Building a Financial Foundation: Student Loan Repayments

There’s no doubt that student loans make higher education more accessible for a vast majority of students, but the lingering debt from student loans can be immensely burdensome for graduates, their families, and those who did not complete their education.^[1] Understanding the repayment process for your student loans can go a long way toward building a solid financial foundation; mismanagement of student loan debt can create ripples that impact your financial future for years to come.

Student loan payments are made to your loan servicer. The U.S. Department of Education uses several loan servicers to handle the billing and other services on loans for the Direct Loan Program and for loans originally made under the Federal Family Education Loan (FFEL) Program (now owned by the Department of Education). It’s essential to know that every loan servicer has its own payment process, you must check with your servicer if you’re unsure about how or when to make payments on your student loan.

Direct and FFEL Loan Repayment Plans

If you have Direct or FFEL loans, several repayment plans are designed to meet your needs. The repayment plan you choose will set the terms of the amount you pay and the length of time you have to repay your loans.

Below is a guide to repayment plans, the loans eligible for each plan, the timeframes and payments of each plan, and a comparison between your repayment options.

Standard Repayment Plan – The standard repayment plan is the basic plan for repaying student loans. You’re automatically placed in this plan when you start repayment, unless you select a different option.^[2]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Subsidized & Unsubsidized Federal Stafford Loans
  • All PLUS loans
• Monthly Payment & Timeframe
  • Payments are a fixed amount of at least $50 per month.
  • Up to 10 years (up to 30 years for Consolidation Loans).
• Comparison
  • You will pay less interest for your loan over time under this plan than you would under other plans.

Graduated Repayment Plan – With a graduated repayment plan, payments start off low and increase every two years.^[3]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Subsidized & Unsubsidized Federal Stafford Loans
  • All PLUS loans
• Monthly Payment & Timeframe
  • Payments are lower at first and then increase, usually every two years.
  • Up to 10 years (up to 30 years for Consolidation Loans).
• Comparison
  • You will pay more for your loan over time than under the 10-year standard plan.

Extended Repayment Plan – If you extend the term of your loan, you will pay more interest over time, but your monthly payments will be smaller.^[4]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Subsidized & Unsubsidized Federal Stafford Loans
  • All PLUS loans
• Monthly Payment & Timeframe
  • Payments may be fixed or graduated.
  • Up to 25 years
• Comparison
  • Your monthly payments would be lower than the 10-year standard plan, but you will pay more for your loan over time.
  • If you are a:
    • Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans.
    • FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans.
  • For example, if you have $35,000 in FFEL loans and $10,000 in Direct loans, you can use the extended repayment plan for your FFEL loans but not for your Direct loans.
    • For both programs, you must be a new borrower as of October 7, 1998.

Income Based Repayment Plan (IBR) – a repayment plan with monthly payments that are generally equal to 15% (10% if you are a new borrower on or after July 1, 2014) of your discretionary income, divided by 12.^[5]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Subsidized & Unsubsidized Federal Stafford Loans
  • All PLUS loans made to students
  • Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents
• Monthly Payment & Timeframe
  • Your maximum monthly payments will be 15% of discretionary income, the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state of residence (other conditions apply). Your payments change as your income changes.
  • Up to 25 years
• Comparison
  • You must have a partial financial hardship.^[6]
  • Your monthly payments will be lower than under the 10-year standard plan, but you will pay more for your loan over time.
  • If you have not repaid your loan in full after making the equivalent of 25 years of qualifying monthly payments, any outstanding loan balance will be forgiven.
  • You have to pay income tax on any amount that is forgiven.^[7]

Saving on a Valuable Education (SAVE) Plan – the SAVE Plan calculates your monthly payment amount based on your income and family size. In addition, the SAVE Plan has unique benefits that will lower payments for many borrowers.^[8]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Direct PLUS loans made to students
  • Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents
• Monthly Payment & Timeframe
  • Your maximum payments will be 5% of discretionary income for undergraduate and 10% of discretionary income for graduate loans. Discretionary income is the difference between your adjusted gross income and 225% of the poverty guidelines for your family size and state of residence (other conditions apply).
  • A single borrower who earns less than $32,805 ($67,500 for family of four) will not have to make payments.
• Comparison
  • Revised Pay as You Earn (REPAYE) plans converted to SAVE.
  • Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 10 years for low original-balance borrowers (less than $12,000) and 20 years for undergraduate or 25 years for graduate. If you make your payments the loan balance won’t grow because of unpaid interest. If $100 of interest accumulates each month and you have a $60 payment, the remaining $40 would not be charged.
  • SAVE Plan excludes spouse income who are filing married filing separate (MFS).

