The Ultimate Guide to Student Loan Repayment

Student loan repayment occurs when the borrower begins paying back their student loans.  PayForED has created student loan solutions for borrowers to better understand their student loan debt. Understanding the details of repayment and which options work best in your life means considering student loan repayment: when to start,  organizing your loan type, deciphering student loan repayment options, and understanding the tax implications of the loan repayment options.  If you are eligible for Public Service Loan Forgiveness you also need to know which repayment method to pick and understand loan amortization. Be sure to check out our article on the ultimate guide to student loans if you are just beginning the paying for the college process.

The Timing of Your Loans

Facing the thought of paying for college is tough enough. Understanding when you need to start paying back your loans is a confusing but important part of the repayment process. Paying for college using private loans requires some consideration. Repayment begins at different times, and this is why it is confusing. The loan repayment will depend on the type of loan and what year the loan was awarded to the student. In many cases, students and families decide to defer payment until after graduation. With the exceptions of Perkins and Subsidized Direct loans, interest will be charged to the loan starting sixty days after it has been dispersed. Students and families do have the option to begin payments while the student is in school. This can be an option as it will decrease the amount of interest and loans outstanding at graduation.

For recent graduates, if they have Direct Federal Loans, they will have a grace period of six months from the day of graduation.   This grace period is only available once. As stated above, repayment begins at different times and some borrowers may not want to take advantage of the six-month grace period.

The most common situation of starting repayment earlier involves the borrower who is considering using the Public Service Student Loan Forgiveness (PSLF) to repay their student loans. The second situation would be for the borrower who is trying to avoid the additional interest charges on specific federal student loans which have an accruing interest during the grace period.

Taking an Inventory of Loans

Before the borrower can start the repayment process, they will need to take an inventory of their student loans.  Each loan needs to be classified as either a federal or private loan, first. The lender or servicer of the loan is the next item to be identified.

For federal loans, the borrower can get their list of loans on the National Student Loan Data System,  To get access to the NSLDS system, the borrower will need their FSA ID and password.  The FSA ID is the electronic method used to apply for federal student aid and access any federal student aid records online. This login process authenticates the user and allows them to access the NSLDS Student Access download.

Another resource a borrower can utilize is a credit report which will list all of their outstanding loans both private and federal.  This will show their complete inventory of student loans. The NSLDS will only list the borrower’s federal loans.

Often overlooked is the Parent PLUS Loans.  These will be listed under the parent and not the student.

Federal Student Loan Consolidation

A person is unable to consolidate federal and private loans together under the federal loan process. This can only be done through a private lending company.  The federal loans have some advantages that are not available through private lenders.  The federal repayment methods offer more flexible repayment options, loan forgiveness plans, and death and disability benefits.  You will forfeit these federal loan advantages by consolidating them into private loan consolidation.  Plan carefully because once you leave the federal repayment program, through private consolidation, there is not the ability to be reinstated.

The one main reason to consolidate your loans is to reduce the risk of missing payments, and you can also receive some incentives, including a .25 percent reduction if you use the electronic withdrawal payments process. It will also help you maintain good credit, which will be important in the future if you want to purchase a home or car.  Many young adults are unaware of the importance of maintaining a good credit score, also called your FICO score.

Four major loan servicers are used for any new federal direct student loan consolidation: Mohela, Aidvantage, Nelnet, & EdFinancial. Mohela is the servicer who handles all the Public Service Loan Forgiveness (PSLF) program. If you consolidate your federal loans, you will need to select one of the loan servicers. The old FFEL loans can still be serviced by the original servicers until you consolidate, or the servicer sells your loan.

If the borrower decides to consolidate their loans to a private lender this is called a refinancing rather than a consolidation.  A private refinancing can be a good alternative, but you must do your homework.

Federal Repayment Methods

There are currently 9 different federal repayment methods that we have divided into three major categories fixed payments, variable payments, and the Income-Driven Repayment (IDR) methods.  Depending on the type of student loans, income level, marital status, and a specific occupation, making the correct choice can be difficult as each method has its own specific rules and requirements.   To make it easy for your review, we will provide bullets for each of the methods.

Fixed Payment Amount

The Standard Ten Year Repayment Plan and the Extended Repayment Plan both have a fixed payment amount.  The details of these plans are listed below.

Standard Ten-Year Repayment Plan

The loan payment is a fixed amount and is paid off in ten years or 120 payments. This method can be used for all federal student loans and is the normal, default repayment method. This number is important to know since this is the highest amount you can pay if you use any of the income-determined methods. If you no longer qualify for the income-determined methods but still qualify for the Public Service Loan Forgiveness program, this will be the amount you will need to pay but still under the IDR method.

