Reviewing the Options for Repayment
With federal student loans, there are several repayment plan choices, with options to fit most budgets. Some plans are based on a percentage of discretionary income, run for 10-25 years, and may include loan forgiveness if all requirements are met. Other plans start with low payments that increase over time as your income increases. All eligibility and plan specifics should be discussed with your servicer to determine the best fit for your budget and loan payoff goal.
The Most Common Repayment Plans for Federal Student Loans
Extended Repayment Plan
Lower monthly payments than standard and graduated plans with up to 25 years to pay.
Graduated Repayment Plan
10-year plan with payments increasing every two years.
Income-Based Repayment Plan (IBR)
Payments set at 10-15% of discretionary income, but never more than payments on the Standard Repayment Plan, with up to 25 years to pay in full.
Income-Contingent Repayment Plan (ICR)
Payments set at 20% of discretionary income, with up to 25 years to pay in full.
Income-Sensitive Repayment Plan
Payments based on low-income qualifications for Federal Family Education Loans (FFEL), with up to 10 years to pay in full.
Pay As You Earn Repayment Plan (PAYE)
Payments set at 10% of discretionary income, but never more than what you would pay under the Standard Repayment Plan, with up to 20 years to pay in full.
Revised Pay As You Earn Repayment Plan (REPAYE)
Payments increase and decrease and are set at 10% of your discretionary income, with up to 25 years to pay in full.
Standard Repayment Plan
10-year plan with fixed payments. Most common with most loans set with this plan until otherwise changed.
Why are there so many plans?
Great question. It simmers down to a combination of the loan type and your qualifications; there is no one-size-fits-all repayment plan. With all the options, it’s best to consult your loan servicer to confirm that you qualify for the plan that fits your budget the best. Also, keep in mind that as your income changes, so may your monthly payments. Many of the plans require you to re-certify yearly and base your payments on tax returns or paystubs. It’s not uncommon for people to change repayment plans at some point, so if you feel your plan is no longer a good fit, research the other plans and consider switching.
Accrued Interest — Interest that has accumulated on a loan but has not yet been paid.
Capitalized Interest — The amount of accrued interest that is added to the loan balance resulting in a new (higher) balance.
Consolidate — Combining multiple loans into a single loan with a single payment.
Default — The failure to repay a loan according to the terms agreed to in the promissory note. May result in legal action, including wage and tax seizure.
Deferment — A set time for a temporary postponement of loan payments. Does not always postpone interest.
Delinquency — A loan status for overdue payments. Extended delinquency can result in loan default.
Discretionary income — The amount after taxes and living expenses used as qualification for some repayment plans.
Forbearance — An option to temporarily suspend or reduce loan payments.
Garnishment — A legal course of action for a percentage of money to be withheld from a borrower’s paychecks, tax refunds, and Social Security Income (SSI) and applied towards student loan repayment.
Grace period — The set amount of time after you graduate, withdraw, or drop below half-time enrollment before you must begin loan repayment. Not all loans have grace periods, but for most federal student loans, the grace period is six months. Confirm with your servicer.
Interest — The cost of borrowing money that is added to the loan based on the rate of the original loan amount.
Interest rate — A set percentage of loan principal that calculates the amount of interest due.
Loan rehabilitation — The recovery of a defaulted loan through required payments over a specific time that reinstates the loan to good standing. Also reinstates loan repayment and postponement benefits.
Loan servicer — Companies that disburse, manage and collect payments on a loan.
Promissory note — A legal document stating the terms of a loan that is agreed to by all involved parties.
Subsidized — A type of student loan that the government partially or temporarily pays the interest that accrues.
Unsubsidized — A type of student loan that accrues interest as soon as the loan is disbursed-including while students are enrolled in school.