credit. Only the most creditworthy borrowers qualify for the best rates because lenders see them as less of a risk.
Although the ED checks the credit reports of PLUS loan borrowers (it doesn’t check credit reports for any other direct loans), it only checks for an adverse credit history — a recent history of default on any significantly sized loans. It doesn’t check your credit score, nor does it determine your interest rate based on your credit score.
According to Credible, a marketplace for finding private lenders, the average private loan interest rate in 2021 for a fixed-rate 10-year loan with a cosigner is 7.64%.
Types of Student Loans
Although the ED is the most common source for student loans, students can borrow from a variety of lenders. These include state governments, private banks, and even colleges and universities themselves.
Federal Student Loans
The vast majority of student borrowers fund their education with loans from the ED. According to the National Center for Education Statistics, 62.8% — nearly two-thirds — of all students (those who borrowed student loans and those who didn’t) borrowed federal loans during the 2015-2016 school year. By contrast, only 15% of all students borrowed from other sources.
All federal loans currently offered are through the William T. Ford Direct Loan Program. They include direct subsidized loans, direct unsubsidized loans, and direct PLUS loans.
Note the program also includes direct consolidation loans, but you can’t take out a consolidation loan until your loans enter into repayment. More on that below.
Subsidized Direct Loans
Federal direct subsidized loans are available only to undergraduate borrowers who meet financial need qualifications. The ED covers the interest on their subsidized loans while they are enrolled in school at least half-time, for the first six months following graduation (the grace period before repayment begins), and during deferment.
According to the ED, “financial need” is the difference between the cost of attendance and the student’s expected family contribution (EFC), as determined by information provided on their Free Application for Federal Student Aid (FAFSA).
Although one’s EFC does not change no matter where a student decides to go to school, the cost of attendance is entirely dependent on the school. Thus, financial need is ultimately determined by where you go to college.
There are limits on how much you can borrow in subsidized direct loans. You can borrow the rest you need to finance your education in unsubsidized and other loans, such as PLUS or private loans.
Unsubsidized Direct Loans
Unsubsidized direct loans are available to both undergraduate and graduate students. As with subsidized direct loans, there are borrowing caps. But independent undergraduate students are eligible to borrow even more than their fellow students who are legal dependents of their parents or guardians as are graduate students.
Also unlike subsidized direct loans, there is no time period during which the ED covers the interest on the loan. Even though borrowers don’t need to start repaying until six months after they leave school or drop below half-time, interest begins accumulating from the moment the loan is disbursed. And once the grace period ends, and repayment begins, the interest capitalizes (is added to the principal balance).
The interest rate also differs significantly between undergraduate and graduate student loans, with graduate students tending to pay more.
You may not be able to cover the cost of your education with federal direct subsidized and unsubsidized loans alone due to their borrowing limits. That’s where federal direct PLUS loans come in.
For undergraduate students, parents must do the borrowing. Graduate students are always considered independent, so they can borrow grad PLUS loans on their own.
Regardless of the type, PLUS loans allow you to borrow up to the total cost of attendance at the school, minus any other financial aid.
As with all other direct loans, the interest rate remains fixed for the life of the loan, and the rate is determined by the year the loan was disbursed.
The rate is also always higher than subsidized and unsubsidized direct loans. For example, for grad PLUS loans disbursed between July 1, 2021, and July 1, 2022, the interest rate is 6.28%.
How to Apply for Federal Student Loans
To apply for any kind of federal financial aid, you must fill out the Free Application for Federal Student Aid (FAFSA) by the deadline preceding the academic year of enrollment — usually the end of June. However, each college or university may have its own deadline, so be sure to check with the schools you’re considering attending.
In addition to grants, the FAFSA also determines the amount of federal student loans you qualify for. And most schools use the FAFSA to qualify you for any institutional aid, including grants, scholarships, and institutional student loans.
Thus, the FAFSA is the starting point for all student aid, including student loans.
The complete application can be filled out online. Before you begin, you’ll first need to create a Federal Student Aid ID (FSA ID). And if you’re a dependent student borrower, your parent or guardian will also need to create one. These allow you to “sign” the online documents.
Once you have your FSA IDs, gather the following documents:
- Social Security numbers or alien registration numbers
- Federal tax information or tax returns
- Records of untaxed income, such as child support or life insurance
- Cash, savings, and checking account balances
- Record of investments, other than the home in which you live
Then visit the online FAFSA application and follow the prompts.
