Student Loan Repayment Possibilities: Explanations and Resources
Once you’ve graduated and found a job, the reality of debt repayment planning for all those college loans hits hard and unpleasantly. And seemingly impossible to handle. This article is intended to give you as many resources as possible to develop a budget and to explain the core requirements, positives and negatives of the various payback options in clear and simple terms so student loans don't affect your ability to buy a home.
Throughout, the terms “lender” and “loan servicers” refer to the organization that made the loan initially. Your lender could be the school attended, a lending institution such as a bank or credit union, the U.S. Department of Education, or a combination of the above sources.
Types of Student Loan Repayment Plans
Your lender will assign you an education loan repayment plan or ask you to select one when you first begin repaying your student loan. It is important to note that you can change repayment plans at any time at no charge.
- Standard Repayment: The Standard Repayment Plan is the basic repayment plan for loans from the (William D. Ford) Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program. In general, this plan costs less in interest as you pay a bit more monthly than with other loan repayment options. Payments are fixed and made for up to 10 years (between 10 and 30 years for consolidation loans).
- Graduated Repayment: Designed specifically for those who have a low starting pay level but anticipate their income to increase over time, the Graduated Repayment Plan starts with lower payments that increase every two years. Payments are made for up to 10 years (between 10 and 30 years for consolidation loans).
- Extended Repayment: The Extended Repayment Plan allows you to repay your education loans over an extended period of time. If you need to make lower monthly payments over a longer period of time than under plans such as the Standard Repayment Plan, then the Extended Repayment Plan may be right for you. Note: you will end up paying a larger amount of interest if you go for this option. Payments are made for up to 25 years.
- Income-Driven Repayment Plan: The Income-Driven Repayment Plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. If your federal student loan payments are high compared to your income, this might be a good choice. Most federal student loans are eligible for at least one income-driven repayment plan. Eligibility for Income-Driven Plans is subject to a yearly recertification with your lender.
- Income-Sensitive Repayment Plan: The Income-Sensitive Repayment Plan is available only to low-income borrowers who have Federal Family Education Loan (FFEL) Program loans. Under this plan, your monthly payments increase or decrease based on your annual income and are made for a maximum of 10 years.
Now to add to your confusion, there are two other loan repayment options that fall under and share characteristics of Income-Driven Loans.
- PAYE: A 20 year loan. You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011
- REPAYE: A 20 year loan for undergraduate education and a 25 year old for graduate school. Any Direct Loan borrower with an eligible loan type may choose this plan.
Under both the PAYE and the REPAYE loans, any remaining loan balance is forgiven if your federal student loans aren't fully repaid at the end of the stipulated repayment period. For any income-driven repayment plan, periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will count toward your total repayment period.
Because annual repayment amounts on both loans are based on your yearly income and family obligations (as with Income-Driven Loans), there is a possibility you will have a balance due when repayment period expires. In this case, your remaining balance will be forgiven. Your lender/loan servicer will track your qualifying monthly payments and years of repayment and will notify you when you are getting close to the point when you would qualify for forgiveness of any remaining loan balance.
Subsidized vs. Unsubsidized Student Loans
Both are federal student loans (often referred to as Stafford Loans) to help eligible students meet the costs of higher education.
Direct Subsidized Loans
Direct Subsidized Loans areavailable only to undergraduates. Your school determines the amount you can borrow, and the amount can’t exceed your financial need. The U.S. Department of Education pays the interest on a Direct Subsidized Loan while you’re in school at least half-time and for the first six months after you leave school (referred to as a grace period*), and during a period of deferment (a postponement of loan payments).
Note: If you received a Direct Subsidized Loan disbursed between July 1, 2012, and July 1, 2014, you are responsible for paying any interest that accrues during your grace period. If you choose not to pay the interest that accrues during your grace period, the interest will be added to your principal balance.
Direct Unsubsidized Loans
Direct Unsubsidized Loans have no requirement to show financial need. Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive. You are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.
If you choose not to pay the interest while you are in school, during grace periods and deferment or forbearance periods, your interest will accrue and be added to the principal amount of your loan.
Here’s a handy downloadable PDF detailing Student Loan Repayment Options.
Options If You Can’t Afford Your Payments
There are two viable options available if you simply cannot meet your loan payments and one option that will negatively impact your credit rating for seven years. Both deferment and forbearance allow you to temporarily stop making your federal student loan payments or to temporarily reduce the amount you pay and should be your option(s) of choice.
- Deferment: A viable option. A deferment or forbearance allows you to temporarily stop making your federal student loan payments or to temporarily reduce the amount you pay. If granted a deferment from your lender, you may not be responsible for paying the interest accrued on certain types of loans during the deferment period.
- Forbearance: A viable option. If granted forbearance from your lender, you are responsible for paying the interest that accrues on all types of federal student loans.
- Default: Defaulting on your loan(s) comes from failure to make agreed-to monthly payments and not requesting either a deferment or a forbearance. And the consequences are serious. Your credit history becomes a huge red flag that keeps you from being able to finance a car, get a credit card, possibly even being able to sign up for utilities. It certainly prohibits getting a mortgage. Negotiate your loan repayments before default becomes a reality.
- Loan Rehabilitation: This is the fancy term for getting yourself out of default and on the road to economic recovery. The two main ways to get out of default are loan rehabilitation and loan consolidation. Loan rehabilitation is far and away the best option! Utilizing the loan rehabilitate option wipes your record of default from your credit history. Yes, your credit history will still show late payments reported by your loan holder before the loan went into default, but the actual default is off your credit record.
- Loan Forgiveness: There are certain career paths such as teachers, certain government and non-profits that qualify for loan forgiveness status. The Peace Corp is an example of the latter. Check to see if you qualify.
Is Consolidating Loans a Viable Option for Refinancing?
Loan Consolidation and student loan refinancing allows you to consolidate or combine multiple federal education loans into one loan with one monthly payment. Loan consolidation might give you access to additional loan repayment plans and forgiveness programs. There are pros and cons to consolidating your student loans and it is wise to check all your options before making a final decision.
Student loan repayments are daunting. However, by doing your homework, they can be manageable. Soon enough, you may even be in a good position to buy a home even with student loans!