Pro:  Lowest total loan repayment cost and shortest period repayment method.

This method qualifies for the Public Service Loan Forgiveness programs (PSLF).

Con: Payment will be the highest flat amount when compared to the other loan repayment plans at the original start date of repayment.

Extended Repayment Plan

The repayment amount is fixed for the life of the repayment. The number of extended years is based on the outstanding loan balance. This can be an attractive method for cash-flow reasons, and, if combined with a prepayment plan, it can help you avoid default.

Pro: Monthly payment will be lower than the ten-year standard repayment plan.

Payments can be extended to twenty-five years and thirty if the loans are consolidated.

It will give you the lowest fixed payment without the risk of your loan balance increasing.  It is a valid method for Parent PLUS loans.

Con: It is the most expensive repayment total over the life of the loan.

It is not a valid repayment plan for the PSLF program.

Variable Repayment Methods

Variable repayment methods can be found in the Graduated Repayment Plan and the Extended Graduated Repayment Plan.  The details of these plans are below.

Graduated Repayment Plan

The repayment amount is lower at first, and then it increases every two years. The payment is finished in ten years or 120 payments. This method is affordable at the beginning but can get very expensive in the later years.

Pro: Lower payment initially.

Con: You will pay more interest over ten years than with the standard repayment plan.

Interest accrues at the beginning of the payment schedule.

It does not qualify for the PSLF program.

Payments can get expensive in the later years of the loan.

Extended Graduated Repayment Plan

The repayment amount will increase in cost every two years, which is considered to be semi-fixed. The number of years of extension is based on the outstanding loan balance. This can be an attractive method for cash-flow reasons, but it can get very expensive in the later years.

Pro:  Monthly payment will be lower than with the ten-year standard repayment plan.

It can be extended for twenty-five years.

Con: This is one of the most expensive methods of repayment over the life of the loan.

It is not a valid repayment plan for the PSLF program.

Income-Driven Repayment Methods

More student loan borrowers are using the Income-Driven Repayment (IDR) methods that are listed below.  The loan repayment amount is based on a person’s or couple’s Adjust Gross Income (AGI). As more borrowers decide to use these methods more education is required.  Many times traditional loan repayment and amortization of the loan is thought to be used in the IDR methods this is not true.

Borrowers need to know their interest charge per month since many times the IDR amount will not pay the student loan interest charge.  As a result, the loan balance will continue to grow. This is called negative amortization.

General Rules of the IDR Repayment Calculations

The IDR repayment plan is based on the person or couple AGI.  Often overlooked in this process is the impact of how couples need to file their taxes and manage the AGI.  Couples can see significant swings in their repayment amounts based on their tax filing and student debt structure.

The calculations use a person’s AGI, the national poverty level index, and family size. Based on the repayment option selected a certain percent of the person’s discretionary income will be used. This could be from 10 to 20 % based on the repayment option. Discretionary income is the difference between your adjusted gross income and 150 percent of the poverty guidelines for your family size and the state you reside in.

Income-Based Repayment (IBR)

The monthly payment is limited to 15 percent of your discretionary income.  It can be used for both Direct and FFEL Student Loans. This method of repayment does not apply to Parent PLUS loans.

Pro: It qualifies for the PSLF program (ten years).

The debt is forgiven after twenty-five years.

It helps students stay current on loans when their income is low.

It is an alternative to deferment.

Unpaid subsidized loan interest is paid by the government for the first three years on a prorated basis.

Con: Loan balance could go up if using this method (negative amortization).

Need to apply each year based on current income or prior year’s tax-return AGI.

Once a person is married, both incomes will be included if filing married and joint.

Loan forgiveness after twenty-five years is taxable, excluding the PSLF program.

Pay As You Earn (PAYE)

The monthly payment under PAYE is calculated at 10 percent of your discretionary income. To be eligible for PAYE, the person must have no federal student loan debt balance before October 1, 2007, and have received a federal student loan program distribution after October 1, 2011. It can be used for all student direct loans, excluding direct student consolidated loans that include a Parent PLUS loan within them. This method of repayment is not available for Parent PLUS loans.

Pro: Lowest possible payment if the disposable income is low.

After twenty years of repayment, any outstanding balance is forgiven.

It qualifies for the Public Service Loan Forgiveness program.

It is an alternative to deferment.

The government for the first three years on a prorated basis pays a portion of the subsidized loan interest charges.

Con: Unpaid interest is accrued during repayment and can have negative amortization limited to 10 percent of the original balance.

Need to apply each year based on current income or prior year’s tax-return AGI.

