When it’s time to start paying back federal student loans, you have more options than you may think. Through the years, Congress and the Department of Education have a put in place a number of different repayment plans that may work for you. With these plans you may be able to extend your repayment period, get lower monthly payments based on your income, and have your loan balance forgiven after a certain number of years, among other options.
Student Loans That Are Eligible for Federal Repayment Plans
The flexible student loan repayment plans are only available for federal loans. Federal student loans are those that are either made by the federal government or guaranteed by the federal government. Federal loans can be direct, which are funded directly from the Department of Education, or indirect, which are funded by a lender or other institution, but guaranteed by the Department of Education. Indirect loans were made under the FFEL program, but as of July 2010, only direct loans are available as the FFEL program stopped.
If you have private student loans (those not made or guaranteed by the federal government), you cannot take advantage of the below repayment plan options. You can see if your loan is federal or private, and direct or indirect, at www.nslds.ed.gov/nslds_SA/.
(To learn more about federal student loans, see Nolo’s article Types of Federal Student Loans.)
Standard Student Loan Repayment Plans
The Standard plans were all started before the addition of today’s income sensitive programs. If you have a low or moderate income or high loan amounts, they often won’t be the best repayment option.
Ten Year Standard Repayment Plan
This is a simple monthly payment plan where your payments equal your principle and interest divided over 120 months, much like a standard car or home loan. If your loan amounts are high, this may be unaffordable. But for some borrowers with lower balances, it might be the best option. Note that this is the default plan, meaning your lender will automatically put you into this plan unless you request another.
Graduated Repayment Plan
This is the same as the Ten Year Standard (you pay your loan back over ten years), except that your payments start out low and increase over the life of the repayment period. This can be a good option if you expect your income to increase over time.
Extended Repayment Plan
If the total amount of your federal loans exceeds $30,000 you can extend payments to over 25 years. If you have direct federal student loans, you can push the repayment period to 30 years.
Income-Based Student Loan Repayment Plans
In addition to the standard plans, there are many programs that take into account your income when calculating monthly student loan payments. For many people, these options result in a lower monthly payment and, often, forgiveness of the remaining student loan balance at the end of the repayment period.
Income Contingent Repayment (ICR) and Income Based Repayment (IBR)
Both of these plans set your payment according to your income, making your payments much more affordable if your income isn’t high. They are also very helpful if you are disabled, or unemployed -- a reasonable payment under IBR and ICR can actually be $0 if your situation merits it.
You must re-submit your application yearly, so if your income rises, your payments may rise. But if it decreases, your payments will decrease as well.
Best of all, after 25 years, any remaining balance on your loan is completely forgiven, no matter what you’ve paid at the time. For example, if your income only qualifies you for a payment of $50 per month and you have $200,000 in loans, you’ll be finished paying after 25 years, even though there will still be a large chunk of the loan balance left.
There are, however, some differences between IBR and ICR:
- ICR payments are generally higher than IBR payments, due to a different method of calculation.
- With IBR, your spouse’s income won’t count against you if you file taxes separately. The ICR program, however, will take into account your spouse’s income, regardless of tax filing status. This will often result in a higher payment.
- If you have Parent Plus Loans, you cannot qualify for IBR -- you must apply for ICR. This means that if you have Parent Plus loans, you should never consolidate them with your other loans, as it will “taint” the entire loan, and disqualify you for IBR.
- Only direct federal loans qualify for ICR. With IBR, direct or indirect loans qualify.
- You must consolidate Perkins Loans in order for them to qualify for IBR. (Learn more in Nolo’s article Student Loan Consolidation.)
Pay As You Earn (PAYE)
This is a new program for newer loans. It’s the same as IBR, with two big advantages:
- your payments are usually lower than with IBR, and
- your loans are forgiven after 20, instead of 25 years.
However, loans which originated before October 2011, can’t qualify for PAYE.
Public Service Loan Forgiveness (PSLF)
Again, this is the same as IBR, but if you work full time for a 501(c)(3) organization or the government, and have direct loans, your loans will be forgiven after only ten years. You must be working for the 501(c)(3), not volunteering. If you don’t currently have a direct loan, you can consolidate your loans into a direct loan so that they are eligible for this program. You won’t have to pay income taxes on forgiven principle.
Although not technically a repayment program, if you are a secondary or elementary school teacher in a qualifying school (usually lower income areas or areas), teaching math, science or special education, you can obtain up to $17,500 in loan forgiveness.
Will You Pay More Interest With Income-Based Repayment Plans?
If you extend your repayment period and have a lower monthly payment, you may end up paying more interest than if you stuck with the ten year standard plan. But because the remaining balance on your student loan is forgiven after the repayment period (which is ten to 25 years depending on the plan) ends, paying more interest should not be a concern for most people.
Will You Owe Income Tax on Forgiven Debt?
The IRS treats forgiven debt as income, which means you might owe taxes on it. (To learn more, see Nolo’s article Tax Consequences When a Creditor Writes Off or Settles a Debt.)
If your loans are forgiven under the PSLF program, you won’t owe income tax on the forgiven amount. But it’s not yet clear whether forgiven debt under the other plans will be taxable. Because nobody has reached the 20 to 25 year mark yet, the government has not had to deal with this question.
Getting More Information
You can find more information about the various federal student loan repayment plans, including online calculators that let you compare between the programs, on the Department of Education’s Federal Student Aid Website, at http://studentaid.ed.gov/repay-loans/understand/plans.