Today we welcome Natalie Bacon, who is an attorney and blogger at The Finance Girl. She’s written an incredible guide to student loan repayment that I hope sheds some light on a topic that many graduates are in the dark about. Enjoy and please share with others!
So, you’ve graduated from school and a few months have gone by. Hopefully, you’re fully employed and financially prepared for what you are about to receive in the mail: a letter stating that your student loan payments will soon become due. Don’t panic! Learn the different student loan repayment plans and choose what’s best for you.
It’s important for you to understand the various plans yourself because no one else will care more about your student loans (or your finances as a whole) than you will.
Here’s a guide to help you better understand the student loan repayment plans.
Private Loans
Private loans are repayable on lender-specific plans. This means that your private loan lender will have specific repayment plans that you may choose from. For example, your lender may offer a standard, 10-year repayment plan and a 25-year repayment plan (and that’s it!). Private lenders usually do not offer income-based repayment plans (unlike federal loans). So, you need to contract to lender to determine your specific options.
Federal Loans
Federal student loans may be repaid using one of the repayment plans below. Federal loans include, Direct Loans (subsidized and unsubsidized), Stafford Loans (subsidized and unsubsidized), PLUS Loans, Federal Family Education Loan Program (FFEL) Loans, and consolidated loans. Note that no new FFEL Loans have been issued since July 1, 2010. While there are many options to choose from, several of the plans are limited by the loans that qualify (i.e., pay attention to the ineligible loans when considering the repayment plan that is best for you).
Standard Repayment Plan
Qualifying Loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans (to you and your parents), Direct Consolidation Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.
Ineligible Loans: None.
Details: Repay your loans at a fixed amount (of at least $50) for 10 years for all loans, except for Direct Consolidation Loans and FFEL Consolidation Loans. These loans are paid for over a period of 10 to 30 years, depending on your total amount of student loan debt. You pay less interest under this plan than under other plans.
Graduated Repayment Plan
Qualifying Loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans (to you and your parents), Direct Consolidation Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.
Ineligible Loans: None.
Details: Repay your loans at a lower rate initially, then, about every two years your payments increase, for 10 years. This applies to all loans except Direct Consolidation Loans and FFEL Consolidation Loans. These loans are paid for over a period of 10 to 30 years, depending on your total amount of student loan debt.
Extended Repayment Plan
Qualifying Loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans (to you and your parents), Direct Consolidation Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.
Ineligible Loans: None.
Details: Repay your loans at a fixed or graduated amount for 25 years. You must owe more than $30,000 to qualify for this plan.
Income-Based Repayment (IBR) Plan
Qualifying Loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans made to you (the graduate or professional student), and Direct Consolidation Loans that do not include Direct PLUS Loans made to parents, FFEL PLUS Loans made to you, and FFEL Consolidation Loans that do not include PLUS Loans made to parents.
Ineligible Loans: Direct PLUS Loans made to parents and Consolidation Loans with PLUS Loans that were made to parents.
Details: Repay your loans at a monthly payment of 15% of your discretionary income for 25 years. Discretionary income is determined by looking at the amount by which your adjusted gross income exceeds the poverty line (for your family size and in your state). A partial financial hardship is required to qualify. You have a partial financial hardship if your monthly payment under the Standard Repayment Plan would be more than your monthly payment under IBR. Once on the plan, even if your partial financial hardship no longer exists, you may continue on the plan. You must submit annual documentation of your income to set your payment each year. Payments change as your income changes. If you owe after 25 years, whatever amount remains may be forgiven (but you may owe taxes on the forgiven amount).
Pay As You Earn Repayment Plan
Qualifying Loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS Loans made to you (the graduate or professional student), and Direct Consolidation Loans that do not include PLUS Loans made to parents.
Ineligible Loans: Direct PLUS Loans made to parents, Direct Consolidation Loans that include PLUS Loans made to parents (Direct or FFEL), and FFEL Loans.
Details: Repay your loans at a monthly payment that is 10% of your discretionary income for up to 20 years. The payment amount increases or decreases yearly based on your adjusted gross income and family size. To qualify, you must have a partial financial hardship. Once on the plan, even if your partial financial hardship no longer exists, you may continue on the plan. Only “new borrowers” are eligible, meaning your first loan must have been taken out on or after October 1, 2007, and you must have received a loan disbursement on or after October 1, 2011. Generally, your payments under this plan will be lower than under IBR. If you owe after 20 years, whatever remains may be forgiven (but you may owe taxes on the forgiven amount).
Income-Contingent Repayment Plan
Qualifying Loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans made to you (the graduate or professional student), and Direct Consolidation Loans except Direct PLUS Consolidation Loans.