State Student Loans
State loans are offered through various state-sponsored programs, including state agencies and state-sponsored nonprofits. They’re usually restricted to state residents or students enrolled in state colleges and universities.
While they stand separate from federally subsidized loans, state governments typically offer better terms and conditions than private loans; they’re generally similar to those for federal direct loans.
Even better, some state loan programs offer state-specific loan forgiveness options for students who remain in the state after graduation.
Although state resources aren’t as deep as those of the federal government, they’re definitely a resource worth checking into before turning to private borrowing.
The interest rates will be lower for most borrowers and typically remain fixed for the life of the loan. Further, state loans provide flexible repayment options and require no credit check.
Programs vary from one state to another, and some states have discontinued their lending programs. But there are still many states that continue to offer government-sponsored loans.
It’s also worth noting that in addition to loan programs, states typically offer a wealth of grants and scholarships.
How to Apply For State Student Loans
For the most accurate and current information about any state-specific aid available to you, contact your state’s department of higher education.
Or, to get a general idea of what’s available in your state, visit the state-by-state list on The College Investor.
Private Student Loans
Private student loans and federal student loans come with a lot of differences. While both are intended to finance education expenses, private loans aren’t issued, subsidized, or processed by the government. Rather, they’re issued by private lenders — typically banks.
Unlike the ED, private lenders check your credit. This makes private loans a barrier for most undergraduate students who haven’t yet established a credit history.
Further, repayment options are limited. Even the best private lenders can’t match the number of repayment programs, particularly for financial hardship, offered through the ED. And no private lender offers student loan forgiveness.
On the other hand, if you’re a parent or grad student looking to borrow PLUS loans and are able to qualify for a lower interest rate, it may be worth it to you to investigate borrowing private loans.
Just be sure to max out all other federal, state, scholarship, grant, and work-study options — and to carefully weigh the pros and cons — before resorting to a private loan.
How to Apply for Private Student Loans
Shop around to ensure you find a loan with the best rate and terms. Use a marketplace like Credible, which lets you compare rates from up to eight lenders without it affecting your credit.
Institutional Student Loans
Depending on your college, your financial aid package might include institutional aid in addition to federal aid. Institutional aid comes from the college itself and usually includes grants and scholarships.
However, some colleges and universities offer their own loan programs. These are provided as a way to help bridge the gap when state and federal aid falls short of covering the total cost of education at the college.
How to Apply for Institutional Student Loans
To find out what kind of institutional aid you qualify for, including institutional loans, you’ll need to submit a FAFSA. However, some colleges additionally require a form called the CSS Profile, which dives deeper into your family’s financial situation.
So be sure to reach out to your college’s financial aid department to find out if it requires the CSS Profile or any other additional school-specific forms. Consulting directly with a financial aid officer at your school will ensure you uncover all the opportunities for institutional aid.
Student Loan Repayment Options
Your repayment options vary considerably depending on whether you have federal or private student loans. When it comes to state or institutional loans, the options depend on the unique loan program.
Federal Loan Repayment
Federal student loans have the most options for repayment, each of which varies by length, eligibility criteria, and the amount you’re required to repay. Some repayment programs even qualify you to have your loans forgiven after making a required number of payments.
Note that you’re not stuck with any particular repayment plan. If your circumstances change at any time, you can always speak with your loan servicer — the agency that manages your billing and payments on behalf of the ED — about switching repayment plans.
After you graduate, leave school, or drop below half-time enrollment, your loans automatically enter into repayment following a six-month grace period.
Unless you enroll in a specific repayment plan, they’ll automatically default to the standard 10-year repayment plan. This means your monthly payments will be calculated based on a fixed, 10-year repayment schedule.
If you can afford your monthly payment, in most cases, the standard plan allows you to pay back the least amount in total. Although stretching the repayment term beyond 10 years will lower your monthly payment, you’ll end up paying more in the long run due to accumulating interest.
The graduated repayment plan resembles the standard plan in that it has a 10-year limit, but it has graduated payments that increase every two years.
No payment under this plan can ever be more than three times the amount of any previous payment. But the increase has no other limit, including no basis on your income. Rather, it continually rises to an amount that ensures the loans will be paid off within 10 years.
This can benefit students who expect to enter their career field with lower pay but gradually rise in income over the next 10 years. However, in the final years of repayment, the monthly amount can be immense.
