Federal student loan borrowers can choose from several flexible options for paying back their education loans. A little planning before you begin repaying your loans can help you avoid missing payments – or, worse, defaulting on your student loans.
Some of these options are influenced by your income. Some apply only to certain types of loans. Others depend on when you took out the loan. Here, we summarize the basics.
Explore repayment options in more detail in the USA Funds® Borrowing for College brochure. Or visit our Resource Library for more Loan Resources.
Applies to: Stafford, PLUS, Consolidation loans.
Description: Equal monthly payments of at least $50 per month over a period of up to 10 years (up to 30 years, depending on education debt levels, for Consolidation loans), excluding periods of deferment and forbearance.
Advantages: Fixed monthly payments; typically results in lowest total loan costs.
Drawbacks: Payments may not be affordable, if your debt is large relative to your income.
Best for: Borrowers who can afford the standard monthly payments typically will pay the lowest total interest costs under this option. If the standard payment amount exceeds 8 to 10 percent of your gross monthly income, you might consider one of the other repayment options to obtain a payment you can afford.
Applies to: Stafford, PLUS, Consolidation loans.
Description: Payments start low, followed by periodic increases over a 10-year period (up to 30 years, depending on education debt levels, for Consolidation loans).
Advantages: May provide an affordable monthly payment for former students with modest incomes just starting out in their careers, but who expect growth in their incomes, so they can afford the higher monthly payments in the later years of the repayment period.
Drawbacks: 10-year repayment limit; interest costs higher than standard repayment; borrower must be able to afford higher monthly payments in later years of payback period.
Best for: Borrowers who need a reduced monthly payment as they establish themselves in their careers during the first few years after graduation, but who expect to be able to manage higher monthly payments as they progress in their careers.
Income-Related Repayment Options
- Income sensitive: Available only for loans through Federal Family Education Loan program.
- Income-contingent: Direct Loans, except Direct PLUS loans.
- Income-based: All loans except PLUS loans or consolidation loans repaying PLUS loans.
Description: These options all tie monthly student loan payments to a borrower’s income levels, so payments are likely to be more affordable than under the other payment plans.
Advantages: Affordable payments. Under income-based and income-contingent, borrowers may qualify for forgiveness of remaining balances after 25 years of repayment. Borrowers in certain public service professions repaying through income-based and income-contingent options may qualify for public service loan forgiveness after 10 years of repayment. Under income-based repayment, subsidized loans are eligible for interest subsidy during first three years of repayment.
Drawbacks: Income-sensitive repayment is much less flexible because the payment term is limited to 10 years (15 years with a special forbearance provision), and monthly payments must cover accruing interest. Under income-based and incomes-continue repayment, payments may be less than accruing interest, which means loan balance may actually increase while the borrower is making payments. Amounts forgiven after 25 years of repayment under income-based and income-contingent options will be treated as taxable income to the borrower. To qualify for income-based repayment, borrowers must demonstrate a partial financial hardship that payments under standard repayment option would exceed 15 percent of their discretionary income.
Best for: Especially beneficial for borrowers who have large amounts of student loan debt relative to their incomes.
Applies to: Available only to borrowers with more than $30,000 in eligible federal student loans.
Description: Permits payments over 25 years under a standard (equal monthly payments) or graduated repayment schedule.
Advantages: Reduces monthly payments by spreading payments over 25 years. Available in graduated payments, as well.
Drawbacks: Interest costs significantly higher than other options, due to loan duration.
Best for: Borrowers who need a lower monthly payment and understand they will be paying back their loans for 25 years and will incur significantly higher interest costs due to the extended payback period.
Pay as You Earn
This repayment plan is similar to income-based repayment, except payments are limited to 10 percent of your "discretionary" income, and you may qualify for loan forgiveness after 20 years of repayment. the option is available only Direct Loan borrowers -- except for those with Direct PLUS loans to parents or Direct Consolidation loans that repaid a parent PLUS loan -- who were new borrowers as of Oct. 1, 2007, and received a Direct Loan disbursement since Oct. 1, 2011.
Applies to: All federal loan types.
Description: A Direct Consolidation loan may replace multiple federal student loans with a single consolidated loan and, depending on the borrower’s total education debt, permit payments over a period of up to 30 years.
Advantages: Helps borrowers manage repayment by combining multiple loans into one loan with one payment to one entity. Extended payback period results in lower monthly payments.
Drawbacks: Slightly higher interest rate. Total interest costs will be significantly higher because of loan duration and lower payments.
Best for: Borrowers who are struggling to manage multiple monthly student loan payments, as well as borrowers with significant student loan debt who need a lower monthly payment.
Visit our Resource Library to get information and forms for repayment options, loan deferment, loan forbearance and loan forgiveness and cancellation.