MONEYSCHOOL'S Simplified Guide
to FAFSA and Federal Student Aid

Section 16: Repaying Student Loans

Obviously, if you borrow money for school you will have to repay it with interest at some point.  You must repay your student loans, even if you don’t complete your education or can’t find a job after you graduate. 

Student borrowers with Perkins or Stafford loans are not required to begin repayment until they leave school or drop below half-time.  Then there is a grace period of six months (Stafford loans) or nine months (Perkins loans) before repayment begins.  When you graduate, or if you notify your lender that you are leaving school or dropping below half-time, you will receive instructions on repaying your loan and on the options available for repayment.
The standard repayment schedule for federal student loans is ten years of fixed monthly payments, but there are optional plans available.  The graduated payment plan provides for reduced payments initially, with payments increasing every two years so that the loan is repaid in ten years. 

Borrowers with loans totaling over $30,000 in either Direct loans or FFEL loans can choose an extended payment plan which stretches payments out over 25 years.  The graduated and extended payment options are available for PLUS loans as well as for Perkins and Stafford loans.  Of course, plans that allow loans to be repaid more slowly increase the total amount of interest paid on the loan.

Starting on July 1, 2009, a new Income-Based Repayment (IBR) option is available for student loans.  This program caps payments on existing or future Direct or FFEL loans at 15% of discretionary income.  Discretionary income is defined as the amount exceeding 150% of the federal poverty level for your family size.  After 25 years of making payments under this program, any remaining principal and interest is completely forgiven. 

IBR could be very helpful to low income borrowers with heavy student loan debts.  This option is not available for parents’ PLUS loans.  For more information, check out this web page.

Important Tip: It is extremely important to keep close track of the amounts you receive from student loans.  Your loans will normally be approved for the entire year but a portion of the loan will be disbursed for each term, and the checks may go directly to your school. You should receive a statement of the amount of each disbursement.  So, if you receive student loans for four years and are on a semester system you could receive eight separate disbursements.  When it comes time to repay your loans, you want to be sure that your payments are based on the correct loan balance.  Some borrowers have complained that the amounts owed to certain FFEL lenders exceeded the amount that was borrowed. You need to protect yourself in case that occurs.  Make a student loan file and keep all of your paperwork in it.   

Deferment or Forbearance

Once a student loan is in repayment status, it is possible under some circumstances to delay repayment temporarily through either deferment or forbearance

Deferment is a period of time when no payments are required.  Deferments can be granted to students who are enrolled in school at least half-time, or in cases where the borrower is unable to find full-time employment or is suffering from economic hardship.  Deferments also are available for active duty military service.  For subsidized Stafford loans, interest is not charged while the loan is in deferment.  For unsubsidized Stafford loans and PLUS loans, interest continues to be charged while the loan is in deferment. Deferments are limited to three years.

Forbearance may be available for borrowers who are temporarily unable to meet their repayment schedules and are not eligible for deferment.  In forbearance, the lender may agree to suspend or reduce loan payments for a specific and limited amount of time.  There are some situations in which forbearance is mandatory, including periods when the borrower is in a medical or dental residency or has loan payments that exceed 20% of monthly income.  While a loan is in forbearance, interest continues to be charged. 

It is extremely important to understand that if you apply for either deferment of forbearance, you must continue to make payments on your student loan until you have been notified in writing that the deferment or forbearance has been granted.  If you stop making payments without approval, your loan can go into default.  Defaulting on a student loan can have very serious consequences.  For more on loan default, see the section titled “What To Watch Out For” below.

Public Service Loan Forgiveness

The College Cost Reduction and Access Act of 2007 created the Public Service Loan Forgiveness Program to encourage individuals to work full time in public service careers.  Under this program, borrowers may qualify for forgiveness of the remaining balance due on eligible federal student loans after they have made 120 payments on those loans while employed full-time by certain public service employers. 

This option applies only to federal Direct loans.  However, some other types of federal student loans, such as Perkins and FFEL loans can be consolidated into Direct loans to become eligible for this program.  The FSA fact sheet with details on the program, including the types of service that qualify for this program, can be found here.

Loan Consolidation

Since students may receive loans from more than one program (e.g., subsidized and unsubsidized Stafford loans), many students end up with multiple loans when they leave school.   In that case, it may be to your advantage to consolidate all of your student loans into a single loan. 

Consolidation loans are available both as Direct loans and as FFEL loans.  Interest rates on consolidation loans are based on the weighted average of rates on the underlying loans.  Consolidation will simplify repayment, and may give you more time to repay your loans, but could also result in the loss of interest discounts available on the original loans. 

Once you consolidate your loans, you may not consolidate or refinance them again, so when the time comes to repay your loans, it is important to research your options carefully.  For all the details on student loan consolidation, check out this web page.