Understanding the Basics of Student Loans & Repayment Options

July 9, 2019 Lisa Black

Congratulations you graduated! You’ve worked tirelessly for your degree and got a job!  It’s time to celebrate…but wait; now you have to start paying back loans.

For many, student loans equate more than a car payment or a mortgage. And that’s if you’re able to afford one or both with the additional obligation of your student loan payment. No matter which way you slice it student loan debt can be a huge financial burden for anyone – I should know, I’m one of the lucky few that have completed my doctoral degree but at the same time incurred more student loan debt than I have for my car and home combined. This can feel like an insurmountable burden for even those with the most lucrative of jobs. To avoid feeling overwhelmed, it’s important to understand and make repayment choices that work best for you.

What Does Repayment Look Like Exactly?

Loan repayment options often depend on the type of loan and who you borrowed the loan from. There are two main types of student loans: federal and private. For the purposes of this article we’ll be discussing federal loans, but for private loans try visiting this resource.

When it comes to federal loans there are many types (subsidized, unsubsidized, grad plus, etc.) and many programs or options that once were available and are no longer are or vice versa. Before starting repayment, it is very important that you know all your options and makes the best-educated choice possible. Picking the wrong repayment plan or changing plans mid-repayment can cost you thousands.

First Know Your Basics:

  1. Loan amount
  2. What type of loans you have (e.g., subsidized, unsubsidized, grad plus, etc.)
  3. Year timeframe you took out your loans (e.g., 2007-2014)
  4. Potential life changes (e.g., marriage, kids, or job change)
  5. If you are married or plan to be soon, gather your spouse’s info as well.

Understanding All the Repayment Options & Plans:

  1. Standard Repayment Plan:

  • A fixed amount of at least $50 each month.
  • Payments made for up to 10 years (up to 30 years if the debt is over 60,000).
  • All Direct and Federal Family Education Loan (FFEL) Program loans are eligible.
  • Pro: Saves you money in accrued interest over time because you'll pay off your federal student loan faster.
  • Con: Monthly payment may be unaffordable.
  1. Graduated Repayment:

  • Payments made for up to 10 years (up to 30 years if the debt is over $60,000).
  • Start out low and increase every two years.
  • Will at least equal the amount of interest that accrues on your loan each month.
  • Won't be more than 3x greater than any other payment.
  • All Direct and FFEL Program loans are eligible.
  • Pro: Saves you money in accrued interest over time because you'll pay off your federal student loan faster.
  • Pro: Payment starts low when you are likely making less money.
  • Con: Payment increase is not based on actual income and may become unaffordable.
  1. Extended Repayment:

  • Payments are fixed or graduated.
  • Payments are made for up to 25 years.
  • To be eligible you must have had no outstanding balance on a Direct Loan and /or a FFEL Program loan as of October 7, 1998, or on the date you obtained a Direct Loan and/or an FFEL Program loan after October 7, 1998, and you must have more than $30,000 in outstanding Direct Loans or FFEL Program loans.
  • Pro: Smaller payments
  • Con: Ultimately pay more with accrued interest over time.
  1. Income-Based Repayment (IBR) Plan:

  • Payments equal to 15% of your discretionary income, divided by 12 or 10% if you are a new borrower. Specifically, the IBR program means you didn’t have any loan amount prior to July 2014 and took a new loan out after July 2014.
  • Payments are made for 20 or 25 (for graduate loans) years and the rest of the loan is forgiven.
  • Pro: Lower payments
  • Con: Payments increase as your salary increases (or if/when you file joint taxes with your spouse).
  • Con: You will be taxed on the amount forgiven. Therefore if, for example, you have $100,000 forgiven and you are in the 25% tax bracket, then you will have to add $25,000 to your tax bill that year.
  1. Income-Contingent Repayment (ICR) Plan:

