Switching Repayment Plans
If you have federal student loans, you can change plans by contacting your lender. FFEL lenders must allow you to switch at least once each year, but most will let you switch more often if necessary. Borrowers with Direct Loans may change plans at any time by notifying the Department of Education. There are some important consequences if you choose to leave some of the IBR plans. Under current policy, if you choose to leave the IBR plan, you will be required to pay under the standard repayment plan. You do not have to leave IBR, however, if you no longer have a partial financial hardship. You can remain in IBR in these circumstances, but your payment amount will be recalculated. This is a big reason why it’s so important to make sure that you respond to all requests for information from your servicer, including the annual recertification process for IBR.
Special Information for PLUS Loans
PLUS loan borrowers have nearly all the repayment options that Direct and FFEL Stafford loan borrowers have, with one big exception. The income-driven plans are not generally available to parent PLUS borrowers. These plans are available to graduate PLUS borrowers.
Parent PLUS borrowers who also have other federal student loans and choose to consolidate with Direct will find that the PLUS loan taints the entire consolidation loan, and will mean that they will not be eligible to repay the consolidation loan using income-driven repayment. If they wish to consolidate, parent PLUS borrowers may exclude the PLUS loans from the consolidation and pay them separately. These borrowers should also be able to consolidate and choose ICR.
Direct Loan Alternative
Direct Loan Alternative is another type of repayment plan for Direct Loan borrowers only. To qualify for an alternative repayment plan, a borrower must show that the terms and conditions of the other available repayment plans are not adequate to accommodate the borrower’s exceptional circumstances. Borrowers will likely need to provide documentation of these exceptional circumstances. All Department servicers are required to offer alternative repayment plans. Your Direct Loan servicer may also place you in an alternative plan temporarily after a successful rehabilitation. This is usually temporary while the servicer is determining the payment amount under an income-driven repayment plan. There is no standard definition of “exceptional circumstances” to get an alternative repayment plan.
These plans may be useful in many circumstances including for:
- Borrowers with very high medical debt or private student loan debt since the income-driven repayment plans do not take these expenses into account;
- Borrowers who do not qualify for income-driven repayment, such as parent PLUS borrowers.
Extended repayment plans allow you to extend the loan term for up to 25 years. You must have total outstanding principal and interest exceeding $30,000 to qualify. If you have both FFEL and Direct loans, you must meet the $30,000 minimum requirement for each type of loan.
Extended plan monthly payments will be less than under the standard repayment plan. However, you will also pay more interest over the life of the loan because the repayment period is longer.
The Department of Education has a repayment estimator to help you estimate payments under the extended and other repayment plans.
Graduated Repayment Plan
Under a graduated repayment plan, payments start out low and increase during the repayment period. The payments usually increase every two years. For FFEL and Direct loans that entered repayment on or after July 1, 2006, the loan must be paid over a ten-year period. However, if your loan balance is high enough, you can make graduated payments as part of an extended repayment plan. Graduated plans tend to work best for borrowers who are likely to have relatively quick increases in earnings over time.
Income-driven repayment options help many borrowers keep their loan payments affordable with payment caps based on their income and family size. There are several income-driven repayment (IDR) plans: Income-Based Repayment (IBR), Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE) and Income Contingent Repayment (ICR). Eligibility for each program depends on the type of loan, and often when the loan was taken out.
After the initial calculation, your payment may be adjusted each year based on changes in income and family size. You will have to verify your income every year. If you are in default, you must first get out of default in order to select an income-driven repayment plan.
You can choose to make higher payments if you can afford it while you are in an IDR plan. You might want to do this to try to pay off the principal sooner. You should tell your servicer in writing, along with the loan payment, that you want the extra money to be applied to the loan principal. Be sure to follow up to make sure that the payment was applied properly. Payments under these plans can be very low, sometimes zero. This means that it will usually take more time to pay off your loans, but this is better than going into default and facing the government’s powerful collection tools.
Parent PLUS borrowers are not eligible for any of the IDR plans. However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan.
It can be very confusing to figure out which plan is best for you. If you prefer, you can check a box on the income-driven repayment plan request form (or on-line) requesting that you get the plan with the lowest monthly payment. The Department has a web site with information about all of the income driven repayment plans. The Institute for College Access and Success (TICAS) created a summary chart to help borrowers understand the various income-driven repayment plans. There are pros and cons to the different plans that vary depending on individual circumstances.
Revised Pay As You Earn (REPAYE)
Who is eligible? All Direct Loan borrowers (except for parent PLUS borrowers) can apply regardless of when you took out the loans. There is no requirement to show a partial financial hardship in order to qualify.
What is the payment amount? The payment amount is determined based on adjusted gross income. Payments are capped at 10% of discretionary income. (This is defined as adjusted gross income above 150% of the relevant poverty level income divided by 12). You must renew eligibility every year. Under this plan, there is no limit (or cap) on the monthly payment. This means that higher income borrowers could end up with payments even higher than the standard ten-year plan. Borrowers can always switch to a different plan if they prefer.
