A government study finds 38% of federal loan borrowers may overpay.
In 2015, the Government Accountability Office (GAO) conducted a study to assess federal loan repayment plans. They found that although 51% of federal student loan borrowers were eligible for income-based repayment, only 13% participated. That means millions of Americans could be paying less, but they either don’t know about these programs or don’t know how to use them.
Federal Student Loan Repayment Plans
There are eight total federal repayment plans available. You choose a plan based on the types of loans you have and what you need to accomplish with repayment.
Here is a basic overview of each plan:
- Standard repayment plan. This is the most basic federal loan repayment plan. If you don’t enroll in another plan then you’re automatically enrolled in this one. It totals up your federal loans then breaks it up to repay the debt over a 10-year term with fixed payments.
- Graduated repayment plan. This plan focuses on matching payments to salary advancement. Payments start lower than the standard plan, but then increase by 7% every two years throughout the 10-year term. The idea is to start low, so payments are easier to afford, then increase gradually to finish strong.
- Extended repayment plan. This is a specialized option that simply extends the term on a standard plan OR a graduated plan from 10 years to 25 years. So, instead of 120 payments, you make 300. Extending the term, lowers your payments. On an extended graduated plan, your payments still increase by 7% every two years, but you start at a lower payment.
- Income-based repayment (IBR) plan. This is the most popular “hardship-based” repayment plan. Payments are determined by Adjusted Gross Income (AGI) and family size. In most cases, payments end up being 15% of your AGI. The term of the plan is 25 years.
- Income-contingent repayment (ICR) plan. This is another hardship-based plan that also sets payments based on AGI and family size. It also has a 25-year term. However, the AGI payment percentage is slightly higher. Payments are generally set at a around 20% of your AGI.
- Income-sensitive repayment (ISR) plan. This is plan specifically designed for borrowers that have loans from FFEL program. That’s an old federal loan program that no longer exists, but if you have old loans from that program that you still need to pay, you can use this option. It has a 10-year term and payments are set at roughly 20% of your AGI.
- Pay as You Earn (PayE) plan. This is the hardship-based repayment plan that offers the lowest payments possible. It also bases payments on AGI and family size and monthly payments end up being about 10% of AGI. However, if you have extreme financial hardship, your payments can be even lower; in some cases, you may pay nothing and not get penalized for missing payments. This is the program you should use if you’re really struggling.
- Revised Pay as You Earn (RePayE) plan. This is an updated version of PayE, but it applies to more borrowers. The original PayE program only applied to new loans taken out after 2011. RePayE can work for anyone. Payments are based on AGI and family size. Unlike other hardship programs, if your AGI increases, your payments can increase too and be even higher than a standard plan. The term is 20 years for undergraduates and 25 for graduates.
Public Service Loan Forgiveness (PSLF)
PSLF is a specialized program over and above the federal repayment plans. It provides a path to student loan forgiveness for public service professionals. If you work in public service as a teacher, nurse, or first responder, then you may be able to qualify for this program.
- You must first enroll in a hardship-based repayment plan (IBR, ICR, PayE, RePayE)
- Then you must certify your employment through studentaid.gov
- Each year or at least each time you switch jobs, you should certify your employment again.
- Then you make 120 qualified payments on your repayment plan.
- Once you meet all those requirements, you can apply for PSLF.
- If approved, all remaining balances on your loans are forgiven without penalties.
Qualifying for PSLF is a lot of work. In fact, the first borrowers are just now becoming eligible, because the program started in 2007. Out of the 29,000 applications received since October 2017, 99% have been rejected. The most common reason was a failure to meet all of the requirements listed above.
Still, the amount of debt you can have forgiven is worth the effort. Some borrowers have gotten out of debt for less than they originally borrowed.
How to navigate federal student loan relief programs
There are two ways to handle navigating the federal student loan repayment system. You can do-it-yourself and work directly with your loan servicers and through studentaid.gov. This can be complicated, since federal loan servicers aren’t exactly known for having great customer service.
You can also find federal student loan document preparation services. These help you navigate the paperwork, so you have a better chance of success.
In any case, this is the basic process you’d follow:
- First, you need to make sure as many of your federal student loans are eligible for these repayment plans. Since the repayment plans are handled through the Federal Direct Loan Program, you can use a Federal Direct Consolidation Loan to consolidate various types of student loans into the Direct Program.
- Then you apply for a federal repayment plan through your loan servicer.
- If you use a hardship-based repayment plan, you must certify your AGI and family size when you start the program and every year you are enrolled thereafter.
- If you are aiming for student loan forgiveness, you also need to certify your employment.
- You can switch repayment plans anytime you want, as often as you want as your needs change. However, if you want to apply for PSLF, you must stay within the hardship-based programs.
- On any of the plans, you can pay off your loans before the end of the term without penalties. If you’re enrolled in a hardship-based plan and you have balances left at the end of the term, then they are forgiven without penalties.
- After 120 payments, if you qualify for PSLF, then your balances are forgiven without penalties in half the time.