  • Payments that are the lesser of (1) what you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income or (2) 20% of your discretionary income divided by 12.
  • Payments are made for 20 or 25 years and the rest of the loan is forgiven.
  • Eligible loans include Direct Loan Program loans except:
    • Direct PLUS Loans made to parent borrowers – Direct and FFEL PLUS Loans made to parent borrowers may become eligible for this plan through loan consolidation.
    • FFEL Program loans are not eligible for this plan but can become eligible through loan consolidation.
  • Pro: Payments won’t increase
  • Con: Payments can be higher than other programs
  • Con: You will be taxed on the amount forgiven. Given the size of the loan and amount of accrued interest, this tax bill may be more than paying standard payments.
  1. Pay as You Earn (PAYE):

  • Payments are limited to 10% of your discretionary income, divided by 12.
  • Payments are made for 20 or 25 years and the rest of the loan is forgiven.
  • You must have a partial financial hardship, which means that your calculated payment amount under PAYE must be less than what you would pay under the Standard Repayment Plan with a 10-year repayment period.
  • You must be a new borrower (no outstanding loans after Oct. 2007 and a new loan taken after Oct. 2011).
  • Eligible loans include all Direct Loan Program loans except:
    • Direct PLUS Loans made to parent borrowers – Direct and FFEL PLUS Loans made to parent borrowers may become eligible for this plan through loan consolidation.
    • FFEL Program loans are not eligible for this plan but can become eligible through loan consolidation.
  • Pro: Lower payments
  • Con: Payments increase as your salary increases (or if/when you file joint taxes with your spouse).
  • Con: You will be taxed on the amount forgiven. Given the size of the loan and amount of accrued interest, this tax bill may be more than paying standard payments.
  1. Revised Pay as You Earn (REPAYE):

  • Payments are limited to 10% of your discretionary income, divided by 12.
  • Payments are made for 20 or 25 years and the rest of the loan is forgiven.
  • Eligible loans include all Direct Loan Program loans except:
    • Direct PLUS Loans made to parent borrowers – Direct and FFEL PLUS Loans made to parent borrowers may become eligible for this plan through loan consolidation.
    • FFEL Program loans are not eligible for this plan but can become eligible through loan consolidation.
  • Pro: Lower payments
  • Pro: If your payment doesn’t cover all of the accrued interest the government pays for 50% of that interest.
  • Con: Payments increase as your salary increases (or if/when you file joint taxes with your spouse).
  • Con: You will be taxed on the amount forgiven. Given the size of the loan and amount of accrued interest, this tax bill may be more than paying standard payments.
  • Con: Forced to count spouse’s income, even if you file taxes separately.

Let’s Talk About Loan Forgiveness:

If you are an individual with high debt that is going to take advantage of one of the income-based programs I would highly recommend looking for jobs that qualify for the Public Student Loan Forgiveness (PSLF) program. This option allows for debt to be forgiven but, keep in mind, may not be a great choice for all individuals, since in the long run non-profit and government sectors tend to pay less. For those looking at the PSLF program, keep in mind:

  • You will make the same payments with the payment program you chose.
  • The loan is forgiven after 120 payments/10 years (instead of 20 or 25 years).
  • The loan amount forgiven is NOT taxed.
  • If you change to a job that doesn't qualify or drop below 32 hours a week (average) your payment won’t count toward the PSLF program, but will still count toward whichever program you are enrolled in.

Student Loan Resources:

Before you do anything with your student loans make sure you understand the steps you’re taking, confirm your eligibility, and know what happens next. Remember, in most cases, student loan forgiveness isn’t an easy wave of the wand to get rid of debt. Don’t get caught unaware (it could cost you thousands of dollars!) – utilize your resources to get yourself situated with the repayment plan that works best for you.

Should I Consolidate My Loans?

Student Loan Consolidator Calculator

The Complete List of Student Loan Forgiveness Program

About the Author

Lisa Black

Lisa Black, PsyD has served as adjunct faculty in the psychology department at San Diego Mesa College since 2010. Dr. Black is a digital faculty consultant for McGraw-Hill and has been involved in a variety of projects, which include creating concept clips, textbook reviews, interactive game interface review, and serving on the board to help create a 3D brain interface. In addition to her teaching activities, Dr. Black is a licensed clinical psychologist specializing in integrative psychology, integrated primary care, biofeedback, neurofeedback, and treatment for concussions.

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