How does the formula work for married borrowers? Your spouse’s income is included in calculating monthly payments even if you file separate tax returns. However, a borrower may request that only his/her income be included if the borrower certifies that she/he is separated from his/her spouse or is unable to reasonably access the spouse’s income information. (See Section 4 of the IDR application and recertification form).
What happens if a borrower fails to re-certify? If you fail to provide income documentation within ten days of the servicer’s deadline, and the Department cannot determine your new monthly payment before the end of the annual payment period, you will likely be removed from the REPAYE plan and placed in an alternative repayment plan. You can return to REPAYE by providing the documentation, and by making any required REPAYE payments that were owed during the time you were on the alternative payment plan.
Is there loan forgiveness? Yes, twenty years for borrowers with loans for undergraduate studies, and 25 years for borrowers with loans for graduate studies. This canceled amount will be taxed as income. However, you may not have to pay taxes even if the forgiven amount is considered taxable income. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.
Pay as You Earn (PAYE)
Who is eligible? Only certain Direct Loan borrowers qualify, including all Direct Loan borrowers taking out loans July 1, 2014 or later.
What is the payment amount? The payment amount is determined based on adjusted gross income. Payments are capped at 10% of discretionary income. You must renew eligibility each year.
How does the formula work for married borrowers? For a married borrower filing jointly, both the borrower’s and spouse’s income will be included in the calculation. For a married borrower filing separately, only the borrower’s income will be included.
IBR is available for both FFEL and Direct Loan borrowers. IBR will generally be less favorable for borrowers than REPAYE or PAYE. However, it is the only income-driven repayment plan available to FFEL borrowers. If you have a FFEL loan and want an income-driven plan other than IBR, you will have to consolidate your loans into the Direct Loan program, and then choose between the range of Direct Loan IDR plans.
IBR is comparable to the PAYE plan in that your payment is based on adjusted gross income.
You can stay in IBR even if you no longer qualify because of increases in your income. If this happens, your payments will be no more than the 10 year standard monthly payment amount, based on the balance you owed when you first entered the IBR repayment plan. Your repayment period may be longer than 10 years, but any interest that has accrued will be capitalized (added to the loan balance).
If you are married and both you and your spouse have student loans, the IBR formula considers you and your spouse’s joint federal student loan debt as well as your joint income if you file taxes jointly. If you are married, but file income taxes separately, only your income will be counted in determining the IBR repayment amount. However, you may lose certain tax benefits by filing separately. You should consult a tax professional if you are considering this.
Under both IBR and PAYE, if a borrower fails to provide income documentation within ten days of the servicer’s deadline, the borrower is treated as if the borrower no longer has a partial financial hardship, and payments are set to the amount the borrower would have paid under a standard plan. Unpaid accrued interest will be added to the loan balance. In these circumstances, borrowers can get back into IBR or PAYE by submitting income documentation, and can request forbearance while the repayment amount is recalculated.
If you continue making IBR payments for 25 years, any debt that remains is canceled. This canceled amount will be taxed as income. However, you may not have to pay taxes even if the forgiven amount is considered taxable income. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.
Direct Loan Income Contingent Repayment (ICR)
The ICRP is available only in the Direct Loan Program, including the Direct Loan consolidation program. The required payment can be no greater than 20% of any earnings above the poverty level. The Department has a repayment estimator to help you estimate payment amounts under ICR and other payment plans. If you are married and file taxes jointly, your joint income will be counted in figuring out the ICR repayment amount.
Parent PLUS loans are not eligible to be repaid under ICR (or IBR or PAYE). However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan.
Application Process and Annual Recertification
You may request an IDR plan electronically on the StudentLoans.gov. Using this site, you will enter your personal information into the Electronic Application, authorize a transfer of tax information using the IRS Data Retrieval Tool, review, electronically sign and submit the completed form online. There is a repayment plan selection form (and on-line) that allows you to request the payment plan that provides you with the lowest monthly payment.
You should be able to use this site to initially apply for IBR, PAYE, REPAYE and/or ICR, meet the annual income documentation requirement and request recalculation of your monthly payment due to a change in circumstances.
The annual process of recertifying IBR/ICR/PAYE/REPAYE should look like this:
- Under all plans, borrowers are required to submit updated income documentation annually
- Borrowers must annually certify their family size or a family size of one will be used
- The re-evaluation date is based on when the borrower initially entered the plan (anniversary date)
- Servicers must require borrowers to submit annual income documentation no more than thirty-five days before the anniversary date
- Borrowers whose loans are serviced by Department of Education servicers or who have FFEL loans serviced by Department of Education servicers can use the electronic application to recertify their income and family size
- Borrowers will receive notice that they must submit income and family size information/documentation and the consequences of not doing so. Notices will be sent no earlier than 90 days, and no later than 60 days prior to the annual deadline.
