Most students need to take out at least some student loans to help pay for college. Before you borrow any money, though, it's important to understand how repayment works so you can start planning for how you will repay your loans. The federal government offers many repayment plans on its student loans, along with a few ways to stop making payments for a short time (deferment or forbearance), or even forever (forgiveness, cancellation, or discharge).
The default repayment plan is called standard repayment. On this plan, you will have equal monthly payments for 10 years. After those 10 years, you will be done paying off your loans. This repayment plan has the highest monthly payments, but is a good option if you have enough income and want to pay off your loans quickly and with minimal interest costs.
Another option for paying off your loans quickly is the graduated repayment plan. It also will allow you to pay off your loans in 10 years, but monthly payments start lower at the beginning and increase every two years. This can be a good option if you expect your income to increase steadily during the decade after you graduate.
If you borrow at least $30,000, you are eligible for the extended repayment plans. They are like the standard and graduated plans, but space out payments over the course of 25 years instead of 10 years. Monthly payments will be lower, but your total interest cost will be higher.
The federal government also offers several types of repayment plans where monthly payments are based on your income. These plans cap your monthly payments at 10-20 percent of your monthly discretionary income, depending on which specific plan you are on. If your income is very low, you may even be able to not make payments at all on your student loans until your income increases.
Deferment and Forebearance
During repayment, you may be eligible for times of deferment or forbearance, which allow you to temporarily stop making payments or make reduced payments on your loan. Deferment stops payments when you are in graduate school, active duty military, and for up to 3 years of unemployment or severe economic hardship. Forbearance stops or reduces payments for up to 12 months during mild economic hardship. You must take action and apply for deferment or forbearance if you think you may qualify.
Cancellation and Forgiveness
Under a few limited circumstances, the federal government will cancel or forgive your remaining student loan balance. For example, Public Service Loan Forgiveness is available after 10 years of payments while working a public service job, and some of the income-based plans offer forgiveness after 20 or 25 years of payments. Loans can also be canceled entirely if you die, are totally and permanently disabled, or if your school closes before you complete your degree.
As you repay your federal student loans, remember that these loans are your responsibility. The government has many options for helping you repay your loans, but you need to actively select the best option for your situation. If you are having problems repaying your federal student loans, call 1-800-4FED-AID right away to find out what help may be available.