Borrowers with more than $30,000 of direct loan debt who did not have an outstanding loan balance of any kind on or before October 7, 1998, are eligible for extended repayment.
The plan can stretch out for up to 25 years, and payments can be either fixed over the life of the loan or graduated, where they are lower at the beginning and then increase every two years.
As with the graduated plan, this can be helpful for borrowers who expect their incomes to rise over time.
But, unlike the graduated plan — because you’re extending the repayment term — you’ll end up paying back more than you would have on the standard repayment plan due to accumulating interest over a longer term.
There are four income-driven repayment plans (IDR): pay as you earn (PAYE), revised pay as you earn (REPAYE), income-based repayment (IBR), and income-contingent repayment (ICR).
Each of them can help borrowers who are struggling to make their monthly payments by calculating the amount borrowers have to repay each month as a certain portion of their discretionary income.
Further, enrollment in an IDR plan is the only way to qualify for student loan forgiveness, including public service loan forgiveness. More on that below.
However, the plans vary in the details. The differences include who qualifies, how discretionary income is calculated, caps on how much you have to repay each month, and how long you have to make payments before your loans can qualify for forgiveness.
See our article on IDR plans to learn more.
When you consolidate your student loans, you essentially combine them all into one. Technically, you’re issued one large loan that pays off all the others. You then have only one loan to worry about.
Most federal student loans are eligible for consolidation, but not until after they enter into repayment — either when you graduate, leave school, or drop below half-time enrollment.
Also, you can’t consolidate private student loans with a federal direct consolidation loan. Private loans can only be consolidated through refinancing. More on that below.
Once you consolidate your loans, you can put them on a 10-year repayment schedule. 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 StudentAid.gov.
Be aware you may need to consolidate your loans to qualify for IDR and loan forgiveness if you have older, ineligible loans, since only direct loans qualify. But otherwise, consolidation doesn’t have many benefits.
Many students consolidate because of common myths about student loan consolidation or because they simply think they’re supposed to. But consolidation isn’t the right move for all borrowers. So think carefully before making this move, because once done it can’t be undone.
Private Loan Repayment
Private student loans typically have far fewer repayment options than federal student loans. Most private loans don’t have income-based or financial hardship options. However, this varies by lender. For example, some lenders offer a specified number of years you can make interest-only payments on your loan.
Most private lenders offer in-school deferment and a post-graduation grace period, similar to federal student loans. However, after the grace period ends, you’ll need to begin repayment.
Typically, private loans have fixed repayment terms. So your monthly payment will depend on the repayment term you agreed to when you applied for the loan, your interest rate, and how much you owe.
The only way to change these factors is through refinancing.
Student Loan Refinancing
If you have excellent credit and good career prospects, you might be able to qualify for student loan refinancing.
Refinancing is like federal student loan consolidation in that several loans can be paid off with one new loan. But, unlike with consolidation, the loan is issued by a private bank and not the ED.
You can refinance federal loans as well. But keep in mind that if you refinance your federal loans you’ll lose access to federal repayment and forgiveness programs.
The primary purpose of refinancing is to score a lower interest rate. As long as you stick to a 10-year (or shorter) repayment term, a lower rate reduces the overall amount you’ll have to repay.
It also reduces your monthly payment. How much it gets reduced depends on how significantly your interest rate goes down. But note that only the most creditworthy borrowers qualify for the lowest interest rates. And that typically means having not only an excellent credit score, but also proving sufficient income to repay the debt.
Thus, refinancing isn’t a repayment strategy for those dealing with financial hardship. It’s most useful for those in a good financial position. And it’s an especially useful strategy for paying off student loans as quickly as possible.
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 an online marketplace like Credible. It matches you with prequalified rates from up to eight lenders without affecting your credit.
Options If You Can’t Afford to Repay Your Student Loans
For those unable to repay their student loans, the ED offers a number of forgiveness, cancellation, and discharge options. Note, however, that each has very specific requirements. Deferment and forbearance are also options for those dealing with short-term financial hardship.
As with repayment, private loans offer fewer hardship options.
Deferment is a temporary postponement of student loan payments. The ED and private lenders both offer student loan deferment options. But the ED’s terms are more generous.
When it comes to federal student loans, a deferment prevents the accrual of interest on direct subsidized loans and Perkins loans (a discontinued federal loan program). However, interest is added to the principal balance for unsubsidized loans.
