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 Loan Resources page.
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 borrowers 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 the Federal Family Education Loan program.
- Income-contingent: Direct Loans only, except Direct parent PLUS loans.
- Income-based: All loans except parent PLUS loans and consolidation loans that repaid parent PLUS loans.
- Pay as You Earn: Direct Loans only, except Direct Parent PLUS loans and Consolidation loans that repaid parent 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. Borrowers may qualify for forgiveness of remaining balances:
- After 25 years:
- Income-contingent repayment.
- Income-based repayment for borrowers who had loan balances prior to July 1, 2014.
- After 20 years:
- Income-based repayment for new borrowers on or after July 1, 2014.
- Pay as You Earn repayment.
Borrowers in certain public service professions repaying through income-based, income-contingent and Pay as You Earn options may qualify for public service loan forgiveness after 10 years of repayment. Under income-based repayment and Pay as You Earn, subsidized loans may be 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 income-contingent repayment, payments may be less than accruing interest, which means loan balance may actually increase while the borrower is making payments. Under current tax law, amounts forgiven under income-based, income-contingent and Pay as You Earn options will be treated as taxable income to the borrower. To qualify for income-based and Pay as You Earn repayment options, borrowers must demonstrate a partial financial hardship, meaning that payments under a standard repayment option would exceed 15 percent of their discretionary income (10 percent for borrowers under the Pay as You Earn plan and under income-based repayment for new borrowers on or after July 1, 2014).
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 FFELP or Direct 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 longer repayment term.
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 limits payments to 10 percent of your "discretionary" income, and you may qualify for loan forgiveness after 20 years of repayment. The option is available only to 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: Weighted average interest rate calculation can result in slightly higher interest rate. Total interest costs can be significantly higher because of longer repayment term 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.
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