Once a person is married, both incomes will be included if filing married and joint.

Loan forgiveness after twenty years is taxable, excluding the PSLF program.

Revised Pay As You Earn (REPAYE) Borrowers on the REPAYE Plan automatically get the benefits of the new SAVE Plan.

The REPAYE is an extension of the current Pay AS Your Earn (PAYE) program.  The REPAYE method includes a larger number of borrowers who have federal student loans.  The PAYE repayment method is only available for newer borrowers.  REPAYE is to help borrowers who did not qualify for PAYE due to the timing of their loans.

REPAYE caps the monthly student loan payment amount to 10 percent of their annual discretionary income allocated on a monthly basis.  As default rates continue to rise, the new REPAYE method can help borrowers stay current with their repayments and reduce the financial stress on their budget.

Pro:   No loan origination date limit

Qualifies for Public Service Loan Forgiveness

It is an alternative to deferment

Con:  If married, both incomes will be included.

Under this process, the tax filing status is excluded for married couples.

Unpaid interest is accrued during repayment and can have a negative amortization limited to 10 percent of the original balance

Need to apply each year based on current income or prior year’s AGI.  Married couples cannot separate their pay under this method.

Loan Forgiveness is available for undergraduate debt after 20 years and 25 years for post-graduate debt

Income-Contingent Repayment (ICR)

ICR repayment is intended to make payments more affordable and is one of the original IDR methods. ICR can be used only for Direct Federal Student Loans. This is one of the original income-determined repayment methods.

Pro: The debt is forgiven after twenty-five years.

Available for Parent PLUS loans if consolidated in the direct program.

It qualifies for the Public Service Loan Forgiveness program.

Con: Loan payment changes as income changes.

The minimum payment must cover the loan interest charge.

PAYE and IBR are normally better solutions.

Need to apply each year based on current income or prior year’s tax-return AGI.

Income-Sensitive Repayment

This repayment method uses 20% of your discretionary income. It can be used with subsidized and unsubsidized federal Stafford loans, FFEL PLUS loans, and FFEL consolidation loans.

Pro: Loan is repaid in twenty-five years.

Con: Payment changes as your income changes.

Need to apply each year based on current income or prior year’s tax-return AGI.

The minimum payment must cover the loan interest charge.

The loan balance could go up if using this method (negative amortization).

Quick Table Recap of Income-Driven Methods

Importance of tax filing

An important part of analyzing your taxes gets more complicated when a person has student loans especially when you have picked an IDR repayment method. The borrower needs analyze the deduction of their student loan interest. This is especially true for married couples.

Since 2016, more student loan borrowers have been using Income-Driven Repayment (IDR) methods such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).  With this change, the traditional loan repayment strategies also changed and the borrower should do some additional tax planning.  The IDR methods use a borrower’s Adjusted Gross Income (AGI) to determine their monthly repayment amount.

Married couples face additional complexities since they could have up to 126 different student loan repayment and tax filing options if they both have federal loans.  If you were married last year or if one of the spouses needs to start repaying their student loan, a proper tax analysis is highly recommended.  We suggest a full review of your loan repayment options when life events change.

Student Loan Interest Deduction Phases Out

There is a phase-out of the student loan interest deduction based on how a person or a couple files their taxes and their income.  If a couple or one of the spouses is using an IDR repayment method, you will need to take an additional step that most people do not do.  You need to compare your AGI number and the impact it may have on your student loan repayment.  The tax advisor’s job is to lower your taxes, but in most cases, they do not know the impact it will have on a borrower’s student loan repayment.  Properly managing the borrower’s AGI could result in hundreds of dollars a month in a lower payment.

Let’s review this by tax filing options and student loan repayment impact.  The tax filing and repayment options are only available if a borrower has federal student loans.

1. Single, Head of House Hold, and Qualified Widow

In each of these cases, the tax filing status will have no impact on student loan repayment.  The Qualified Widow is the exception only if the surviving spouse has outstanding student debt.  In that case, they may want to contact their loan servicer or weigh their other tax filing options to manage their AGI better.

1. Married Filing Joint

A couple filing married and joint will still qualify for the student loan interest deduction.  The problem they may face is with their IDR repayment.  If both have federal loans, the income for the IDR repayment will be based on the percent of total federal loans by each borrower times the joint AGI.

If only one borrower is using an IDR method, this will make the payment much higher.  The filing of  married and separate should be reviewed to see if the tax increase will offset the monthly repayment amount.

1. Filing Married but Separate

By filing married but separately, the couple will generally be paying a higher tax than filing married and joint for a variety of reasons.  Regarding the student loan interest deduction, this will disqualify either of the filers from the deduction.

