Students’ Repayment Options

According to a 2014 Federal Reserve report, nearly one in three borrowers in repayment are at least 90 days late with their payments.

There are, however, many ways that borrowers can avoid getting in trouble with their student loans. Here are eight tips to repay college debt:

1. Identify outstanding loans.

After leaving or graduating from college, borrowers have six months to begin repaying their federal loans. Their first step should be to identify their outstanding loans.

Borrowers can access all their federal loans by logging into the National Student Loan Data System ( Keeping track of these loans can be harder than you think. Students could have 16 federal loans (one for every semester) or more after graduating from college.

2. Consider the federal repayment options.

There are a variety of ways to repay student debt. The standard method is to pay off the loan over 10 years. Borrowers, however, can be eligible for other types of repayments. (See the chart at the bottom of this lesson.)

The graduated repayment method allows borrowers to enjoy lower payments in the early years of the 10-year repayment program with payments usually increasing every two years. Under the extended repayment plan, debtors can have up to 25 years to repay their loans. To qualify for this last option, borrowers must have more than $30,000 in outstanding college loans.

3. Check eligibility for income-based repayment.

Grads or college dropouts, who borrowed far more than their salaries can realistically cover, should explore whether they are eligible for one of the federal income-based repayment plans. The newest plan, which also offers the best terms, is called Pay As You Earn. PAYE will lower a person’s monthly payments and can also result in loan forgiveness if the loan hasn’t been repaid in 20 years. With PAYE, a borrower doesn’t have to devote more than 10 percent of his/her discretionary income to repaying federal student loans.

These repayment programs, however, won’t always be the cheapest solution because the interest keeps accruing throughout the repayment period. If a person loses eligibility for the plan by earning a higher salary, he or she could end up paying more over the life of the loan.

4. Use the Repayment Estimator

Choosing the correct repayment method can be daunting. Borrowers should use the federal Repayment Estimator to see what plans they might be eligible. The estimator will also calculate what a borrower’s monthly payments would be, along with the total lifetime cost of the loan. Here is the repayment link:

5. Check out loan forgiveness program.

Graduates should also explore whether they will qualify for the federal public service loan forgiveness program. Under this program, graduates who work for a government entity or a nonprofit can have their loans forgiven after 10 years of payments. People who can be eligible for this program include public school teachers and librarians, preschool workers, police, firemen, emergency medical technicians, social workers, prosecutors and public defenders.

Borrowers can find out if they qualify by completing the Employment Certification form on the U.S. Department of Education’s website.

6. Repay loans automatically.

To reduce the chances of missing payments – or in a worst-case scenario – defaulting on loans – borrowers should sign up for automatic monthly payments. Even after setting up automatic payments, borrowers should pay attention to all correspondence from their lender. The lender could be notifying a debtor that another servicer is taking over the loan, a payment wasn’t received, or other important information.

7. Consider emergency options: deferment and forbearance

The worst thing a borrower can do is to simply stop paying because it can lead to default. The federal government considers a loan in default if payments have stopped for at least 270 days. A default will ruin the debtor’s credit history and can reduce the chances of finding a job, getting an apartment, obtaining a cell phone plan and securing additional federal student aid. Borrowers who default can have their wages garnished and tax refunds can be withheld and applied to repaying the defaulted loans.

Rather than default, borrowers should explore requesting a deferment or forbearance from their loan servicer. With a deferment, a borrower temporarily stops making payments and the government will pay interest during this period on federal direct subsidized loans and federal Perkins loans.

A less desirable option is seeking a forbearance that allows a borrower to stop or reduce payments for up to 12 months. The federal government will not pay down the interest on any federal loans during forbearance.

8. Get a head start on paying.

Students who are still in school may want to consider paying interest on some of their loans. There are two main federal college loans for students – direct subsidized and direct unsubsidized. The federal government pays the interest on the subsidized loan that accrues when a student is in school, but not the unsubsidized version. A student can save money by paying interest on the unsubsidized version.

*Measuring Student Debt and Its Performance, Federal Reserve Bank of New York, April 2014

Learn More…

Federal Loan Repayment Chart

Here are the links to the three standard repayment plans referred to in the above screenshot for federal student loans:

Standard Repayment Plan

Graduated Repayment Plan

Extended Repayment Plan


Do you have any questions about student repayment plans?

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