Federal Loan Repayment
Federal Loan Repayment
Africa Studio / Shutterstock.com

Navigating loan repayment options can be tricky, and while you were in school, you probably didn’t have to deal with them much. Now that you’ve graduated, left school, or decreased your enrollment, your loan servicer is going to start sending you monthly bills and you’re going to have to pay them. Remind yourself what kind of loans you took out for your education, as different loans behave in different ways. You can find a refresher course on the types of federal loans here.

Loan Repayment Basics

The good news is that no matter what type of loans you have, this section will provide you with plenty of information about repayment plans. Know the basics upfront.

  • Loan servicers: This is a company assigned to you by the U.S. Department of Education that will maintain your loan on their behalf. You will need to contact them about repayment options, billing, etc.
  • Timing: You don’t have to begin repaying your loans until after you finish college or drop below half-time enrollment. However, if you are a recipient of PLUS Loans, you must start repaying as soon as you have received the last disbursement.
  • Grace periods: There is a grace period for all students who are recipients of Direct Subsidized or Direct Unsubsidized Loans. This is a six-month period after you graduate, leave school, or drop below half-time enrollment before you must begin repaying your loans. Loans may begin to accrue interest during this period. For a Perkins Loan, the grace period is nine months.
  • Extending a grace period: Grace periods can be extended under special circumstances.
    • If, during your initial grace period, you are called to active military duty for more than 30 days, you will receive another full grace period when you return from active duty.
    • If you return to school before the end of your initial grace period and enroll at least half-time, you will receive another full grace period when you stop attending or drop below half-time enrollment.
    • If you consolidate loans during your grace period, you will lose your grace period and begin repayment within approximately two months of your Direct Consolidation Loan being paid out.
  • Deferments: A deferment is a period of time during which you temporarily delay the repayment of the loan for up to three years. This is different from a grace period. Grace periods are automatically given to you so that you can get your life in order after leaving school before you have to start repayment. You must ask your loan servicer or financial aid office for a deferment.
  • Payment: You will probably pay your bill every month. Your monthly payment amount depends on the type of loan, the amount of the loan, the interest rate, and the repayment plan that you’ve chosen (typically 10 years). You can always pay more than your required monthly payment. Doing so will help you save on interest and reduce the cost of the loan over time. Tell your loan servicer that any extra money you send is to be applied to the loan now, not used for future payments.
    • You can pay electronically or by mail. Contact your loan servicer if you want to set up automatic electronic payments. You can often choose this option on their website.

Repayment Plans

When deciding how to pay back your loan(s), you can choose from a variety of repayment plans. These differ in length and payment amount; they can be based on the total amount of the loan or on your income.

Federal Perkins Loans

If you have a Federal Perkins Loan, remember that it is administered by your educational institution, not by the U.S. Department of Education. Your school, then, is working directly with your loan servicer. Your loan repayment options depend on your situation. To learn more about repayment plans for your Perkins Loans, you will need to contact your school’s financial aid office.

  • Note: Federal Perkins Loans may be eligible for Direct Loan Program repayment plans (see below) if they are first consolidated with a Direct Loan into a Direct Consolidation [glossary_exclude]Loan[/glossary_exclude].

Direct Loans

The U.S. Department of Education administers the Direct Loan Program, and has standardized repayment plan options for all borrowers, regardless of where they studied. If you have any of the four types of loans from the Direct Loan Program (Direct Subsidized, Direct Unsubsidized, Direct PLUS, or Direct Consolidation Loans), you may be able to choose from one of several repayment options.

Keep in mind that some plans (standard, graduated, and extended) will help you pay off your loans in a certain amount of time, usually 10 years. In these cases, your monthly bill is calculated so that you can pay off your entire loan—and its accumulated interest—in this time frame.

Other plans are income-driven. These plans provide flexibility to qualified low-income borrowers who have trouble making fixed monthly payments. They extend the life of the loan to 20 or 25 years, allowing you to make smaller monthly payments over a longer period of time. Interest can add up, but at the end of these 20 or 25 years, if there is a remaining balance on your loan, it is forgiven (cancelled). Even if you qualify because of your income, you do not have to select an income-driven repayment plan; they are voluntary.