Since there are no subsidized private loans, periods of deferment don’t suspend interest on private student loans. They only suspend payments.
Academic deferments are automatically available on federal student loans for students enrolled at least half-time in school. And those deployed for active military duty can qualify for a military deferment.
Additionally, borrowers facing unemployment or low income can qualify for an economic hardship deferment.
However, in the case of ongoing financial hardship, it’s more advantageous to enroll federal student loans in an IDR plan. That’s because if you’re unemployed or your income is so low it falls below a certain percentage of the poverty line, your monthly payment is calculated at $0. But each “payment” still counts toward eventual loan forgiveness.
Many private lenders allow academic deferment and have specified periods for military deferment, financial hardship deferment, and some even allow medical residency deferment.
However, while the ED allows unlimited terms for categories like academic deferment (you can suspend payments while in school for as long as you want to attend school), private lenders aren’t as generous.
Many only allow loans to be deferred for specified periods, such as up to 36 months. And the terms are typically aggregate. For example, you can’t defer your loans for 36 months for financial hardship and another 36 months for military deployment. Once the 36 months are used up, that’s it.
If a borrower doesn’t qualify for a deferment, or their allowable time limit on a deferment has run out, forbearance also allows payments to be suspended or reduced.
For federal student loans, it differs from a deferment in that interest continues to accrue on all loans — subsidized or otherwise — during the forbearance. At the end of the forbearance, the interest is capitalized, increasing the total amount owed.
For private student loans, the difference is in name only since private lenders don’t offer loan subsidies. Typically, deferment terms and reasons are specified in the loan contract, whereas forbearances are granted at the lender’s discretion.
There are two types of forbearances available for federal student loans. Discretionary forbearances are granted at the discretion of the lender in the event of a financial hardship or illness.
Mandatory forbearances are required to be granted by lenders under certain circumstances, such as if the borrower is serving a medical or dental residency, serving in a national service program like AmeriCorps, or is activated into National Guard duty and doesn’t qualify for a military deferment.
As with deferments, because of the impact of accumulated interest on your loans and the benefit of potential loan forgiveness, it’s best to explore an IDR plan before resorting to forbearance.
Federal student loan forgiveness comes after making a required number of payments in an IDR program. At the end of your repayment term, you qualify to have your outstanding balance wiped out.
Typically, forgiveness comes after making 20 to 25 years of payments, depending on the program you qualify for.
But if you work full time in a public sector or nonprofit job while enrolled in IDR, you can qualify for Public Service Loan Forgiveness (PSLF). This program allows your loans to be forgiven after 10 years of payments.
Note that in neither circumstance are the payments required to be consecutive.
No private lender offers student loan forgiveness.
Cancellation or Discharge
Although different programs are labeled either “cancellation” or “discharge,” they effectively mean the same thing. As with forgiveness, when a loan is canceled or discharged, the borrower has no further obligation to repay.
However, when it comes to federal student loans, a discharge could happen immediately and the borrower isn’t required to pay income tax on the canceled amount.
The circumstances for which federal student loans can be canceled or discharged include:
- Closed School. Borrowers who attend a school that closes for any reason before the borrower can graduate are eligible to have their loans discharged.
- False Certification. If your school falsely certified your eligibility to receive your student loans, including through identity theft, or lied about your ability to benefit from your educational program, you can have your debt discharged. However, loans may not be forgiven because a student fails to graduate, is merely dissatisfied with the institution, or is unable to find work in his or her chosen field.
- Unpaid Refund. Borrowers who left school and were not paid a refund they were rightfully due are eligible for a discharge of the unpaid amount because they never received it.
- Borrower Defense to Repayment. If your school misled you or violated state law directly in relation to either your federal loans or the educational services provided by the school, you can have your federal loans discharged.
- Total and Permanent Disability. If borrowers are disabled to the extent they can no longer work and, therefore, can never make loan payments even under an IDR plan, they can have their loans discharged. A doctor’s certification is required.
- Death. Loans are discharged for deceased borrowers upon the receipt of a certified death certificate. Additionally, parent PLUS borrowers can have their loans discharged if the student on whose behalf they borrowed the loan dies.
No private lender offers all of these options, commonly referred to as “borrower protections.” But many offer at least a few of them. The most common are discharge due to death or permanent and total disability.
Most federal student loans go into default when the borrower fails to make payments for 270 days, or roughly nine months. Private student loans can go into default immediately — as soon as a single payment is missed. It’s up to the discretion of the lender.
