How To Evaluate And Apply For The Best Federal Loan Repayment Plan For You (Without Getting Scammed)

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There are a lot of federal loan payment plans out there, and for someone just out of school, it can be overwhelming to try to evaluate them all and determine what’s best. The Dept. of Ed’s calculator does a great job of helping with that, but here’s a more advanced breakdown of the main federal loan repayment options. Keep in mind, if you’re in default, you’ll need to get out of default before applying for some of these plans.

This is a followup to an article I wrote for Yahoo Finance: How To Get Your Federal Loans Out Of Default Without Getting Scammed. If your federal loans are in default, it will make more sense if you read that article first and then read this one. 



About the programs: Together, Income Based Repayment, Income Contingent Repayment, Pay As You Earn, and Revised Pay As You Earn make up the main “income-driven” repayment plans. These plans calculate payments based on 10-20% of a borrower’s discretionary income and also take into account family size and dependents.

They have some limits on the amount of interest that can accrue over the life of the loan, and the plans offer forgiveness after 20-25 years of repayment (but must be certified ever year to attain the forgiveness). These plans follow the same basic structure, but have individual nuances and rates that must be considered before applying. For instance, on RePAYE, your combined adjusted household gross income is used to calculate the payment regardless of tax filing status. Whereas on IBR, a borrower filing taxes separately will have payments calculated on just their income and not their spouses.

How to apply: studentloans.gov, or paper repayment application completed and sent to your loan servicer.

Why should I apply: Borrowers who are behind on payments or are struggling to stay current may benefit from payments related to their income, which can be much lower than the Standard Payment Plan. The income-driven plans aren’t perfect, but they are a much better alternative to defaulting for borrowers who can’t afford their Standard Plan payments.

When should I apply: Borrowers who decide to apply for an income-driven payment plan should apply when they are struggling to make payments or are delinquent but not yet defaulted. For borrowers who are in default, they must apply in conjunction with a Direct Consolidation loan application or bring loans current through 9 months of Rehabilitation payments before applying.

Pros: The income-driven payment plans offer flexibility and relief that can make federal loan payments manageable. Since payments rise and fall based on your income, you won’t have to worry about a reduction in hours or loss of employment resulting in payments that you can’t afford leading you into default.

Cons: One of the downsides of these payment plans are that they extend the payment term out to 25 years from the date you start them, and can increase interest over time, especially if payments are low relative to overall balance.

To stay on these plans, you must also recertify your income every year (through studentloans.gov or paper application). You’ll want to begin the recertification process several months before the yearly anniversary of when you began paying on the plan. Despite some built in interest limitations, interest can still accrue and become capitalized in large amounts; especially if a borrower is making a very low payment due to low income, but has a high federal loan balance . The forgiveness option is a popular provision, but the forgiven amount after 20-25 years is taxable (though some borrowers may be insolvent – consult a tax professional for more information).  Not all federal loans are eligible for these plans. For example, Parent Plus loans are only eligible for ICR; and that is only if they have been originated after June 2006 and have also first gone though the Direct Consolidation process. 


The Standard/Extended Fixed Payment Plans

About the program: The Standard or Extended Fixed Payment Plan is the payment plan that everyone is automatically put on when they graduate or leave school. The Standard Plan is fixed for a period of 10-30 years depending on the size of the loan. When the payment plan is applied to a larger balance, the payment term is automatically extended and the plan is then referred to as the Extended Fixed Payment Plan.

How to apply: The Standard/Extended Fixed Payment Plan is automatically assigned before your loans enter repayment, if you don’t apply for a different payment plan first. To switch back to the Standard/Extended Fixed Payment Plan from an income-driven plan, call your loan servicer or apply through studentloans.gov.

Why should I apply: The Standard/Extended Fixed Payment Plan will usually offer the least amount of interest accrual over time than other payment plans, especially with a shorter repayment period.

