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How to Repay Federal Student Loans

Debt Personal Finance
Students discussing about Federal loans in a living room

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Did you know almost 43 million Americans have federal student loans? With nearly $1.7 trillion in total student loan debt, many Americans are financially strapped by their student loan debt. And when it seems like those monthly payments are eating up most of your paycheck, the road to getting them paid off can be long and stressful. If saving money to repay student loans just isn’t cutting it, and if you’re a federal student loan borrower, you might be eligible for options to get that debt paid down and start working toward other financial goals.

Forgiveness programs

The greatest perk of federal loans is the option for forgiveness. Unfortunately, the mere act of having federal student loans doesn’t automatically make you eligible for forgiveness. Many of the existing programs require an exchange of service and payments before loans will get discharged. One of the most widely known, and most applicable, forgiveness programs is Public Service Loan Forgiveness (PSLF). Graduates who work full-time in a qualifying public sector job (such as government, non-profit, and teachers) can be eligible to have a Direct Loan – including loans consolidated through the Direct Consolidation Loan – forgiven after 10 years of service and 120 qualifying payments. Qualifying payments are those on an income-driven repayment plan, meaning they are set based upon your monthly income levels. If you aren’t working in the public sector or don’t anticipate staying a public servant for at least a decade, then an income-driven repayment program can help your loan payments feel more affordable. You should note, it’s a requirement to put your loans on an income-driven repayment plan to be eligible for PSLF.

Income-driven repayment plan

Income-driven repayment plans help keep your monthly payments affordable relative to your income. That’s right, your monthly payments get capped. It’s a bit of a complicated formula, but it basically comes down to a percentage of what the government determines as your discretionary income based on factors, such as income, family size, state of residence, and poverty level in your state. After making these payments for 20 to 25 years, depending on the plan, the remainder will be forgiven. There is a catch, however. The forgiven amount could be taxable – but it’s hard to say what the terms will be in two decades. It is necessary to consolidate your loans using the Federal Direct Consolidation Loan in order to make them eligible for the repayment plans. Although technically you could just consolidate one at a time and place each loan on a plan individually. You can also choose to consolidate only one loan to make it eligible for an income-driven repayment plan.

There are four main income-driven repayment plans:

  • Pay As You Earn (PAYE): Generally capped at 10 percent of your discretionary income and forgiven after 20 years.
  • Revised Pay As You Earn (REPAYE): Usually capped at 10 percent of your discretionary income and forgiven after 20 years if you’re only repaying for undergrad. It’s 25 years if you’re also repaying graduate or professional study loans.
  • Income-Based Repayment (IBR): Capped at 10 percent to 15 percent depending on when your loans were disbursed. Loans are forgiven after 20 years of payments if you were a new borrower on or after July 1, 2014 or after 25 years if you borrowed before July 1, 2014.
  • Income-Contingent Repayment (ICR): Payments are capped at 20 percent of your income (the highest) and forgiven after 25 years. This is also the only program available to Parent PLUS loans – but you must first consolidate through the Direction Consolidation Loan to be eligible.

Each income-driven repayment program does have limitations based on the type of loan and years the loan was disbursed. Be sure to visit studentaid.ed.gov to check your eligibility or discuss with your student loan servicer. Struggling to make payments? Apply for deferment or forbearance Sometimes forgiveness isn’t an option and making any payments feels completely unbearable. If this is your situation, consider applying for deferment or forbearance. Both of these programs allow you to pause making payments and keep your loans in good standing, but with different terms. Deferment is the superior option because the federal government will pay the interest that accrues while you stop making payments. But, it’s more difficult to qualify. Active military duty is usually one way to be eligible as well as a period of unemployment or the inability to find full-time work. Forbearance only lasts for up to 12 months and interest will continue to accrue. You can request discretionary forbearance due to financial hardship or illness while mandatory forbearance has specific eligibility requirements including medical or dental residency, being a member of an activated National Guard unit, your total amount owed exceeds 20 percent or more of your total monthly gross income.

Always talk to your student loan servicer

You will not be automatically enrolled in any of the above programs or repayment options. You need to be proactive about speaking with your loan servicer and ensuring you’re on the best repayment plan. Make sure to avoid defaulting and going delinquent on your loans because it can do serious damage to your credit and minimizes your future options to make your loans more affordable. Finally, make sure to check out our student loan payment hacks to see if there are any creative ways you can further pay down your loans.

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