This is the fourth article in our series covering student loans. Our goal in this series is to equip you with the knowledge necessary to make efficient and informed decisions regarding your student loans. In this post, we will cover the various repayment plans available with federal student loans. If you missed any of the prior posts (Part 1, Part 2, Part 3), go back and check them out before reading on so that you have the necessary foundation.
Federal Student Loan Repayment Plans
The good news is you have a ton of options. You should be able to find a repayment plan that fits your needs. The bad news is… you have tons of options. Often, complexity is paralyzing. Please avoid this as it will cost you – keep reading so that you can make educated decisions!
For starters, you can change repayment plans at any time as long as your underlying loans are eligible for the desired repayment plan. There is a super handy repayment estimator online which allows you to run the numbers on your loans.
It’s important to know exactly what types of loans you have FIRST before analyzing your options. If you are unsure, go back to part 1 in our series to learn what information you need to gather. We will be covering the following federal student loan repayment options:
- Standard Repayment
- Graduated Repayment
- Extended Repayment
- Income-Driven Repayment (IBR, PAYE, or ICR)
- Income-Sensitive Repayment
Student Loan Status
Before we get into the repayment options, it’s important to clarify how loan repayment status works. Your federal student loans will always be categorized under one of the following repayment status, depending on your situation and how you are repaying them (or not repaying them). We will reference these more in future posts as they are extremely important for student loan planning, but for now it’s important to define each.
In-School– It is what it says. Interest treatment is similar to the deferment status detailed below.
Deferment– Repayment of the principal and interest of your loan is temporarily delayed. No payments are required. Interest will accrue on your federal loans however if they are subsidized, the federal government picks up the tab. Interest will capitalize at the completion of deferment.
Grace– Offers a set period of time when you graduate, leave school, or drop below half-time enrollment before you must begin repayment of your loan. Interest will typically accrue during your grace period. Grace is not available on all loans. (Example – PLUS loans have no grace period)
Forbearance– Available in some situations when you don’t qualify for deferment and you cannot make scheduled loan payments. Your monthly payment is reduced or eliminated depending on the circumstances. You qualify for forbearance in 12 month increments of time. Interest will accrue on your subsidized and unsubsidized loans during this period. Interest also capitalizes at the completion of each forbearance period. Use caution with Forbearance. We see many medical residents defaulting to it however it’s rarely your best option.
Repayment– The period of time when you are actively making payments under one of the qualified repayment options which we will cover below.
Delinquent– This period begins the first day after you miss a payment and continues until all outstanding payments are caught back up and your loan becomes current. Delinquencies of at least 90 days are reported to the credit bureaus and likely will negatively affect your credit rating.
Default– After a long enough period of delinquency, your loans eventually default. You want to avoid this as there are many negatives associated with it. Most notably, interest capitalizes and your credit takes a hit.
Standard Repayment
Available for the following loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
- Unsubsidized and Subsidized Federal Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
Monthly payments are fixed (minimum $50/mo) and are made for up to 10 years for all loan types except Direct Consolidation and FFEL Consolidation Loans. If you have a FFEL or Direct Consolidation Loan, your monthly payments are fixed (minimum of $50/mo) and are made for 10 and 30 years depending on your total education loan indebtedness.
Graduated Repayment
The Graduated Repayment plan is very similar to the Standard Repayment plan (same eligible loans, same repayment periods, same exception with consolidation loans).
The main difference is that payments are not fixed – they start out low and increase every two years. The payments will never be less that the amount of interest accrued between payments and will never be more than three times your lowest payment.
Extended Repayment
The Extended Repayment option is available on the same loans as the Standard & Graduated Repayment plans. Although Direct Loans are eligible, there are some additional requirements specific to Extended Repayment you should be aware of which you can read more on here.
With the Extended Repayment, you can setup monthly payments that are fixed OR graduated. The monthly payments, which are generally lower than Standard or Graduated payments, can be made for up to 25 years.
Income-Driven Repayment
Income Based Repayment “IBR”
Available for the following loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not pay any parent PLUS loans
- Unsubsidized and Subsidized Federal Stafford Loans
- FFEL PLUS loans made to graduate or professionals studies
- FFEL Consolidation Loans that did not repay any parent PLUS loans
- Federal Perkins Loans (only if you consolidated)
Payment amounts are based on a percentage of your discretionary income, but are never more than the 10-year Standard Repayment plan amount. The percentage depends on when you became a new borrower. If it was before July 1, 2014, it’s 15% of discretionary income. If it was on or after July 1, 2014, it’s 10% of discretionary income.
The repayment period also depends on when you became a new borrower. If it was before July 1, 2014, the repayment period is 25 years. If it was on or after July 1, 2014, the repayment period is 20 years.
