Student Loans - Part Two: Repayment Options for Federal Student Loans

Repayment Options

There are a few terms we wanted to clarify before we get into details:

Grace period- This gives you 6 months after you graduate until you have to start repayment

Both deferment and forbearance are temporarily stopping or reducing your monthly payments

Deferment - don’t have to pay interest if need-based

Forbearance - have to make interest payments but can pay less

These two usually happen in dire situations, like losing a job or becoming disabled

Repayment Types

Standard (default) - Standard is the plan you will be automatically enrolled in if you do not choose a different one. It's a 10 year plan with 120 equal payments that are the same amount the whole way through.

Graduated - This plan is also 10 years with 120 payments, but payments start lower and increase every 2 years. This is helpful if you have a combination of private and federal loans or will start with a low paying job after school.

Extended - The extended plan can be up to 25 years, but to qualify you must have at least $30,000 in student loans. It has smaller payments over the extended period.

An example of these payment types and their costs over time is shown to the left.

Some other options are:

Pay As You Earn (PAYE) - You will use 10% of your discretionary income to pay back your loans and after 20 years the rest is forgiven. However, you have to pay taxes on the forgiven amount in that specific year!

SOMETIMES this can be more expensive than the standard plan

Revised PAYE - Graduate loans can be forgiven after 25 years of payments of 10% of income.

Income Based - 15% of discretionary income is used to pay back the loans and after 20 years the rest is forgiven.

Income Contingent - This method is based on your tax filing, income, and number of dependents. You will pay up to 20% of your income and the rest will be forgiven after 25 years.

*For these repayments that are based on income, you must reapply every year so an increase in salary can affect how much you pay.

Loan Forgiveness

Sometimes you can get your loans cancelled or forgiven after a certain period of time! Here are some of those options:

Public Service Loan Forgiveness (PSLF) - If you work for a government organization, if you work for a tax-exempt non-profit, or you work for a non-profit whose main purpose is public service, you qualify for this. You have to make 120 payments, not necessarily continuously, the rest of your loans are forgiven.

If you do this, don't forget to change from the standard repayment plan!

Teacher Loan Forgiveness Program - If you work full time for 5 straight years in a low income school or education service agency, you loans can be forgiven up to $17,500.

Other - Some states can have certain forgiveness programs also. For example, Kansas has rural opportunity zones where there are forgiveness benefits offered.

Perkins loan cancellation - You can qualify to have up to 100% of your Perkins loans forgiven if you have served full time in an elementary or non profit school organization

Which is the Best?

It depends! There are so many repayment types so you can decide which is the best for you.

Use https://studentaid.ed.gov/sa/ to plug in your loans and see what your options may look like.

"Money Tip of the Week"

If you know you are going to graduate school directly after college, you could potentially take out extra undergraduate loans to pay for your first year in graduate school and save some money on lower interest rates.