Federal student loan repayment options explained

If you have student loans, or will soon, you’re in good company. Nearly 44 million Americans owe almost $1.6 trillion in combined student loan debt. Federal student loans make up the biggest portion of this outstanding student debt at more than 92%. If you have a federal student loan, here’s what you need to know about your repayment options.

The benefits of federal student loans

Federal student loans usually have many advantages over private student loans, including:

• Fixed interest rates that are set by the government rather than based on a student’s credit score
• Forgiveness programs like those for federal workers
• Repayment plan options tied to income level
• Loans that don’t need to be repaid for six months until after you graduate or leave school
• Options to postpone or lower your monthly payments

Still, as with any loan, you’ll want to be very careful about borrowing. It’s wise to think about the kind of repayment plan that would benefit you the most and plot out what you would do if you find it hard to make your loan payments. Check out our guide below, outlining the types of federal student loans, your repayment options, available loan forgiveness programs and what to do if you become delinquent or default on your student loan.

Types of student loans

The U.S. Department of Education’s William D. Ford Federal Direct Loan Program offers four main types of student loans. (If you have an existing student loan, you may have one through the Federal Perkins Loan or Federal Family Education Loan (FFEL) programs, which no longer offer new loans.)

Direct Subsidized Loans — Meant for undergraduate students with financial need. 

• Your school determines how much you can borrow.
• The U.S. Department of Education pays the interest on these loans while you’re in school, for the first six months after you graduate (the grace period) and during any deferment period. 

Direct Unsubsidized Loans — For both undergraduate and graduate students. You don’t need to demonstrate financial need to qualify. 

• Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive.
• You must pay the interest on these loans.
• If you decide not to pay the interest while you are in school, during grace periods, or during deferment or forbearance periods, the interest will accrue and be added to your loan principal.

Direct PLUS Loans — Available to graduate or professional students and to the parents of dependent undergraduate students to pay for education expenses that aren’t covered by other financial aid. You don’t need to show proof of financial need, but a credit check is required.

• The U.S. Department of Education is the lender.
• The maximum amount of the loan is the cost of attendance (determined by the school) minus any financial aid that is received.
• PLUS loans don’t have a six-month post-graduation grace period. Payment starts as soon as the full amount of the loan is dispersed. 

Direct Consolidation Loans — This loan allows you to combine all your eligible federal student loans into one under a single provider with one monthly payment. Generally this means getting a longer term (up to 30 years) to pay off your loan, possibly with a lower interest rate. The downside is extending your repayment time will mean paying more toward the loan overall and you could lose benefits connected to your existing loans.

Federal student loan repayment options

Just as there are different types of student loans, there are also different ways to pay them back. Usually, the longer the repayment plan, the more you’ll pay toward your debt, but your monthly payments may be lower.

The good news is that you’re not locked into one repayment plan for life. You can change your repayment plan at any time, for free. 

If you want to pay less interest, you might want the Standard Repayment Plan. If you want lower monthly payments, then look into an income-driven plan. The graduated and extended student loan payment plans also will lower your monthly payments, but they’re not based on your income. 

Standard Repayment Plan — If you don’t specify a different plan, this will be the default. It will cost you less in interest over time because it’s the shortest repayment option at 10 years worth of equal monthly payments (10 to 30 years for a debt consolidation loan). But your monthly payments will likely be higher than other options.

• Can be used with Direct Subsidized and Unsubsidized Loans; Subsidized and Unsubsidized Federal Stafford Loans (loans given through the former FFEL program); all PLUS loans; all Consolidation Loans (Direct or FFEL). 

Graduated Repayment Plan — Payment starts off lower and then increases over time, usually every two years. The payments are structured to be paid off in 10 years. 

• Can be used with Direct Subsidized and Unsubsidized Loans; Subsidized and Unsubsidized Federal Stafford Loans; all PLUS loans; all Consolidation Loans (Direct or FFEL).
• You’ll pay more over time than with the Standard Repayment Plan.

Extended Repayment Plan — Fixed or graduated payments aimed at paying off your loans in 25 years.

