Repaying student loans

18 September 2019

If you’re on the ball, you can plan your repayment strategy.

If you owe money to the federal government for the loans that helped cover the cost of your education, you’re not alone. A majority of college graduates are in the same boat. Fortunately, there are a number of ways to structure repayment to make it affordable—something that’s not always the case with private loans.

Repayment begins

When you graduate, are enrolled less than halftime, or drop out, you have a six-month grace period in most cases before your first loan payment is due. During that period you’ll hear from your loan servicer—the company that bills you and collects your payments—that you’re enrolled in the Standard Repayment Plan.

That may be fine for you. The payments are fixed, and you’ll pay off your loan within ten years. But it’s also possible the payments will be more than you can comfortably afford. So early in the grace period you should use the loan Repayment Estimator at to find out which plans you qualify for, an estimate of the monthly cost, and the conditions that apply.

If you think one of your alternatives would make it easier to keep up with your payments, you should tell the servicer you want to change plans.

It’s your right to switch if you qualify, either initially or at some time in the future if your economic situation changes. The process often, but not always, is handled efficiently. But if it isn’t, you’ll have to press your case. If you need help, you can contact the National Consumer Law Center’s Student Loan Borrower Assistance Project or the Consumer Financial Protection Bureau.

Repayment Alternatives

Among the alternatives to the Standard plan are four income-driven plans that link your monthly payment to your discretionary income, or what’s left of your gross income after taxes and necessities including housing, food, and clothing. The plans, including the Pay As You Earn (PAYE) Plan, the Repay As You Earn (REPAYE) Plan, the Income-Based Plan (IBP), and the Income-Contingent Plan (ICR), do differ in ways that may make one better for you than the others. But each of them is a good choice if you hope to qualify for Public Service Loan Forgiveness (PSLF).

Outstanding balances on these loans will be forgiven if you’ve made payments for 20 years, or 25 in some cases, though you may owe income tax on the amount that’s forgiven.

Two other possibilities are the Graduated Repayment Plan, which has a 10-year term and payments that are lower in the initial years and higher later, and the Extended Repayment Plan, which has a 25-year term with either fixed or graduated payments.

Finally, if you have FFEL Loans, FFEL Plus Loans, or FFEL Consolidated Loans, you might consider the Income Sensitive Repayment Plan.

Postponing Payments

If it becomes hard for you to repay your federal student loans and you are unable to change your plan to reduce the monthly payment, you may find temporary relief by qualifying to suspend your payments for a limited time.

If you’re in school at least half time, if you’ve taken parental leave, you’re unemployed, unable to work, or if you’re in the armed forces or the Peace Corps, you can apply for deferment. If it is granted and your loans are Subsidized, interest isn’t due on your loan principal while you’re not paying. Unsubsidized loans will accrue interest, however, which may be added to the balance you already owe.

If you don’t qualify for deferment, you may request a forbearance. If it’s granted, your payments will be suspended for a limited time, but interest will accrue on your loan and be added to your principal balance.

But suspending payments isn’t a long-term solution to avoiding default and its negative consequences. So you’ll want to work with your servicer to resolve your debt.

Loan consolidation

If, as students typically do, you took several federal loans, potentially with different interest rates and different servicers, keeping track of what you owe and to whom can be a challenge. One solution may be to consider taking a federal Direct Consolidation Loan. There’s no charge, and you’ll end up with a single monthly payment.

Consolidated loans have a fixed interest rate calculated as an average of the rates on the loans you’re consolidating. The repayment term can be up to 30 years.

There are some potential drawbacks, such as the potential for paying more interest and the possibility of losing certain benefits, such as eligibility for loan forgiveness or the discount for regular electronic debt of your account. You’ll want to weigh the limitations against the convenience of a single payment.

One warning: You may be offered loan consolidation deals from private lenders. You almost always make out better with the government option.

Other loans

If you’ve taken loans from private lenders, the terms of repayment may be less flexible that those of the Direct Loan program. But they must also be repaid.

Serving the public

If you work in a qualifying public service job for 10 years, you may be eligible for loan forgiveness after making 120 payments in an income-driven plan. Be prepared, though. The rules are complex, and it can be hard to be sure you’re on track.

This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.

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