Loan Repayment Options
Types of relief
- A deferment is a temporary suspension of loan payments for specific situations such as returning to school, unemployment, disability, or military service. You have a right to defer repayment for certain defined periods.
- Forbearance is a temporary postponement or reduction of payments for a period of time, as you and the lender or holder of your loan may agree, because you are experiencing financial difficulty.
- Graduated payment plans provide short-term relief through low, interest-only payments followed by standard principal and interest payments. If you are having difficulties making your loan payments, switching to this repayment plan may lower your monthly obligations.
- Income Based, Income Contingent and Income-sensitive payment plans offer payment relief with payments that are a specific percentage of your gross monthly income. Switching to one of these repayment plans may lower your monthly payments.
The Federal Student Aid Web site has more information on loan deferment.
Consequences of Defaulting On Your Loan
Defaulting on your loan means that you have failed to make payments for 270 days consecutively. Below are some of the consequences of defaulting:
- A collection agency will take over your loans
- It will hurt your credit score
- A percentage of your income may be taken to pay your loans
- Social Security benefits could be withheld
- No longer eligible for future federal loans
- Deferments are no longer an option
Income-Based Repayment & Public Service Loan Forgiveness
On July 1, 2009, the federal government introduced a new way to repay student loans. Under the IBR program, monthly loan payments for eligible borrowers will be capped based on income and family size. After 25 years of “qualifying” to payments, all remaining debt will be forgiven.
IBR is meant to help borrowers who have difficulty making monthly payments under the Standard 10-year repayment plan.
Loans eligible for IBR
You can tap into the IBR program if you have loans issued under:
- The Federal Family Education Loan (FFEL) program
- The Direct Loan program
- The Perkins Loan program, but only if you consolidate your Perkins Loan with your FFEL or Direct Loan
Eligible loans under both FFEL and Direct include Stafford, Grad Plus, and federal Consolidation loans.
Loans not eligible for IBR
Loans excluded from IBR eligibility include:
- PLUS loans made to your parent(s)
- Consolidation loans that include Parent PLUS loans
- Private (alternative) loans
- Loans not guaranteed by the federal government
How IBR can reduce your monthly payments
IBR uses a formula to compare your debt to your income. If your monthly payments would take more than 15% of your earnings above 150% of the poverty level for your household size, you may be eligible.
- If your income is below 150% of the poverty level for your household size, you won’t have to make any monthly payments.
- If your income is above 150%, you will pay 15% of the amount that exceeds 150% of the poverty level.
- If your annual income is $20,000 and you live alone, your monthly payment will be reduced from about $230 per month under the Standard (10-year) payment plan to $56 under IBR
- If your annual income is $20,000 and you have two persons in your household, no monthly payment will be required.
- If your annual income is $40,000 and you have two persons in your household, your monthly payment will be reduced from about $460 per month under the Standard payment plan to $272 under IBR.
Public Service Loan Forgiveness
This new program forgives all remaining debt in the Direct Loan program after 10 years of payments under the Standard (10-year) or alternative repayment plans, including IBR. The program is open to borrowers who take jobs in government and nonprofit 501(c)(3) organizations.
Only payments made after Oct. 1, 2007 count towards the 10 years. If your loans are in the FFEL program, you may be able to switch them to the Direct Loan program.