• Can be used with Direct Subsidized and Unsubsidized Loans; Subsidized and Unsubsidized Federal Stafford Loans; all PLUS loans; all Consolidation Loans (Direct or FFEL).
• You must have more than $30,000 in outstanding Direct Loans to use with this program.
• You must have more than $30,000 in outstanding FFEL Program loans to use with this program.
• Your monthly payments will be less than either the Standard or Graduated repayment plans, but you’ll pay much more interest.

Revised Pay As You Earn Repayment Plan (REPAYE) — Your monthly payments equal 10% of your discretionary income. Payments are recalculated each year and changed based on your income and family size.

• Can be used with Direct Subsidized and Unsubsidized Loans; Direct PLUS loans made to students; Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
• If you’re married or get married, your spouse’s income and debt will be considered with limited exceptions.
• Any outstanding balance on your loan debt will be forgiven after 20 years (if all your loans were for undergraduate schooling) or 25 years (if any loans were for professional or graduate schooling). You may have to pay income tax on the forgiven debt.
• Usually costs more over time than the Standard Plan.

Pay As You Earn Repayment Plan (PAYE) — Your monthly payments equal 10% of your discretionary income. Payments are recalculated each year and changed based on your income and family size. Borrowers must have a high amount of debt compared to their income.

• Can be used with Direct Subsidized and Unsubsidized Loans; Direct PLUS loans made to students; Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.
• If you’re married or get married, your spouse’s income and debt will be considered with limited exceptions.
• Any outstanding balance on your loan debt will be forgiven after 20 years. You may have to pay income tax on the forgiven debt.
• Your monthly payments will never be higher than they would be with the Standard Plan, but you will likely pay more over time.

Income Based Repayment Plan (IBR) — Monthly payments will equal either 10% or 15% of your discretionary income. Payments are recalculated each year and changed based on your income and family size. 

• Can be used with Subsidized and Unsubsidized Federal Stafford Loans; Direct PLUS loans made to students; Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.
• If you’re married or get married, your spouse’s income and debt will be considered with limited exceptions.
• Any outstanding balance on your loan debt will be forgiven after 20 years or 25 years, depending on the timing of your loan. You may have to pay income tax on the forgiven amount. 
• Your monthly payments will never be higher than they would be with the Standard Plan, but you will likely pay more over time.

Income Contingent Repayment Plan(ICR) — Your monthly payment will be either 20% of your discretionary income or the amount you would pay on a repayment plan with an income-adjusted fixed payment over 12 years, whichever is less. Payments are recalculated each year and are based on your updated income, family size, and the total amount of your Direct Loans.

• Can be used with Direct Subsidized and Unsubsidized Loans; Direct PLUS loans made to students and Direct Consolidation Loans.
• Parent borrowers can use this plan by consolidating their Parent PLUS loans into a Direct Consolidation Loan.
• If you’re married or get married, your spouse’s income and debt will be considered with limited exceptions.
• Any outstanding balance on your loan debt will be forgiven after 25 years. You may have to pay income tax on the forgiven amount. 
• Your monthly payments will never be higher than they would be with the Standard Plan, but you will likely pay more over time

Income Sensitive Repayment Plan — This option is only for existing loans through the FFEL program, which was discontinued in 2010.  Your monthly payment is based on your annual income, but your loan must be repaid in full in 15 years.

Loan forgiveness or discharge

Beyond the loan forgiveness built into some repayment plans, there are several other types of loan forgiveness programs. Here are some scenarios where borrowers may qualify for loan forgiveness:

• Closed School Discharge: For borrowers whose school closes while they’re in attendance or within 120 days after they withdraw.
• Public Service Loan Forgiveness: For borrowers who make 120 qualifying payments while employed for a government organization or eligible nonprofit companies.
• Teacher Loan Forgiveness: Up to $17,500 in loan debt forgiveness for teachers who have taught for five full consecutive years in eligible schools.
• Perkins Loan Cancellation and Discharge: For Perkins Loans holders of certain occupations, such as teachers, firefighters, police officers and nurses.
• Total and Permanent Disability and Discharge: For loan holders who have a permanent disability.
• Discharge Due to Death: For cases where the borrower or the recipient of the loan dies.
• Discharge in Bankruptcy: This is very rare, but borrowers who can prove undue hardship might have their student loans discharged through bankruptcy.
• False Certification Discharge: Some student loans can be discharged for borrowers who were not truly eligible for the loan, if the loan was taken out without their knowledge, or if they are not qualified to work in the field they studied.
• Unpaid Refund Discharge: In cases where someone withdraws from a school, but the school doesn’t refund the remaining loan amount to the government.

