Once you’ve graduated or started going to school as less than a part-time student, you’ll usually have a period of time, between 6-9 months, when you don’t have to repay your student loans. This is called your “grace period” and interest can still build up on the time between graduation and repayment.
In a perfect world, we would all be able to make 10 years (or less) of payments after the grace period ends and be completely student loan free. In reality, some people can afford to put much more than their monthly payment towards their loans while others cannot come close to affording their monthly payment.
What are Federal Student Loan Repayment Programs?
Aside from the standard 10 year repayment plan, there are a few other options which can help with your monthly payments depending on your expenses and how much you make.
What is the Student Loan PAYE Plan?
- PAYE Plan – Pay As You Earn – If your first federal student loan was disbursed after September 30, 2007, you can repay your loans under the PAYE plan. With this, your maximum monthly payment is capped at 10% of your discretionary income (more on that here) as long as it’s less than what you would normally repay on a standard 10 year plan. Your repayment schedule will stretch out to 20 years under this plan, but you can still have your loans forgiven under the Teaching/PSLF programs after 5/10 years.
What is the Student Loan REPAYE Plan?
- REPAYE Plan – REvised Pay As You Earn – Unlike the PAYE plan that requires you to have a qualifying income, anybody can elect to pay under the REPAYE plan. 10% of your discretionary income would be your maximum monthly payment over a period of 20 years (unless part of the loans were used for graduate studies, then 25 years). As with the PAYE plan, you can qualify for forgiveness after 5 or 10 years if you work in certain professions.
What is the Student Loan ICR Plan?
- ICR Plan – Income Contingent Repayment – This is the only repayment plan available for PLUS loans, though they must be consolidated first. Payment caps are 20% of your discretionary income or what you would normally pay on a 12 year schedule at a fixed rate based on your income, whichever is lower. Anyone can qualify for an ICR plan and your term will be extended to 25 years. Federal forgiveness/cancellation options are still available once you’ve made the required number of payments/worked for a certain amount of time.
What is the Student Loan IBR Plan?
- IBR Plan – Income Based Repayment – Similar to the PAYE plan for those who receive their first loan after Sep 30, 2014, your payments are capped at 10% of discretionary income but never any more than what you’d pay under a standard repayment plan. For those who received loans before that date, it’s capped at 15% and no more than a standard repayment amount. Loan terms are 20 years for those starting after Sep 30, 2014 and 25 years for those before that date. As with other plans, you can still have loans forgiven under Public Service Loan Forgiveness (PSLF).
What are Options When You Cannot Repay?
Federal student loans do have some flexibility when it comes to being unable to make your monthly payments. Some of them only take place in a limited timeframe, other repayment options can extend indefinitely.
What is Student Loan Deferment?
- Deferment – During a deferment, you don’t have to pay principal or interest on a student loan but the interest does keep racking up. If your loans are subsidized, the government pays the interest during a deferment. There are several reasons why you can apply for a deferment, but the ones that apply to most people are the economic hardship and inability to find employment deferments, each lasting up to 3 years.
What is Student Loan Forbearance?
- Forbearance – Similar to a deferment, you don’t have to make payments while your loan is in forbearance, but it does still accumulate interest. You can request a forbearance if you otherwise wouldn’t qualify for a deferment, but in many cases it’s up to the lender to decide whether or not to grant it. In some cases, they are required to grant the forbearance, usually if your student loan payment would make up 20% or more of your gross income.
What is Student Loan Consolidation?
- Consolidation – There are times when an unmanageable situation occurs that would be fixed if several loans were consolidated. This often results in a lower monthly payment and a fixed rate, but at the expense of having to repay for a longer period of time. The federal government lets you consolidate several types of public student loans into a new loan, but prohibits you from rolling private loans into your federal consolidation. It’s also possible to get a private consolidation loan that would pay off your federal loans, but you lose all the flexibility you enjoy with federal programs when you do this.
What is Student Loan Bankruptcy?
- Bankruptcy – Discharging your student loans in a bankruptcy is possible but it doesn’t happen very often. In order to do this you typically have to show that your student loans alone would put you in an untenable financial situation for a long period of time. This means if all of your other debt were wiped out in a bankruptcy, your student loan payment would have to be so high you still wouldn’t be able to support yourself. Few people get their student loans discharged through bankruptcy, those who do are sometimes under unique financial stress.
Forgiveness and Cancellation of Student Loans
Some people may be eligible to have their federal student loans forgiven or cancelled. Though there are many reasons which can result in the loan completely disappearing, becoming a teacher or entering a public service profession are the two most common ways to receive loan forgiveness.
Perkins loans are forgiven on a graduated scale for public service professionals, sometimes resulting in 100% of the loans being forgiven. Other types of federal loans can be forgiven after 120 on-time regular payments while you are employed in the public service sector. Teachers have a special carve-out that only requires them to work 5 years in a low-income school to qualify for loan forgiveness.
What happens when you are overpaying Your Student Loans
If you think you’re going to be eligible for public service/teacher loan forgiveness programs, it’s usually in your best interest never to overpay your monthly payment. You won’t get credit for the extra money you put into the loan when it’s time to have it forgiven.
Student loan debt usually accumulates interest at a lower rate than most other types of debt. Pay off things like your credit cards first before trying to knock out student loans. Car loans and mortgages can sometimes have rates higher than your student loans, but paying your student debt faster can free up your monthly payment to go towards these other, sometimes larger loans. It can come down to a personal preference if the interest rates are close to the same.
Summary of Student Loan Repayment Issues
Federal loans are much better than private loans because they offer payment flexibility and forgiveness programs. Say goodbye to Perkins loans, they are leaving us next year. Fill out the FAFSA as early as you can to get a clear picture of how much you’ll need to borrow. Be smart about how you pay back your loans.