If you’re unable to make your loan payments, you should exhaust every other possible option before defaulting. Once you’re in default, your loan becomes due in full.
If it’s through a private lender, your loan may be referred to a collection agency or the lender may pursue legal action to recover the amount due.
With federal loans, you’ll no longer have access to federal repayment programs. You’ll also owe any unpaid interest and any fees associated with collecting on the amount.
Worse, the federal government has extraordinary powers to collect, including garnishing your wages or Social Security and seizing your tax refunds. And, unlike a private lender, they can do all of this without having to go through the process of suing you.
If you default on a private loan, your only recourse is to attempt to settle the debt or declare bankruptcy. More on that below.
When it comes to federal student loans, there are three ways you can get out of default:
- Pay the Balance in Full. If you’re able to pay the full balance, your debt will be cleared and you’ll no longer be in default.
- Consolidate Your Loans. You must consolidate your loans, and agree to repay them under an IDR plan. However, this won’t remove the default from your credit report.
- Go Through the Process of Student Loan Rehabilitation. You must make nine on-time monthly student loan payments. Once you do, the default is removed from your credit report.
Historically, it’s been excessively difficult to discharge either federal or private student loans in bankruptcy. Unlike a typical chapter 7 or 13 bankruptcy, discharging student loans requires filing an “adversary proceeding.” This means the borrower’s creditors may challenge the request.
Further, to qualify for bankruptcy discharge, the bankruptcy court must find that repayment would impose undue hardship on the borrower and their dependents. Courts have interpreted this “undue hardship” standard in different ways. But most often they use the Brunner test.
The Brunner test requires you meet the following criteria:
- Based on your current income and circumstances, if you’re forced to repay the loan, you will not be able to maintain a minimal standard of living.
- Your situation is likely to continue for a significant portion of the repayment period.
- You made a good faith effort to repay the loan before filing for bankruptcy.
It’s a nearly impossible standard to meet, which is why it’s often thought student loans aren’t capable of being discharged in bankruptcy. However, the current student loan crisis affecting the U.S. may be changing things.
In July 2021, a New York-based federal court of appeals ruled that private student loans could be discharged in bankruptcy, according to Reuters. While other courts could decide individual cases differently, this precedent makes it easier for other private loan borrowers to get bankruptcy relief when their loans have become unmanageable.
Further, in August 2021, a bipartisan bill called the Fresh Start Through Bankruptcy Act of 2021 was introduced in Congress to make it easier to get a bankruptcy discharge on federal student loans.
Although the fate of the bill is uncertain as of this writing, its passage could mean bankruptcy relief for many federal borrowers unable to manage their loans and for whom the federal repayment and forgiveness programs haven’t worked.
It’s excessively difficult to settle federal student loans. And even when it does happen, borrowers are unlikely to get a “good” deal, as noted by the National Consumer Law Center.
This is because federal law dictates what collection agencies can offer, which is typically only a waiver of fees and interest. For any other deal, the collection agency must get approval from the ED.
On the other hand, if you’ve defaulted on private student loans, it’s possible to negotiate a settlement. Private lenders have a lot more leeway in what they can accept.
Moreover, if your debt has been sent to a collection agency, it’s already been sold for pennies on the dollar. And thanks to recent court rulings making bankruptcy for private student loans more accessible, there’s always the threat a private company could end up collecting nothing.
That means they’re a lot more willing to accept a lesser amount lest they get zero. Thus, it’s often possible to settle a private loan that’s in default for 30% to 60% of the total owed, according to Stanley Tate, a student loan lawyer interviewed by U.S. News.
Depending on the terms of your settlement, you can pay the money back as a lump sum or in installments. Typically, you’ll get a better deal if you’re able to pay a lump sum amount.
You can either negotiate with your creditor yourself or hire a reputable debt settlement agency or an attorney who specializes in student loans to negotiate on your behalf.
Student loans provide access to an education for the majority of Americans who can’t afford to pay for college out-of-pocket. But it’s important to be careful with how much you borrow and who you borrow it from.
I know this first hand. Not only do I have more than 14 years experience working in higher education, but I also made my own ill-informed borrowing decisions to finance my way through graduate school.
Debt can have a significant effect on your future, impacting everything from your career choices to your decisions to get married and start a family.
So ask yourself the most important questions before borrowing student loans. It pays to be well informed.