Federal Student Loan Repayment Options

Categories: College

Week #4 of Dave Ramsey’s Financial Peace University: Dumping Debt was a great motivating lesson. Since that class I have received numerous questions about Federal student loans. Therefore I put together the following brief about Federal Student Loans various repayment options to foster your additional research and consulting with your advisors. Please keep in mind, this subject is complicated and further investigation about someone’s particular situation is recommended.

When you are out of school (graduate, leave school, or drop below half-time enrollment), monthly repayment installments are required. The rate of interest that is charged depends upon when the loan was disbursed, type of loan and whether graduate or undergraduate degree. There are various options for making, consolidating and stopping payments, and some of them are as follows:

Loan Payments Stopping

  • Grace period of 6 – 9 months  from the date school ends, depending upon the type of federal loan
  • Total forgiveness for death, total and permanent disability, and other severe hardship
  • Deferment of loan payments for specific situations or hardship, depending upon the type of loan you may not have to pay interest during deferment, or you might have to pay it or have it added (capitalized) to the loan
  • Military deferment for active or post-active service
  • Forbearance with interest accruing
  • Partial forgiveness after 10 years if employed by a “Qualifying Public Service Organization,” remaining balances of loans granted under the William D. Ford Federal Direct Loan (Direct Loan) Program are forgiven after making 10 years of Qualifying Repayments (Income-Based Repayment (IBRP) Plan or the Income-Contingent Repayment (ICR) Plan, or the 10-year Standard Repayment Plan or repayment plan where the monthly payment amount equals or exceeds the 10-year Standard Repayment Plan
  • Partial forgiveness after 25 years for Income Based Repayment eligible borrowers but not employed by Qualifying Public Service Organizations, this is new

Loan Repayment options (example used $100,000 at 5%)

  • Standard level for 10 years $1,060.66 for a total of $127,279
  • Standard graduated repayment plan, for 10 years, the first payment is $706.10, and total payments would be $132,496
  • Extended months for 25 years of $584.59 for a total of $175,377
  • Extended graduated repayment plan, for 25 years, the first payment is $416.67, and total payments would be $191,558

Income Based Repayment

  • Income based repayment programs, base the repayment on various factors, including family size, household income, and spouses student loans. Repayment will change as someone’s situation changes, including income. Using the online calculator for a family of four, earning $60,00 the payment is only $330 per month.

New Student Loan Consolidation

  • In October President Obama announced a new loan consolidation plan, it seems to have a few benefits: slight reduction in fees, interest rates and complexity

Lastly, someone asked me even if there are financial benefits to doing IBRP and forgiveness, are there any behavioral, ethical or financial disadvantages?  Negotiating payments or bankruptcy I think gets into the ethics and behavior issues more than federal forgiveness programs, however some may argue this point, because forgiven payments will have to be paid by tax payers ultimately. From a financial perspective it is possible that someone could end up paying more with a IBRP than a standard 10 year repayment plan, with longer term payment plans especially if their income increased quite a bit over time.  To estimate this one would have to run 20 different reports.