You should assume when you take out a student loan that you will likely have to repay it at some point. However, this does not mean that you have to accept the payment plan that the lender gives you. You have choices, including different types of repayment plans, ways to postpone repayment, and even ways to get out of default through repayment. There are also ways to cancel loans in limited circumstances and raise defenses to repayment.
The repayment plans tied to your income are good options for many borrowers. You should review the Department’s repayment estimator to get estimates of your monthly payments under different repayment plans. The repaying out of default section has information about getting out of default through repayment.
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.
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
You have the right to pay off your federal student loan as fast as you can without a penalty. As the CFPB advises: If you can afford it, paying a little extra each month or making a lump sum payment towards your principal is a great way to lower the total cost of your loan. Not only do you pay down your debt faster, but you save money on interest charges over time. The CFPB also warns about servicers that may not follow your instructions and advises borrowers to contact your servicer if you regularly pay extra toward your loans through automatic payments and ask to establish a standing instruction on your account so your extra money goes to, for example, your most expensive loan-generally the loan with the highest interest rate. You can also provide instructions with individual payments.