There could be a significant advantage to filing your taxes this way when it comes to loan repayment.  If one of the spouses in using an IDR method, then only their AGI number will be used to calculate their loan repayment method.  Here is where the borrower needs to be more aware of their situations and options.

In most cases, the tax advisor will not ask you additional questions or see the impact of filing your taxes this way.  PayForED’s student loan repayment software can provide the borrower with this additional analysis so the proper interpretation and decision can be made.

1. Recent Married

For people married in the prior year and who will be filing their taxes for the first time as a couple, a full review should be done by a tax professional.  This is especially true if either of the spouses has federal loan repayment under the IDR methods.

A big mistake many couples make is not correctly analyzing their options.  There is a significant drop off in people qualifying for Public Service Loan Forgiveness after years 3 and 4.  It is my opinion this occurs for a few reasons.  One is their income goes up faster, and they do not qualify any longer.  Another reason is the correlation in the age of the couple getting married and filing their taxes jointly.  Filling their taxes jointly raises their incomes and repayment becomes higher.

As you can see, the student loan interest deduction is not as easy as it appears.  The tax advisor’s goal is to lower a person’s or family’s taxes.  Many tax advisors are unaware of the impact it may have on a couple’s loan repayment and forgiveness options.  You, as the borrower, need to take the extra steps for yourself to lower your taxes and your loan repayments so you will need to calculate both the loan repayment options and the impact of the taxes under each scenario.

Income Drive Repayment and Negative Amortization

Negative amortization can occur when the student loan monthly payment is less than the interest that is charged to the loan each month. This causes the balance on the loan to increase.  When a borrower decides to pick an Income-Driven Repayment plan, they need to understand that negative amortization is being added to the loan total. This means that picking the lowest payment may end up costing the borrower more money at the end of the payment.

Repayment Methods that qualify for Loan Forgiveness

You may be a borrower that is eligible for Public Service Loan Forgiveness.  It is important to check the criteria to make sure your federal loans qualify.  The next step is confirming that your job fits the criteria of being a government or a non-profit company.  The company will typically have a tax file structured code that is called a 501c3 organization. You need to confirm the non-profit status since many governments and nonprofits outsource various services to private industries.    Working in a hospital or government facility does not necessarily qualify your loans for forgiveness.

The Public Service Loan Forgiveness program is a perfect example of the complexity that is often misunderstood or overlooked. Only direct federal loans under the student’s name will qualify for forgiveness. You can only use the Standard Payment method (ten years), Income-based repayment method (IBR), Income-contingent repayment method (ICR), Pay As You Earn repayment method (PAYE), and Revised Pay As You Earn (REPAYE) repayment method. There are other repayment methods available, but only the five listed above will qualify for the Public Service Loan Forgiveness program.

After making 120 (ten years) on-time direct federal loan payments using the four methods listed above, you will qualify for loan forgiveness. The 120 payments do not need to be sequential.  To qualify for loan forgiveness, you must be working full-time for the government or a nonprofit organization. Be aware that some nonprofit positions do not satisfy the loan forgiveness employment requirement. It is important to check with your employer to verify your eligibility. Currently, Fed Loan Servicing handles all public service loan forgiveness clients.

Recertification during Repayment

As stated above, the IDR plans are tied to the borrower’s income, specifically their Adjusted Gross Income. The Income-Driven Repayment plans cap a borrower’s payment based on a percentage of their monthly discretionary income.  The discretionary income is calculated by using the poverty level, family size, and adjusted gross income.  Each of the IDR methods has its applicable percentages. Because of the tie to the Adjusted Gross Income they need to be recertified each year.

The government makes it easy for federal student loan borrower to update their income verification information.  Simply go online at Studentaid.gov and select the Complete Income-Driven Repayment plan request link.  The borrower will need their FSA ID and password before they can update their income verification.

The Income used will be the most current tax filing information that has been filed.  Based on your recertification date and your Adjusted Gross Income (AGI) reported on your tax will impact your new monthly IDR payment amount.  Another factor could be a change in your family size.

Consequences of Not Submitting an Update for Recertification

There are consequences to the borrower if they do not recertify their IDR Plan renewal application.  It turns into a costly mistake for the borrower because when the IDR plan is not updated, the monthly payment converts to the ten-year standard repayment plan.  This amount could be considerably higher than the IDR monthly amount and will increase the monthly amount for the borrower.  Also, any outstanding accrued interest will then be added to the principal balance.  You do not want this to happen and is another reason why borrowers need to be organized.

If you are using the IBR method, you need to make a standardized 10-year monthly payment before you can be re-enrolled in the IBR method.