How to Pay Back Your Student Loans

What kind of student loans do I have?

The first step to paying off your student debt is knowing what you’re working with. You may have different payment options and strategies available to you depending on the type of loan you have.

For most situations, we can break down student loans into two main categories: federal or private loans.

Federal student loans are government-funded and have certain terms and regulations that must be followed. Private student loans are loans that come from credit unions, banks, schools, or other private institutions. These types of loans will have different terms and payment options depending on the lending institution.  

The main differences between the two regarding paying back your loans include the kind of payment plans, loan forgiveness options, interest rates, when payments must begin and consolidation and refinancing options.

Below you can find a summary of the differences.

Federal Student Loan Types

For the majority of this article, we’ll be focusing on federal student loans as they are the most commonly used and have standardized policies and payment options. There are a few different types of Federal Student Loans:

Direct Loans (a.k.a. Stafford Loans)

• Subsidized – Government pays the interest while you’re in school.
• Unsubsidized – You are responsible for paying the interest while you’re in school.
• PLUS – Given to graduate students and parents of undergraduate students.
• Consolidation – Used to combine multiple federal loans into one monthly payment with a fixed interest rate.

Federal Family Education Loan (FFEL) Program– No new FFEL loans have been issued since 2010. If you have an FFEL loan it may affect which repayment plans you’re eligible for.

Servicers

Another key thing to know is who your loan servicer is. A loan servicer is a company that handles the billing and account services of your student loans. They act as the middleman between you and the government and can help you resolve issues regarding payment, as well as work with you to find the payment plan to best fit your circumstances. 

The servicer is there to help make sure your loans are kept in good standing. Remember, they are there to work with you, not against you! When in doubt, call your servicer to see how they can structure your loan payments. If you don’t know who your servicer is, check your most recent bill or loan statement. If you’re still not sure, call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243.

When do I begin making payments?

Once you’ve graduated, leave school, or drop below half-time enrollment status you have six months before you must start making payments. This six-month window is called the grace period and is the time period where you are not required to make any payments. However, interest may still accrue during your grace period if you have unsubsidized loans. If you have unsubsidized loans, you may want to consider making interest payments to prevent the interest from being added to your principal balance (a.k.a. interest capitalization) at the end of your grace period.

PLUS loans given to graduate students don’t have a grace period but are put into an automatic six-month deferment when the student leaves, graduates or reduces their enrollment to half-time which essentially generates the same effect. Parent PLUS loan borrowers don’t have an automatic deferment but can request a six-month deferment from their servicer.

What repayment plan options do I have?

Standard Payment Plan

This repayment plan is one of the easiest to understand. You can qualify for this type of payment plan if you have Direct Loans (Subsidized, Unsubsidized, PLUS, Consolidation), FFEL PLUS or consolidation loans. The Standard Payment Plan is designed to have you pay back your loan over 10 years. If you have a Direct or FFEL consolidation loan, your payment period will be between 10-30 years depending on the total amount you owe.

Generally, your monthly payments will be higher in this plan than others, but you will usually pay less over time than other payment options. Higher monthly payments will pay off your loans in the shortest amount of time and therefore save you the most in interest over the course of your payments. Monthly payments will be a fixed amount, approximately the amount of your loan divided by 120 months (*this doesn’t include monthly interest payments).

Graduated Payment Plan

Graduated plans are similar to standard payment plans in that the same types of loan types are eligible and the payment periods are the same. With these types of plans, you start with lower payments that slowly increase every two years over 10 years. This makes it an ideal plan for people who expect their income to increase steadily over time.

Your monthly payment amount depends on your total loan balance but will never be less than your monthly interest payments or more than three times greater than any other payment plan.

Extended Payment Plan

Extended payment plans are intended for borrowers who need a longer period to repay their loans. The same types of loans that are eligible for the standard and graduated plans are also eligible for the extended plan. To qualify for this plan, you need more than $30,000 in outstanding Direct and/or FFEL loans. For example, if you had less than $30,000 in FFEL loans but more than that in Direct loans, you would be able to use the extended payment option for your Direct loans, but not for your FFEL Program loans.

Monthly payments can be a fixed or graduated (increasing every two years) amount and are paid out over 25 years. Your monthly payment will generally be lower than the standard or graduated repayment plans, but you will usually pay more over time in interest.

Income-Driven Payment (IDR) Plans

These types of payment plans are designed to help borrowers that want to make lower monthly payments or those that have high debt levels relative to their income. IDR plans are not available for people with private loans. The most common IDR plans are:

• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)

Your monthly payments on IDR plans are a percentage of your “discretionary income.” Discretionary income is defined as the difference of your adjusted gross income (AGI) as reported on your taxes and the poverty guideline amount for your family size and state (100% of the poverty guideline amount for PAYE, REPAYE and IBR; 150% of the poverty guideline amount for ICR).

For PAYE and IBR plans, your monthly payment will never be more than what you would pay on the standard 10-year plan, although it may fluctuate year to year based on your annual income.

For REPAYE and ICR plans, your monthly payment amount will also increase or decrease year to year based on your annual income, however, there is no cap on it. This means that if your income increases enough, your monthly payments may be greater than what you would pay on the standard 10-year plan.

