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Federal Student Loan Repayment Programs: An Overview

Published June 29, 2021


Student Loan Repayment

The office of Federal Student Aid, a division of the U.S. Dept Of Education, provides more than $112 billion in financial aid (the large majority of student loans) each year.

They are likely your first stop in funding your education, and in many cases offer the best options (if you qualify) to take out and repay loans for a wide variety of life, financial, and educational backgrounds. If you’re wondering where federal loans come from, check out this overview from U.S. News & World Report.

As a critical budgetary concern within the Department of Education, the Office of Federal Student Aid’s operations are highly regulated and swayed by the economic climate and other factors. Nevertheless, it is a major pathway for millions of students to achieve their higher educational goals.

Different Programs to Repay Your Federal Student Loan

  1. Standard and Extended Repayment

    Upon graduation, federal loan borrowers are granted a six-month grace period before their first loan payment comes due. If no action is taken, they’ll default into the ten-year standard repayment plan. This means they’ll make the same payment every month for ten years, resulting in the loan being completely paid off. Ten years is the shortest standard repayment term offered by the Federal Government. If borrowers want a longer term, they must meet balance thresholds for their requisite loans, qualifying them for longer-term, extended repayment loans. For more information, go to the Federal Student Aid website at StudentAid.gov/repay.

  2. Income-Driven Repayment (IDR), or Income-Sensitive Repayment

    Income-driven repayment was introduced to provide borrowers with options other than forbearance when they have trouble making monthly payments. Four of the more popular income-driven options are, Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR) all of which adjust the borrower’s payments based on their adjusted gross income and family size – not how much they owe. Types of IDR include:

    Plan Monthly Payments Repayment Period
    Income-Based Repayment (IBR)
    • 10-15% of your discretionary income (and your spouse’s if filing jointly)
    • Never more than federal 10-year Standard Repayment Plan amount
    20-25 years depending on when you become a new borrower
    Pay as You Earn (PAYE)
    • 10% of your discretionary income (and your spouse’s if filing jointly)
    • Never more than federal 10-year Standard Repayment Plan amount
    20 years
    Revised Pay as You Earn (REPAYE)
    • 10% of you and your spouse’s discretionary income even if you are filing separately
    • Can be more than federal 10-year Standard Repayment Plan amount
    Undergrad: 20 years
    Graduate: 25 years
    Income-Contingent Repayment (ICR)
      The lesser of the following:

    • 20% of your discretionary income or
    • What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
    25 years

For more information, check out our Federal Student Loan Repayment Guide or go to the Federal Student Aid website at StudentAid.gov/idr.

  • Public Service Loan Forgiveness

    Public Service Loan Forgiveness allows borrowers employed at non-profits and government entities to have their Federal Direct Loans forgiven after ten-years of income-driven payments, entirely tax-free. There are a number of misconceptions about PSLF. One is that borrowers need to “sign up” or “commit” to the program. Neither of these are the case as pursuing PSLF is all about positioning your loans and your employment such that they meet the program requirements. While there is no application required to pursue PSLF, there is an Employment Certification Form (ECF) that borrowers must have filled out by each employer before they can qualify for the program and have their loans forgiven. It is recommended that if you pursue PSLF that you complete an ECF at least annually or when you change employers. While it’s been positioned as a “sign up” for PSLF, the reality is it just notifies the Department of Education that you’re planning on pursuing loan forgiveness. Submitting the ECF could also trigger a transfer of the loans to Fedloan Servicing. For more information, go to the Federal Student Aid website at StudentAid.gov/publicservice.

  • Student Loan Refinancing

    Refinancing your student loans gives you the opportunity to pay off your original student loans and obtain a new loan with different repayment terms and a potentially lower interest rate. Refinancing also may allow you to save money over time, instead of waiting for a period of forgiveness to see any form of savings. The refinancing of Federal Loans can only be done by moving to a private lender. Each lender has its own criteria for determining eligibility and rates, such as credit history, total monthly debt payments, and income. Those who are in good financial standing, have good credit scores, and have shown they are responsible with debts and monthly budgeting are more likely to be approved. Some private lenders, such as Laurel Road, also offer support should the need arise from a change in your financial situation. As a borrower, you want to balance lower rates with terms and payments you are comfortable with. However, certain repayment, forgiveness and other options go away by refinancing federal loans with a private lender, so be sure to do your research to make the best decision for yourself.

What to Do If You’re Having Trouble Repaying Federal Student Loans

If a borrower is having trouble making payments for whatever reason, they may turn to federal programs such as deferment or forbearance. Deferment is a temporarily period when repayment of principal and interest is delayed, and forbearance is a pause or payment reduction granted at the lender’s discretion in the event of economic hardship. Because of the impact on interest and potential loan forgiveness, it might be worth exploring another repayment plan before you consider deferment or forbearance. You can find more tips for avoiding default, here.

For some, lowering their monthly payments through student loan refinancing might be effective in meeting their financial goals. If you’re eligible, you could stand to benefit from terms and rates that work for your individual financial situation, help you pay down debt faster than some of the federal repayment options, and get you closer to achieving your long-term financial goals.

When Refinancing A Federal Student Loan Makes Sense

To recap, consider refinancing your federal loans when:

  1. You’re looking for a lower rate.
  2. You’re looking to change the terms of your loan, such as extending or shortening the length, to better match your income and ability to repay.
  3. You’ve reviewed the different federal repayment options, public loan forgiveness, forbearance, deferment and other available features, and are willing to give up these by refinancing.

In providing this information, neither Laurel Road or KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.

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