Federal student loans can be intimidating and confusing. In this article we will explain:
- Types of federal student loans
- Repayment plans and situations, and
- Loan discharge and forgiveness programs.
- Including Public Service Loan Forgiveness (PSLF). Some recent changes were made to PSLF, but to benefit from them you may have to take action by October 31, 2022!
Types of Loans
Direct Loans: Direct loans are federal student loans made and held by the Department of Education. Direct loans can be subsidized or unsubsidized, and there can be Direct PLUS loans as well as Direct Consolidation Loans.
Stafford Loan: Stafford Loans are loans granted from the Federal Government to undergraduate and graduate students to pay for higher education. Stafford Loans can be subsidized or unsubsidized, are granted based on financial need (though nearly all middle- and lower-class families will qualify), and have a wide variety of repayment options. Stafford Loans are different from Perkins Loans and PLUS Loans.
Perkins Loans: Perkins Loans are another form of Federal Student Loans granted to students based on financial need. Perkins Loans are subsidized and offer better terms for repayment.
PLUS Loans: PLUS Loans are a form of Federal Student Loans granted to graduate students and parents of undergraduate student. PLUS loans can be for the entire remaining cost of tuition after other loans. When parents take loans to pay for their undergraduate children, then it is the parents’ responsibility to repay the loans. PLUS loans are eligible for a more limited number of repayment plans compared to other loans.
Federal Family Education Loan (FFEL) Program: FFEL loans are a form of Federal Student Loans that were made by banks or other financial institutions, not the federal government. They stopped being issued on July 1, 2010.
Subsidized and Unsubsidized: Subsidized loans are loans where the interest is paid by the Federal Government while you are enrolled in school, during the loan’s grace period, and during periods of deferral. Unsubsidized loans do not get this benefit, and interest will be added to the loan’s principal during these periods. The amount of your loan that that will be considered subsidized is determined by your financial need.
There are many different options when it comes to repaying your federal student loans. There are some general repayment plans, and some income-driven repayment plans. Federal Student Aid’s website has a Repayment Estimator that can help you figure out which plan is best for your situation.
Grace Period: The grace period is the time after you finish your education before you have to start making loan repayments. For most loans the grace period is 6 months; for Perkins Loans it’s 9 months.
General Repayment Plans
Standard Repayment Plan: Under the Standard Plan you’ll pay a fixed amount monthly until the loan is paid off. The repayment period will be between 10 and 30 years, depending on the size of the loan. This is the default plan for most former students. For those who can afford the monthly payments, it is the best option over the long term. It has the shortest repayment period, meaning you will pay less interest.
Graduated Repayment Plan: Under the Graduated Plan your monthly payments will start low, possibly as low as $50, and rise every two years. By the end the period your monthly payments will be higher than under the Standard Plan. This plan is good if you are not making much money after finishing school but know that you’ll be making more in the future.
Extended Repayment Plan: Under the Extended Plan you’ll make payments over a longer period of time, but each payment will be lower than under the Standard Plan. The longer payment period means you’ll pay more in interest over the long run, but this plan can be helpful if you don’t have the resources to make the Standard Plan’s payments.
Income-Driven Repayment Plans
Income-drive repayment plans offer lower monthly payments and the opportunity to have some of your loan forgiven after a certain number of years. You must apply for these plans by submitting and Income-Driven Repayment Plan Request (either online or by paper). You can ask your loan servicer for that form or find it through their website. The payment amounts will be based on some percentage of your monthly income.
The Department of Education has recently made some changes to Income-Driven Repayment! The Department of Education will do a one-time automatic revision of payment counts towards forgiveness. This means they will take another look at how your past payments are counted toward forgiveness. Some of these updates will not appear until the end of 2022 or beginning of 2023. The changes include:
- Counting months in which borrowers made payments, no matter the payment plan
- Counting months spent on payment deferment (except for in-school deferment) before 2013
- Counting forbearances of more than 12 consecutive and more than 36 total months
If you have commercially-held FFEL loans, you must consolidate before January 1, 2023 to benefit from these changes.