All IDR plans require you to update your family size and income on an annual basis in a process called “rectifying.” Your servicer will notify you when you need to update your information, but you may do so throughout the year if your income changes.

If you have a remaining loan balance at the end of your IDR plan period, the remaining balance will be forgiven. However, any balance forgiven may count as taxable income.

To see if your loans qualify for a certain type of payment plan or to see which option may be best for your situation, try out the loan simulator on StudentAid.gov.

Other student loan forgiveness options.

You can have your loans forgiven through IDR plans, but that could require over 20 years of payment. IDR plans are not the only way your student loans can be forgiven. They can be discharged due to unfortunate circumstances such as total and permanent disability, death and in some cases of bankruptcy.

Your loans may also be forgiven based on your employment through the Public Service Loan Forgiveness (PSLF) program. This program forgives the remaining amount of your Direct Loan after 120 qualifying monthly payments (10 years of payments) have been made.

A qualifying payment must be made through a qualified payment plan which includes the standard payment plan, or any IDR plans. However, to receive the benefit of the PSLF program, an IDR payment plan should be used. If you use a standard payment plan, you would have paid the entirety of your balance before your loans can be forgiven.

To count as a qualifying payment, the payment must be made for the full amount due and within 15 days of the payment’s due date. Payments made during a grace period, deferment, or forbearance don’t count as a qualifying payment. You must also be employed full-time by a qualifying employer.

Qualifying employers include and government organizations or non-profits that are 501(c)(3) tax-exempt. Full-time volunteering under the Peace Corps or AmeriCorps also counts as qualifying employment.

In general, loan forgiveness only applies to federal loans, but your state may offer loan repayment assistance programs to qualifying borrowers to help pay for private loans as well. To find out which programs your state has, click here.

Should I consolidate my student loans?

Loan consolidation allows you to take all your federal loans and merge them into one Direct Consolidation Loan. This means that instead of having multiple loans, with multiple payment amounts at differing interest rates, you would just have one monthly payment with a fixed interest rate. Consolidating your loans could reduce your monthly payment by extending your loan term or making you eligible for an IDR plan.

However, consolidating your federal loans usually doesn’t save you money in the long run. If you get a longer loan term to lower your monthly payment, you’ll end up paying more in interest. Your new fixed interest rate will be the weighted average of the interest rates of your previous loans. If you consolidate loans with outstanding interest balances, the interest will be capitalized and added to your principal balance.

If you’re considering loan consolidation, remember you can pick and choose which loans you want to consolidate. For example, you may only want to consolidate your loans if you have older federal loans with variable interest rates to give you a new fixed interest rate. Also, remember consolidating loans may change which repayment plans are available to you. If you consolidate a Parent Plus Loan, you may lose the ability to access certain repayment plans. Inversely, if you’re trying to use an IDR plan for a Parent Plus Loan, consolidation might be a good option because it would allow you to use the Income-Contingent Repayment plan (the only IDR plan that can be used by Parent Plus borrowers through a Direct Consolidation Loan).

It’s also important to remember how loan consolidation might affect your progress towards loan forgiveness. If you’re aiming for loan forgiveness through an IDR plan and consolidate your loans, you may lose the credit you’ve accumulated thus far. Consolidating loans basically resets the clock for the number of years you need to make payments before your loans are forgiven. To avoid this, you can always exclude the loans that have IDR plans from the consolidation.

Should I refinance my student loans?

Refinancing your student loans involves taking out a new loan to replace your old one. The reason you would do this is to save money on interest payments over the life of your loan. If current interest rates are lower than they were when you took out your original loan, refinancing may be a good idea.

If you have federal loans, you should consider your options carefully before refinancing because the process would involve replacing your federal loans with a private loan. This would cause you to lose all of the benefits that come with federal loans such as loan forgiveness and eligibility for various repayment plan options.

If you have private loans, refinancing could make sense if you could get a new lower interest rate. Before refinancing compare how much money you would save with your new interest rate. If you have a federal loan, you also need to factor in the difference in spending between paying off your loan in full or aiming for loan forgiveness through IDR plans over 20-25 years.

How to pay off my student loans faster?

What to do if you have trouble making payments.

Deferment and Forbearance

At some point, everyone experiences a financial hardship they haven’t planned for. These situations can make it difficult to make your normal monthly student loan payments. If you’re facing a financial hardship, you may be able to go into a period of deferment or forbearance. In both options, your loan payments are suspended or postponed, however, interest may still accrue. If you don’t pay off the accrued interest, it will be capitalized and added to your principal balance at the end of the deferment or forbearance period.

Generally, to qualify for deferment specific requirements and circumstances must be met. Some examples include being enrolled in school, undergoing cancer treatment, facing economic hardships or military service.

A period of forbearance can be granted by your loan servicer. You can request forbearance if you’re unable to make payments due to financial difficulties, medical expenses or losing a job. Approving a forbearance period is discretionary, meaning that your servicer can consider your unique situation and make an approval decision without the need to meet strict criteria.

Keep in mind that there may be other types of mandatory forbearance depending on your current employment or circumstances. If you meet the eligibility requirements for these types of forbearance, your servicer is required to grant your request.

These options should be used for short-term financial hardships. If you think you’ll have trouble making your monthly payments for a longer period of time, talk with your servicer to see if there’s a more appropriate repayment plan for you.