Pay as You Earn Repayment Plan – a repayment plan with monthly payments that are generally equal to 10% of your discretionary income, divided by 12, but never more than the 10-year Standard Repayment amount.^[9]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Direct PLUS loans made to students
  • Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents
• Monthly Payment & Timeframe
  • Your maximum monthly payments will be 10% of discretionary income, which is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state of residence. Your payments change as your income changes.
  • Up to 20 years
• Comparison
  • No new enrollments are permitted.
  • You must be a new borrower on or after October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011.
  • You must have a partial financial hardship.^[10]
  • Your monthly payments will be lower than under the 10-year standard plan, but you will pay more for your loan over time.
  • If you have not repaid your loan in full after making the equivalent of 20 years of qualifying monthly payments, any outstanding loan balance will be forgiven.
  • You have to pay income tax on any amount that is forgiven.

Income-Contingent Repayment Plan – a repayment plan with monthly payments that are the lesser of (1) what you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income or (2) 20% of your discretionary income, divided by 12.^[11]

• Eligible Loans
  • Direct Subsidized & Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans
• Monthly Payment & Timeframe
  • Your payments will be lesser of
  • 20 percent of your discretionary income; or
  • The amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
  • Payments are calculated each year and are based on your adjusted gross income, family size, and the total amount of your Direct Loans. Your payments change as your income changes.
  • Up to 25 years
• Comparison
  • You will pay more for your loan over time than under the 10-year standard plan.
  • If you have not repaid your loan in full after making the equivalent of 25 years of qualifying monthly payments, any outstanding loan balance will be forgiven.
  • You have to pay income tax on any amount that is forgiven.

You may select or be assigned a repayment plan when you first being repaying your student loans but you can change plans at any time. Contact your loan servicer if you would like to discuss repayment plan options or change your repayment plan.

Federal Perkins Loan Repayment

A Perkins Loan is a type of federal student loan based on financial need. The loan is a low interest, subsidized federal student loan, meaning you won’t pay or collect interest while you are in school and during the grace period after you leave school. The Department of Education pays the loan’s interest during that time. It is offered to undergraduate and graduate students with extreme financial need.^[12]

Unlike other federal loans, your school is the lender for Perkins loans. This means you work with your school, or a company hired by your school, to repay these loans.

Once you started repaying your Perkins loan, you may have received a different loan servicer for this loan than the rest of your federal loans. You likely started paying back your loan nine months after you graduated or dropped below half-time enrollment in school. The longest repayment term for Perkins loans is 10 years.

(The Perkins Federal Loan Program ended in 2017. However, people who received a Perkins Loan are still required to pay those loans and are still eligible for the benefits of the Perkins Loan Program.)

Private Student Loan Repayment

Loan terms, including repayment plans, vary significantly among private student loan lenders. Contact your lender for additional details regarding your repayment options.

If you’re struggling to repay your private student loans, don’t panic. You have options. The CFPB has a number of resources to help get you back on track.^[13]

Consequences of Not Paying on Your Student Debt

If you don’t make your student loan payment or your payments are late, your loan may eventually go into default.

If you default on your student loan, that status will be reported to national credit reporting agencies. This reporting may damage your credit rating and future borrowing ability including a personal loan, taking out a mortgage, or even getting a job. Also, the government can collect your loans by taking funds from your wages, tax refunds, and other government payments.

Remember, you have options when it comes to repaying your student loan debt. If you need additional guidance, contact Sequoia Financial Group.

Sources:

1. https://www.cnn.com/cnn-underscored/money/average-student-loan-debt
2. https://www.nerdwallet.com/article/loans/student-loans/standard-repayment-plan-student-loans
3. https://www.consumerfinance.gov/ask-cfpb/what-is-graduated-repayment-en-635/#:~:text=With%20a%20graduated%20repayment%20plan,graduated%20repayment%20plan%20is%20available.
4. https://www.consumerfinance.gov/ask-cfpb/what-is-extended-repayment-plan-federal-student-loans-en-637/#:~:text=If%20you%20have%20more%20than,monthly%20payments%20will%20be%20smaller.&text=You%20can%20always%20pay%20more%20than%20the%20amount%20due%20each%20month.
5. https://studentaid.gov/help-center/answers/article/ibr-plan
6. A circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 15% (IBR) or 10% (Pay as You Earn) of the difference between your adjusted gross income (AGI) and 150% of the poverty line for your family size in the state where you live. The amount that would be due under a 10-year Standard Repayment Plan is calculated based on the greater of the amount owed on your eligible loans when you originally entered repayment, or the amount owed at the time you selected the IBR or Pay as You Earn plan.
7. Student loan forgiveness is federally tax-free through 2025 because of a provision from the American Rescue Plan of 2021.
8. https://studentaid.gov/announcements-events/save-plan
9. https://studentaid.gov/help-center/answers/article/paye-plan
10. The SECURE act allows for $10,000 in lifetime distributions per person from a 529 plan to pay Qualified Education Loan Repayments.
11. https://studentaid.gov/help-center/answers/article/icr-plan#:~:text=The%20Income%2DContingent%20Repayment%20(ICR)%20Plan%20is%20a%20repayment,Was%20this%20page%20helpful%3F
12. https://studentaid.gov/understand-aid/types/loans/perkins
13. https://www.consumerfinance.gov/paying-for-college/repay-student-debt/private-student-loans/