Types of Income-Driven Repayment plans:
Income-Based Repayment Plan (IBR): Under the IBR Plan you pay a portion of your monthly discretionary income (about 15%) for 20 or 25 years. Then your remaining loan is usually forgiven. This option is only for those who show they are experiencing financial hardship and only for as long as they’re experiencing it. You must re-certify (send in the correct paperwork) with your loan servicer every year if you want to continue paying on this plan.
Income-Contingent Repayment Plan (ICR): Under the ICR Plan you pay a portion of your monthly discretionary income (about 20%) for 25 years. Then your remaining loan is usually forgiven. This option is similar to the IBR Plan except you don’t have to prove financial hardship to qualify. You must re-certify (send in the correct paperwork to your loan servicer) every year if you want to continue paying on this plan.
Income-Sensitive Repayment Plan: This option is only available for FFEL (including FFEL PLUS and FFEL Consolidation) loans and Stafford loans. Your monthly payment is based off of your annual income and the amount that it will take to pay off your loans in 15 years.
Pay As You Earn Repayment Plan (PAYE): Under the PAYE Plan you pay a portion of your monthly discretionary income (about 10%) for 20 years. Then your remaining loan is usually forgiven. Like the IBR Plan, this option is only for those who show they are experiencing financial hardship and only for as long as they’re experiencing it. This option is available only to people who borrowed after Oct. 1, 2007. You must re-certify (send in the correct paperwork to your loan servicer) every year if you want to continue paying on this plan.
Revised Pay As You Earn Repayment Plan (REPAYE): Under the REPAYE Plan you pay a portion of your monthly income (about 10%) for 20 years. Then your remaining loan is usually forgiven. You do not have to prove financial hardship to qualify. You must re-certify (send in the correct paperwork to your loan servicer) every year if you want to continue paying on this plan.
Loan Deferment and Forbearance
There are a number of situations where you may not be able to make loan payments for a period of time. There are options that may be available to help prevent you from defaulting: deferment and forbearance.
Deferment is the option to defer, or put off, your loan payments so you do not default.
- Deferment is only available in certain situations. Check here for a list of what qualifies for deferment.
- Deferment will generally last for as long as you meet the qualifications, but there is a 3 year limit for some categories.
- Whether or not interest continues to accrue while your loans are deferred depends on the type of loans you have.
- To get a deferment you will have to fill out the right forms with your loan servicer, which is often a private company managing your loans for the government. The forms should be available on the servicer’s website or can be sent you if you request them by phone.
Forbearance is when you can’t make your loan payments but don’t qualify for deferment.
- Forbearance is limited to 1 year.
- Forbearance is most often granted for unforeseen events, such as illness or other sudden financial hardship.
- It is up to the loan servicer whether or not to grant a forbearance. But there are some situations where the servicer has to grant a forbearance.
- To get a forbearance you will have to fill out the right forms with your loan servicer. The forms should be available on the servicer’s website or can be mailed to you if you request them by phone.
Delinquency and Default
Your loan becomes delinquent the first day after you miss a student loan payment. After 90 days, your loan servicer can report the delinquency to credit bureaus.
Generally, your loan goes into default when you do not make a payment for 270 days. You cannot get certain repayment plans, deferment, or forbearance when your loans are in default. The default is also reported to credit bureaus, and could mean that your tax refunds or other federal benefits are withheld to pay off the loan.
Loan Consolidation, Rehabilitation, and Fresh Start
Loan consolidation is an option that allows you to combine multiple federal loans into one loan.
- This makes repayment simpler because you will only make one monthly payment.
- Your monthly payment will likely be lower, and the new loan will have an interest rate that is the average of the interest rates of the loans you combined.
- Private companies offer loan consolidation as a service for a fee, but you can consolidate your loans for free through the Department of Education.
- If you consolidate your loans, there may be limitations on the types of repayment plans you can enter, and you could lose credit for previous payments that qualified under an income-driven repayment plan or a loan forgiveness program.
- Consolidation may have negative consequences if you combine different loan types. For example, Perkins Loans are granted a 9 month grace period before repayment, but a consolidated loan is granted only a 6 month grace period (the same as Stafford Loans).
- If your loan is in default and there is a court order against you, you cannot consolidate until that order has been lifted.