Federal student loan deferment and forbearance

If there’s a point when you’re having a hard time making your monthly loan payments, but you think you could get back on track with a little breathing room, you may want to ask your loan provider about a deferment or forbearance.

They both put a temporary hold on your loan payments or temporarily lower your monthly payments. The main differences are that with deferment, if you meet the criteria, your deferment must be approved. You also are generally not responsible for paying the interest that accrues during the deferment period if you have one of the following loans:

• Direct Subsidized Loans
• Subsidized Federal Stafford Loans
• Federal Perkins Loans
• The subsidized part of Direct Consolidation Loans 
• The subsidized part of FFEL Consolidation Loans

With forbearance, or a deferment loan not mentioned above, interest keeps piling up during this period. You can either pay the interest as it accrues or allow it to accrue and capitalize. That means the interest will be added to your loan balance when your deferment or forbearance ends.

There are two types of forbearances: general and mandatory. With general, your loan provider decides if you will be approved or not. With a mandatory forbearance, if you meet the requirements, your loan provider must approve it.

There are many ways to qualify for a deferment, including:

• You’re enrolled half-time in a college or career school.
• You’re enrolled in a graduate fellowship program.
• You’re unemployed or can’t find full-time work for up to three years.
• You’re experiencing economic hardship.
• You’re an active duty service member.

General forbearance requirements include:

• Financial difficulties
• Medical expenses
• Change in employment

Mandatory forbearance requirements include:

• You’re in a medical or dental internship or residency program.
• The amount you owe each month for all your student loans is 20% or more of your monthly gross income.
• You’re a teacher whose work would qualify you for teacher loan forgiveness.
• You’re a member of the National Guard and have been activated by the governor, but you’re not eligible for a military deferment. 

What if you become delinquent or default on your loan?

Before you miss a student loan payment, reach out to your loan provider. Think about switching to an income-based repayment plan if you’re not on one already or request a deferment or forbearance.

You become delinquent on a student loan as soon as you miss a payment, but if you can pay off what you owe before 90 days, the delinquency likely won’t be reported to the credit bureaus. You might also consider a debt consolidation loan if that would help you keep up with your payments.

Related article: How to settle debt and remove it from your credit report

For Direct Loans and Federal Family Education loans, your loan won’t be in default until you haven’t made a payment for 270 days. So you have time to act, which is important. Defaulting on your federal student loan causes serious consequences, such as:

• The entire unpaid balance of your loan and any interest becomes immediately due.
• You’ll no longer be eligible for deferment or forbearance or switching to an income-based repayment plan. 
• The default will be reported to the credit bureaus, hurting your credit score.
• Your wages can be garnished. 
• Your loan provider can sue you for repayment.

If you end up defaulting, you still have some options to improve the situation: paying back your loan in full, loan rehabilitation or loan consolidation. 

Loan rehabilitation — This would mean contacting your loan provider and agreeing in writing to make nine monthly payments in a consecutive 10-month period. The size of your new payments would be 15% of your annual discretionary income, divided by 12. If you can’t afford that amount, you may be able to pay less, possibly as little as $5 a month based on your income.

Loan consolidation — To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you have to either agree to enroll in an income-driven repayment plan or make three consecutive, on-time, full monthly payments on the defaulted loan first.

One big benefit of loan rehabilitation is that the default is removed from your credit report, which isn’t the case with loan consolidation.

Student loans are a reality for many college students these days. Do your homework before you even hit class and choose a loan that gives you the best shot at making your payments.

If you’ve fallen behind on your student loans and don’t see a way to get caught up, Resolve can help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.