Pay As You Earn “PAYE”
Available for the following loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not pay any parent PLUS loans
- Unsubsidized and Subsidized Federal Stafford Loans (only if you consolidated)
- FFEL PLUS loans made to graduate or professionals studies (only if you consolidated)
- FFEL Consolidation Loans that did not repay any parent PLUS loans (only if you consolidated)
- Federal Perkins Loans (only if you consolidated)
Payment amounts are 10% of discretionary income but never more than the 10-year Standard Repayment Plan amount. The repayment period is 20 years.
To qualify, you must be a new borrower as of October 1, 2007, and must have received disbursement of a Direct Loan on or after October 1, 2011.
Income Contingent Repayment “ICR”
Available for the following loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct PLUS Loans made to parents (only if you consolidated)
- Direct Consolidation Loans that did not pay any parent PLUS loans
- Direct Consolidation Loans that repaid PLUS loans made to parents
- Unsubsidized and Subsidized Federal Stafford Loans (only if you consolidated)
- FFEL PLUS loans made to graduate or professionals studies (only if you consolidated)
- FFEL PLUS loans made to parents (only if you consolidated)
- FFEL Consolidation Loans that did not repay any parent PLUS loans (only if you consolidated)
- FFEL Consolidation Loans that repaid PLUS loans made to parents (only if you consolidated)
- Federal Perkins Loans (only if you consolidated)
Payment amounts are the lessor of either 20% of your discretionary income OR what you would pay under a 12 year fixed payment plan, adjusted according to your income. The repayment period is 25 years. The ICR Repayment strategy is very rarely used.
“Only if you consolidated” means that if you consolidated the loan type into a Direct Consolidation Loan you are eligible.
“Discretionary Income” for IBR & PAYE is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence.
Income-Driven Loan Forgiveness Options
If your loans are not fully repaid at the completion of the repayment period under any income driven repayment plan, the remaining balance will be forgiven. This repayment period includes periods of economic hardship deferment and periods of repayment under other plans.
There is also a special forgiveness program called Public Service Loan Forgiveness “PSLF” for those working in not-for-profit and making payments under any of the income-driven repayment plans. In certain circumstances, PSLF can provide forgiveness in 10 years instead of the 20 or 25 year forgiveness available under the Income-Driven forgiveness options.
We will cover this in much more depth in part 5 of our series on Student Loans.
Income-Driven Application, Qualifications & Payments
You must submit an application and provide either your Adjusted Gross Income “AGI” or alternative documentation of income such as a pay stub. If you have no income, you can state this on the application and it should suffice.
You can use AGI to qualify for your income-driven payment if BOTH of the following apply…
- you have filed a tax return in the past two years
- the income on the most recent federal tax return is not significantly different than your current income
Payments are based on your income and family size. This information must be updated each year so that your payments can be adjusted if necessary. The maximum payment for IBR and PAYE is the 10-year Standard Repayment plan equivalent payment. Under ICR, your payment is always based on your income no matter how high it goes.
Income-Sensitive Repayment
This repayment option is available for the following loans:
- Unsubsidized and Subsidized Federal Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
Income-sensitive repayment allows you to qualify for decreased monthly payments based on income, as compared to standard repayment, but is limited to a 10 year repayment term.
If your payments are reduced in the early years, remaining payments are increased to compensate. You must pay at least your monthly interest and it’s required that you reapply each year. It’s basically a 10 year repayment plan that allows for graduated payments based on income but because the term is set at 10 years, those reduced payments must be made up on the back end with higher payments.
This repayment plan will be more costly than the standard 10 year repayment plan. This option is rarely the best choice. Always check out the Income Driven and Graduated repayment plans before considering this option.
Choosing Your Repayment Plan
There are many factors to consider when choosing your student loan repayment plan. What specific loans do you have and what options are available for those loans? Do you plan to keep the loans in their current form or will you refinance or consolidate them? Do you plan to qualify for one of the forgiveness programs? What will be your income and financial situation? What’s your goal for loan repayment?
These are all critical questions that you must answer if you want to make the best possible decision. We will continue digging into your student loan planning as we cover forgiveness options in our post next week. That’s always a fun one – can’t beat having loans forgiven – but there is also a lot to consider.
Don’t forget to check out our other posts in the series below:
Part 1: Student Loans & Your Situation
Part 2: Student Loan Interest
Part 3: Student Loan Consolidation
Part 4: Student Loan Repayment Plans
Part 5: Student Loan Forgiveness
Part 6: Qualifying for Public Service Loan Forgiveness
Part 7: Student Loan Refinance
Part 8: Student Loan Refinance Reviews
Part 9: Student Loan Tax Considerations
Part 10: Student Loan Resources