Loan rehabilitation is an option that allows you to get your loan out of default.
- You agree to make at least 9 voluntary payments within 10 months (or within 9 months, for FFEL loans).
- Your loan servicer will determine the payment amount, which will be around 15% of your annual income divided by 12.
- You can only rehabilitate a defaulted loan one time.
- Once you successfully rehabilitate your loan, the default will be removed from your credit history.
- During the last few months of the federal payment pause, you may be able to do a “streamlined” rehabilitation, which means that you can rehabilitate your loans in less than 9 months.
Fresh Start: The Department of Education is giving some borrowers another option to get out of default as the payment pause comes to an end. You can learn more on studentaid.gov/announcements-events/default-fresh-start.
Loan Forgiveness, Cancellation and Discharge
In August 2022 President Biden announced a loan cancellation plan for some federal student loan borrowers. You can visit our student loan landing page to learn more, or go to studentaid.gov/debt-relief-announcement/.
There are situations where you may qualify to have some or all of your loan forgiven. Depending on how this happens, this can be called loan forgiveness, cancellation, or discharge.
You might be eligible to have some of your loan balance erased depending on:
- the type of job you work,
- if you have a disability, or
- if your school did something wrong.
Some loans can be discharged when the borrower dies or become permanently disabled. In these cases the borrower or the borrower’s estate will have to provide the proper paperwork to the loan servicer.
In a very narrow range of situations, the loan can also be discharged if the borrower declares bankruptcy. But the general rule is that student loans cannot be discharged in bankruptcy. It would be a good idea to discuss this with a lawyer before trying the bankruptcy route.
Public Service Loan Forgiveness (PSLF)
PSLF allows people working in public service, and paying on their loans for 10 years, to have the remaining balance of their loans forgiven. The Department of Education has made some significant changes to the program that you could benefit from! But you may have to take action before October 31, 2022.
Normally, your loans can be forgiven through PSLF if you:
- work full-time in public service,
- have a “qualifying” loan,
- make loan payments on an income-driven repayment plan or the 10-year Standard Repayment Plan,
- make 120 voluntary, full, and on-time payments, and
- submit a PSLF form, that certifies your employment.
These are a lot of requirements; make sure your servicer is counting your payments correctly. You can either wait until you have made 120 payments to file a PSLF form to get relief, or you can periodically file PSLF forms to make sure your employment is properly certified and that you are on track for forgiveness.
Normally, only Direct Loans and loans on specific payment plans qualify for PSLF. But, in October 2021, the Department of Education announced limited waivers for people to count past payments towards PSLF relief for any type of loan or payment plan.
- For example, if you have FFEL or Perkins loans, you can get credit for the payments made on those loans if you consolidate and fill out the waiver by 10/31/2022.
- Or, if you have Direct Loans but you made payments under an ineligible payment plan, those past payments will now count.
- Additionally, people who had their loans on deferment or forbearance while on active military service can now get those months to count towards the 120 payments.
Teacher Loan Forgiveness
You may be able to get $5,000 or up to $17,500 in forgiveness on Direct and Stafford loans if you have worked full-time as a highly qualified teacher for five consecutive years at a school that serves low-income students.
Total and Permanent Disability (TPD) Discharge
You might be able to get your loans discharged if you have a disability or conditions that mean you can’t work. If your disability or condition can cause death, has lasted for 5 years, or is expected to last for five years, you may want to apply for TPD.
A loan can also be discharged or partially discharged if a school committed fraud with your loan such as:
- signing your loan paperwork without your permission,
- certifying you for a course even though the school was aware you were unqualified, or
- knowing that you will be incapable of getting a job in the trade once you graduated.
You should also be able to get a discharge if you were a victim of identity theft, where someone else took out a loan in your name without your knowledge.
The U.S. Department of Education provides helpful information about loan repayment. They also have an Ombudsman program. The Ombudsman helps people who have exhausted attempts to resolve issues on their own. This program is limited to Federal student loans.
The Bureau of Consumer Credit Protection in Maine also oversees student loan servicers and can receive complaints.
Student Loan Borrower Assistance at the National Consumer Law Center also has resources on student loan repayment.