Ineligible Loans: FFEL Loans and PLUS Loans made to parents, unless consolidated into a Direct Consolidation Loan post July 1, 2006.
Details: Repay your loans at a monthly payment that is calculated yearly based on your adjusted gross income, family size, and amount owed, for 25 years. Payments change as income changes. Your payments are determined by looking at 20% of your discretionary income compared to what is the amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor. Whichever is lower is the amount you’ll pay. You do not need to show a partial financial hardship to qualify for ICR. This is a different formula than the IBR formula, and usually results in higher monthly payments than IBR. If you owe after 25 years, whatever remains may be forgiven (but you may owe taxes on the forgiven amount).
Income-Sensitive Repayment Plan
Qualifying Loans: Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.
Ineligible Loans: Direct Loans.
Details: Repay your loans at a monthly payment based on annual income, for 10 years. Payments change as income changes. Loans are not forgiven under this program.
Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) Program is another option where your Direct Loans are forgiven after 10 years in a public service position as long as you’ve made 120 qualifying loan payments. (Note: this applies only to payments beginning after October 1, 2007.) Only Direct Loans qualify for this program, so if you have FFEL or Perkins Loans, you would have to consolidate them into a Direct Consolidation Loan in order to use this program. After 10 years, if your loans are forgiven, the amount forgiven is not taxable as income.
You must be on one of the following three repayment plans in order to qualify for PSLF: Income-Based Repayment, Pay As You Earn Repayment, or Income-Contingent Repayment.
Employment with the following employers constitutes as public service under PSLF: the government; not-for-profit tax-exempt organizations; private not-for-profit organizations that are not tax-exempt if the position pertains to public service, such as military service, public safety, law enforcement, emergency management, public health, public education, public library, public interest law services, and public service positions for people with disabilities and the elderly.
Learn more about PSLF here: http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service.
A Few Things to Remember
- You can change your repayment plan at any time, so don’t panic if you sign up for the wrong plan.
- Perkins Loans are repaid based on a plan determined by your school (i.e. they do not qualify for the plans above).
- You will always end up paying less in the long run if you pay on the Standard Repayment Plan, over a period of 10 years. That is to say, be careful using an income-driven plan because you may pay significantly more money over time.
Do you have student loans? What repayment plan are you using or will you use?
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Photo by Deb Nystrom
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Wow, I had no idea there were so many different kinds of payment plans. I’m so grateful I never had to deal with student loans.
My husband’s loans were on the standard repayment plan until we finally killed them a few years ago. I am so glad that’s over with! =)
I have private and federal loans. My private lender offered the 25 year extended repayment but the first two years were interest-only payments. My federal loans are under IBR with my monthly “payment” set to $0 because I don’t make much. This allows me to focus on paying off my private loans more quickly.
That’s a very comprehensive explanation…thanks! I’m on the 25 extended payment plan…yea those student loans will be here for a while. I paid off the higher interest ones though so the ones left have pretty low interest so I’m not too worried about them. They range from 2% to 4%. I looked into the IBR and loan forgiveness (I work in the public sector), but based on the loan amount and my wife and my income…the IBR would have made me pay based on a 10 year schedule and non debt would have been forgiven. That’s what it seemed when I used the calculator. The pay as you earn would have been different but my loan doesn’t qualify.
It seems as if the payment options have increased in number over the years. I was on a standard repayment plan and thankfully killed the last one several years ago.
I do not have student loans and it was one of the greatest “gifts” my dad has ever given me; however, I advise a number of people who have them, it is a very complicated process. Thanks for sharing this info in one place!
Another thing to add is that you will have to pay the taxes on any forgiven amount. And it is a complete hassle. My mom had a 20k loan forgiven and ended up owing around $6k in taxes from that loan alone (even though she basically makes no money and is on perm disability).
For us, we do income contingent since both of us are in nonprofits and never expect to make much.
One of my goals once finishing college was to pay these stupid things off ASAP. I never spent time researching or trying to understand the different payment plans as I knew I’d always be making a payment more than the minimum, and ensuring the excess was paying down principal and not extending the next due date. I know this isn’t a possibility for everyone but is definitely a good financial goal to have and takes away the time needed to research the payment plans and stress over which one is right for you.
I am glad I paid my loans off shortly after graduating. I only had $7,500 or so, and I paid like mad to get rid of them. They were at 7% I think.
But they did help me to graduate. I thought about dropping out of school a few times, but knew I would be forced to pay them back right away if I did. So I stayed in school and kept the loans at bay. No interest either while in school.
Fortunately I didn’t have to take out loans when I was in college, so I don’t know there are a lot of options to pay back your loans. Thanks for sharing, will refer to it in the future in case someone I know need it.