Income-driven repayment plans can be great options for eligible low-income borrowers. Do remember that your monthly payment amount is calculated annually based on your discretionary income. If, down the road, you obtain a higher paying job, your monthly payments could skyrocket. In this case, you may be able to pay off your loan in full—and the interest it accumulated over the years—before the 20 or 25 years are up, no loan forgiveness granted.

Income-driven repayment plans are most cost-efficient if you fall into one of these categories:

  • It is financially impossible for you to make a standard monthly payment because of your income.
  • You expect to work long term in a low-salary career.

If you anticipate a long-term career in public service, for example, you may want to choose an income-driven repayment plan. Not only will it control the amount of your monthly payments, but you may be eligible for loan forgiveness after just 10 years.

The charts below illustrate the differences between repayment plans for the Direct Loan Program. Before you subscribe to one, understand your options and their eligibility requirements, if any.

Common Loan Repayment Plans

Repayment Plan Repayment Period Payments Other Information
Standard Up to 10 years Fixed End up paying less over time than other plans
Graduated Up to 10 years Graduated; payments lower at the beginning of repayment and increase over time End up paying more over time than if you were on the standard repayment plan due to accumulated interest
Extended Up to 25 years Fixed or graduated Must have more than $30,000 in outstanding Direct Loans; monthly payments are lower than on the standard or graduated plan, but you will end up paying more overall due to accumulated interest

Income-Driven Repayment Plans

Repayment Plan Repayment Period Payments Other Information
Revised Pay-as-You-Earn (REPAYE) Up to 20 years for undergraduate loans; up to 25 years for graduate or professional school loans 10% of discretionary income*; monthly payment amount recalculated each year based on family income and family size Cannot use this repayment plan for loans made to parents; if married, spouse’s debt is considered; outstanding balance of the loan is forgiven at the conclusion of the repayment period, but you may have to pay taxes on the balance that is forgiven
Pay-as-You-Earn (PAYE) Up to 20 years Up to 10% of discretionary income*; eligible only if this payment amount is less than what you would be required to pay under the standard plan; monthly payment amount recalculated each year based on family income and family size If married, spouse’s debt is only considered if you file a joint tax return; must have high debt to income ratio; outstanding balance of the loan is forgiven at the conclusion of the repayment period, but you may have to pay taxes on the balance that is forgiven
Income-Based Repayment (IBR) Up to 20 years if you borrowed your first Direct Loan on or after July 1, 2014; up to 25 years if you borrowed your first Direct Loan before July 1, 2014 Up to 10% of discretionary income* if you were a new borrower on or after July 1, 2014; up to 15% of discretionary income if you borrowed a Direct Loan before July 1, 2014; eligible only if this payment amount is less than what you would be required to pay under the standard plan; monthly payment amount recalculated each year based on family income and family size Cannot use this repayment plan for loans made to parents; if married, spouse’s debt is only considered if you file a joint tax return; outstanding balance of the loan is forgiven at the conclusion of the repayment period, but you may have to pay taxes on the balance that is forgiven
Income-Contingent (ICR) Up to 25 years The lesser the following: 20% of discretionary income† or the amount you would pay on a repayment plan with fixed payments for 12 years adjusted to your income; monthly payment amount recalculated each year based on family income, family size, and Direct Loan amount If married, spouse’s debt is only considered if you file a joint tax return or pay loans jointly; outstanding balance of the loan is forgiven at the conclusion of the period of repayment, but you may have to pay taxes on the balance that is forgiven

*For pay-as-you-earn, revised pay-as-you-earn, and income-based repayment plans, discretionary income is considered the difference between your total income and 150% of the poverty level for your family’s size and location. The poverty level is the least amount of income a family requires to maintain an adequate standard of living.

†For the income-contingent repayment plan, discretionary income is considered the difference between your total income and the poverty level for your family’s size and location. The poverty level is the least amount of income a family requires to maintain an adequate standard of living.

Once you decide on the repayment plan that’s right for you, talk to your loan servicer. They can give you more information or help you fill out the Income-Driven Repayment Plan Request.

Page last updated: 05/2018

Related topics: