BASIC FEDERAL OPTIONS
The available pre-default repayment plans are different depending on what type of loan you have. (Not Sure What Type You Have?). These plans are not available if you are already in default. For borrowers entering repayment on or after July 1, 2006, the rules for Direct Loan repayment plans are the same as for FFEL, except for the Direct Loan Income Contingent Repayment Plan (ICR). However, public service forgiveness is only available in the Direct Loan program.
PLUS loan borrowers have nearly all the repayment options that Direct and FFEL Stafford loan borrowers have. The main exception is that the income-based plans described below (ICR and IBR) are not generally available to parent PLUS borrowers. These plans are available to graduate PLUS borrowers. IBR is available in both the FFEL and Direct loan program while ICR is available only in the Direct Loan program. Perkins has its own rules, as do private loans.
Standard Repayment
A standard repayment plan is what you get if you do not make a different choice. You have a minimum of five years, but not more than ten years to repay with a standard plan.
FFEL borrowers are automatically assigned this plan if they do not select a different option within 45 days of being notified by the lender to choose a repayment plan. Standard plans have the highest monthly payments, but allow you to pay off your loan in the least amount of time. The monthly amount may vary if there is a variable interest rate.
Click here to use the Department of Education’s calculators to estimate repayment amounts under the different repayment plans. Finaid.org also has calculators to estimate repayment.
Graduated Repayment
Under a graduated repayment plan, payments start out low and increase during the course of the repayment period. The payments usually increase every two years. For FFEL Loans and Direct Loans that entered repayment on or after July 1, 2006, the loan still must be paid over a period of 10 years. However, if your loan balance is high enough, you can make graduated payments as part of an extended repayment plan. Graduated plans tend to work best for borrowers who are likely to have relatively quick increases in earnings over time.
Extended Repayment
Extended repayment plans are available if you have total outstanding principal and interest exceeding $30,000. In these cases, you may repay on a fixed or graduated payment schedule for a period not to exceed 25 years. If you have both FFEL and Direct loans, you must meet the $30,000 minimum requirement for each type of loan.
Extended plan monthly payments will be less than under the standard repayment plan. However, you will also pay more interest over the life of the loan because the repayment period is longer.
Perkins Loans Repayment
Perkins repayment plans are different from FFELs and Direct Loans. For example, Perkins loans have minimum monthly repayment rates, set by law. The current rate is $30 for an NDSL loan or a Perkins Loan made before October 1, 1992 and $40 after that date.
Schools are allowed to extend the repayment period due to a prolonged illness or unemployment. Extensions may also be granted if you qualify as a low-income individual. Interest continues to accrue during any extension of a repayment period.
The Department of Education suggests that borrowers contact their school or the school’s agent to get exact Perkins repayment amounts.
Examples of Typical Perkins Loans Repayments
| Total Loan Amount | Number of Payments | Approximate Monthly Payment | Total Interest Charges | Total Repaid |
| $4,000 | 120 | $42.43 | $1,091.01 | $5,091.01 |
| $5,000 | 120 | $53.03 | $1,364.03 | $6,364.03 |
| $15,000 | 120 | $159.10 | $4,091.73 | $19,091.73 |
Source: U.S. Department of Education: The Guide to Federal Student Aid, 2009-10
INCOME BASED OPTIONS
Income Based Repayment (IBR) Program
Department of Education’s IBR Calculator
Department of Education Questions and Answers about IBR (July 2010)
IBR helps borrowers keep their loan payments affordable with payment caps based on their income and family size. You can repay all FFEL and Direct student loans using IBR, except for parent PLUS loans. Borrowers with grad PLUS loans may also use IBR.
To qualify for IBR, you will have to show that you have enough debt relative to income. IBR then uses a sliding scale to determine how much you can afford to pay each month. If you earn below 150% of the poverty level for your family size, your payment will be 0. If you earn more than 150% of the poverty level, your loan payment will be capped at 15% of whatever you earn above that amount. Except for the highest earners, this amount will usually be less than 10% of total income.
After the initial calculation, your payment may be adjusted each year based on changes in income and family size. You will have to verify your income every year.
You can stay in IBR even if you no longer qualify because of increases in your income. If this happens, your payments will be no more than the 10 year standard monthly payment amount, based on the balance you owed when you first entered the IBR repayment plan. In addition, uour repayment period may be longer than 10 years, but any interest that has accrued will be capitalized (added to the loan balance).
If you are married and both you and your spouse have student loans, the IBR formula considers you and your spouse’s joint federal student loan debt as well as your joint income if you file taxes jointly. If you are married, but file income taxes separately, only your income will be counted in determining the IBR repayment amount. However, you may lose certain tax benefits by filing separately. You should consult a tax professional if you are considering this.
The Department’s repayment plan selection form states that spouses with Direct joint consolidation loans may repay under the IBR plan as long as both spouses have partial financial hardships.
If you are in default, you must first get out of default in order to select the IBR plan.
If you continue making IBR payments for 25 years, any debt that remains is canceled. This canceled amount will be taxed as income. However, you may not have to pay taxes even if the forgiven amount is considered taxable income. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.
ALERT: Congress passed legislation in 2010 that will change some of the terms of the IBR program, but only for borrowers that take out new loans on or after July 1, 2014. If these borrowers select IBR, the “forgiveness” period will be 20 years instead of 25 years and they will be required to pay no more than 10% of their income toward federal student loans rather than 15%.
In October 2011, the Obama Administration proposed to extend this more favorable IBR formula (10% and 20 year forgiveness) to certain borrowers taking out loans in 2012 and later. This is a proposal that is not yet final.
The Direct Loan income contingent program is still available, but most Direct Loan borrowers will find that their payments will be lower under IBR. Direct Loan borrowers repaying through ICR can switch to IBR and still get credit toward the 25 year forgiveness period for payments they made while in the ICR program.
IBR application forms and information can be hard to find. IBRInfo.org has pulled together the most direct links for some of the biggest lenders. If you have a Direct Loan, there is an IBR check box on the “Repayment Plan Selection” form. Other lenders have their own forms and some, such as Sallie Mae, require you to log in to their web site to get an IBR application.
You can find out more about IBR at ibrinfo.org. This web site has a calculator that will help you figure out whether you will qualify for IBR. The Department of Education also has an IBR calculator. Your loan holder should base the IBR amount on your adjusted gross income (AGI), not your gross income. Your AGI will appear on line 4 if you filed a 1040EZ, on line 21 if you filed a 1040A and on line 37 if you filed a 1040.
Sample IBR Payments
Pros and Cons of IBR
Pros:
- Lower payments
- Interest Payment Benefit (If your IBR payment is less than the monthly interest that accrues on the loan, the government will pay your unpaid interest on subsidized Stafford loans for up to three consecutive years from when you first enter IBR repayment).
- Cancellation if you Repay under IBR for 25 years
- 10 Year Cancellation (If you are working in a public service job and you are in the Direct Loan program)
Cons:
- You Will Likely Have a Longer Repayment Period
- You May Pay More Interest (The faster you repay your loans, the less interest you pay)
- Annual Documentation Requirements for IBR
Direct Loan Income Contingent Repayment
The ICRP is available only in the Direct Loan Program, including the Direct Loan consolidation program. Monthly payments can be very low, even zero for borrowers with household incomes below the poverty level. Payments go up as income increases. The required payment can be no greater than 20% of any earnings above the poverty level. If you are married, your joint income will be counted in figuring out the ICR repayment amount regardless of whether you file taxes jointly or separately.
Parent PLUS loans are not eligible to be repaid under ICR (or IBR). However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan. (See the Department’s answer to Question 10 explaining this issue).
If you continue making ICRP payments for 25 years, any debt that remains is canceled. This canceled amount will be taxed as income. However, you may not have to pay taxes even if the forgiven amount is considered taxable income. For example, you may be able to claim insolveny status using I.R.S. Form 982. It is a good idea to a tax adviser or professional for more information about possible tax consequences. (see Bankruptcy Tax Guide).
For an excellent resource to help you figure out your monthly payment amounts under an ICRP, visit the Federal Student Aid website. Finaid.org also has an Income Contingent Repayment calculator.
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What is the difference between Income Based Repayment (IBR) and IBR and ICR share certain features, but there are also important differences between the two repayment plans. Similarities between IBR and ICR include the following:
These are some of the major differences between IBR and ICR:
Source Income Based Repayment Q&As (prepared by Federal Student Aid, U.S. Department of Education) *(Note from Student Loan Borrower Assistance Project: Parent PLUS borrowers can consolidate PLUS loans and then choose ICR for the new Direct Consolidation loan). |
FFEL Income Sensitive Repayment
The FFEL program offers Income Sensitive Repayment Plans (ISRP). With these plans, your monthly loan payment is calculated based on your expected total monthly gross income. Adjustments are made every year.
You are required to submit income information to the lender in order to establish an Income Sensitive Repayment Plan. These plans are generally less affordable than the Income Contingent Repayment Plan (ICRP) available for Direct Loans and IBR. This is because monthly payments under an ISRP, unlike ICR and IBR, must cover at least accruing interest. Exact payment amounts are set at the lender’s discretion.
PRIVATE LOANS
Most of the strategies discussed above apply only to borrowers with federal government student loans. Private lenders may offer similar programs, but they are not required to do so. Still, they must at least fulfill any promises they have made about the types of options they offer. For example, a private lender may offer loan modification or forbearance. See section J of this sample private loan contract. Some lenders will charge for these services. There are almost as many private student loan repayment plans as there are lenders.
You should review your private loan contracts carefully to better understand what rights you have.
Many private student lenders also offer small reductions in interest or other benefits for consecutive on-time or automatic debit payments. You should be careful as these “deals” are not always what they seem to be. Some lenders offer incentives that very few borrowers ever achieve.
SWITCHING REPAYMENT PLANS
You can change plans to suit your financial circumstances by contacting your lender. FFEL lenders must allow you to switch at least once each year but most will let you switch more often if necessary. Borrowers with Direct Loans may change plans at any time by notifying the Department of Education. However, if you are repaying your Direct Loan through ICRP, you cannot change plans until you have made payments in each of the previous 3 months before requesting the change.
WHAT YOUR PAYMENT COVERS
Lenders are allowed to credit any payment received first to accrued late charges or collection costs, then to any outstanding interest, and finally to outstanding principal. This is also true for schools collecting Perkins loans.
This means, for example, that, if the collection rate for a particular year is 24%, then 24% of each payment you make is applied to collection costs, the balance to interest, and then, if the payment is sufficient, to the reduction in the principal.
You may repay the entire loan or any part of a federal loan at any time without penalty. If you send in a payment amount that equals or exceeds the monthly payment amount, the lender must apply the prepayment to future installments by advancing the next payment due date, unless you request otherwise.
If you would like to prepay some of the principal on your loan, you must request in writing that the extra amount you send be applied to principal. Send the payment and request together, via certified mail, get a receipt, and keep copies for yourself.
Private lenders may charge you a penalty if you repay early. You should read your loan agreement carefully to look for rules related to prepayment.
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How is Interest Calculated? Interest on all federal loans is calculated on a simple daily basis. The following formula demonstrates how the sample interest is calculated between payments:Average daily balance between payments x interest rate x (Number of days between payments/365.25) = monthly interest. For example: Average daily balance $10,000 Interest rate x .08 Days between payments (30/365.25) x .08214 _____________________________________________ Monthly Interest: $65.71 |
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