- Borrowers submitting income documentation within 10 days of the deadline will have their current payment amount maintained until income documentation is processed and a new payment amount is calculated.
- If the borrower provides the documentation within 10 days of the deadline, the loan holder’s inability to determine a borrower’s new payment amount by the borrower’s anniversary date should not result in automatically increased payment amounts and capitalization of all outstanding interest.
- In addition to the annual review process, under IBR, PAYE, and REPAYE borrowers may request at any time that their loan servicer recalculate their payment amount if the borrower’s financial circumstances have changed, and the income amount that was used to calculate the borrower’s current monthly payment no longer reflects the borrower’s current income. This resets the annual payment period.
Leaving Income Driven Repayment
You may remain in these plans regardless of whether you maintain a partial financial hardship. The rules are different depending on the type of plan. For REPAYE, for example, it never matters whether you have a partial financial hardship. You can leave the PAYE or REPAYE plans at any time if you want to switch. If you leave IBR, you must repay under a standard plan. However, you do not have to stay in the standard plan for the life of the plan. You can change after making one monthly payment under the standard plan. Be advised that switching repayment plans usually means that the government will add accrued interest to the balance. You should check the rules of your plan and check with your servicer to make the decision that is best for you.
Perkins Loans (formerly called National Direct Student Loans, and before that National Defense Student Loans) are low-interest loans for both undergraduate and graduate students with exceptional financial needs. Perkins Loans are originated and serviced by participating schools and repaid to the school. The government does not insure the loans, but instead provides money to eligible institutions to help fund the loans.
If you default on a Perkins loan, it is usually the school that will come after you to collect. In some cases, the school will assign a Perkins loan to the Department of Education. In 2015, Congress chose not to keep the program. Then, in December 2015, President Obama signed a law temporarily extending the Perkins loan program for two years for eligible undergraduates, and one year for eligible graduate students. The Department posted information about the winding down of the Perkins program.
Perkins loan repayment plans are different from FFELs and Direct Loans. For example, Perkins loans have minimum monthly repayment rates, set by law. The current rate is $30 for an NDSL loan or a Perkins Loan made before October 1, 1992, and $40 after that date.
Schools can extend the repayment period due to a prolonged illness or unemployment. Extensions may also be granted if you qualify as a low-income individual. Interest continues to accrue during any extension of a repayment period.
The Department of Education suggests that borrowers contact their school or the school’s agent to get exact Perkins repayment amounts. If the school holds the loan, you should expect to hear from the school about payment and other issues. Be aware that many schools assign Perkins loans to the Department of Education.
Perkins loan borrowers may also rehabilitate defaulted loans. Borrowers must make on-time payments for nine consecutive months. The “full monthly payment” is defined as a payment that is paid within twenty days of the due date each month.
The Perkins Loan Program regulations do not explicitly state that the payments must be reasonable and affordable, but rather that they must be determined by the school. Loans reduced to judgment may not be rehabilitated. Borrowers are also ineligible if they pleaded no contest or guilty to a crime involving fraud in obtaining federal student assistance.
As is true for FFEL and Direct loan rehabilitations after August 2008, Perkins loans may be rehabilitated only once, but there should not be a limit to the number of times a borrower is permitted to attempt rehabilitation. Collection costs related to Perkins loan rehabilitations cannot exceed 24%.
A standard repayment plan is what you get if you do not make a different choice. You have a minimum of five years, but not more than ten years to repay with this plan.
FFEL borrowers are automatically assigned this plan if they do not select a different option within 45 days of being notified by the lender to choose a repayment plan. Standard plans have the highest monthly payments but allow you to pay off your loan in the least amount of time. The monthly amount may vary if there is a variable interest rate.
The Department of Education’s repayment estimator can help you get a sense of repayment amounts under the different repayment plan.
If you’re having trouble making payments, don’t ignore your loans. We offer several options that can help keep your loans in good standing, even if your finances are tight.
Change Your Due Date
Do you get paid after your student loan payment is due each month? If so, contact your loan servicer and ask whether you’d be able to switch the date your student loan payment is due.
Change Your Repayment Plan
What you ultimately pay depends on the plan you choose and when you borrowed. If you need lower monthly payments, consider an income-driven repayment plan that’ll base your monthly payment amount on how much you make.
Consolidate Your Loans
If you have multiple student loans, simplify the repayment process with a Direct Consolidation Loan—allowing you to combine all your federal student loans into one loan for one monthly payment.
If the options above don’t work for you and you simply can’t make any payments right now, you might be eligible to postpone your payments through a deferment or forbearance. However, depending on the type of loan you have, interest may still accrue (accumulate) on your loan during the time you’re not making payments.