When should I apply: It will automatically happen when your loans begin repayment if no other option is chosen first.

Pros: Low interest accrual, you can plan on the same monthly payment amount every year, potentially shorter repayment term than income-driven plans (depending on student loan balance).

Cons: The Standard/Extended Fixed Payment Plan is inflexible and does not take into account income, family size, or economic hardships. Graduates who are unable to obtain immediate or gainful employment often find the payments to be unaffordable on this plan, especially with larger loan balances. Payments can be high, up to 1-1.2% of the loan balance each month.

The Graduated Repayment Plan

About the program: The Graduated Payment Plan was a precursor to the income-driven programs. It starts out lower than the Standard Payment Plan, but the monthly payment amount automatically increases every 2 years.

How to apply: studentloans.gov, or request it through your loan servicer.

Why should I apply: The Graduated Payment Plan can offer lower initial payments to those who may not qualify for a lower payment on the income-driven plans, since this plan does not calculate payments based off of income.

When should I apply: After evaluating your repayment plan options and deciding that it’s the best plan for your situation – for example, if you need a 2-4 year break on payments and all the other payment plans are showing a higher amount.

Pros: Starts out lower than the Standard Plan regardless of income; offers predictable increases in payment amount every two years.

Cons: The Graduated Payment Plan often has the most accrued interest over time when comparing it to other options using the Student Loan Repayment Estimator tool. At first the payments will be lower, but with the monthly payment amount increasing every 2 years regardless of income or family size, it can become unaffordable. It can be a helpful short term option, but it isn’t the best payment plan to stay on for the long haul in my opinion.


Public Service Loan Forgiveness

About the program: The Public Service Loan Forgiveness program was created as an incentive for borrowers to work in the public and nonprofit sectors, so that their student debt would not be a deciding factor in whether or not to work in public service or for a nonprofit (positions that traditionally offer a lower income than the private sector). “PSLF” is available to full time (30 hours per week or more) employees who are working in an approved public service or nonprofit organization. “PSLF” forgiveness takes place after 10 years or 120 qualifying payments, and the forgiveness is tax exempt.

How to apply: Using the Public Service Loan Forgiveness Employment Certification application. You may first need to convert your loans through the Direct Consolidation program if you have federal student loans that are not Direct, such as FFEL loans. You will need to be on a qualifying repayment plan while making payments that count towards PSLF forgiveness. Keep meticulous records of all payments made. 

Why should I apply: If you work for a public service or nonprofit organization and have a large debt amount relative to your income, or expect to not be able to make enough at your public service or nonprofit position to repay your loans after 10 years of payments.

When should I apply: Your loans must be out of default in order to apply for PSLF. Qualifying payments made before you complete your Employment Certification can still count towards your PSLF forgiveness. Qualifying payments do not have to be consecutively made. If you plan on applying, you should do so after fully evaluating the program and after you’re sure that you will be in the nonprofit or public sector for the next 10 years of your career.

Pros: Tax free forgiveness after 10 years/120 payments; a wide range of qualifying organizations.

Cons: The application process can be tedious, and evaluating all of the criteria needed to apply can be also. Some loans may have to go through the Direct Consolidation process before payments on them count towards PSLF forgiveness. There have been some issues with payments being properly allocated and tracked towards PSLF by loan servicers. There is speculation that this program could be ended in the future due to shifts in the political landscape, but if that happened borrowers who are already on the program would most likely still be able to complete the process even if no new applicants were being taken.

A Starting Point

These are the main federal loan payment programs that borrowers can use to obtain relief from a crushing federal student loan burden. This is by no means an exhaustive list, and many of the lesser known state based options not mentioned here can also make a huge difference to qualifying borrowers, as can outside refinance; for borrowers with extremely good credit scores and income. “Salt Money” has a great guide on some of the lesser known programs here

In addition to the programs listed above, borrowers can also apply for federal loan discharge in limited circumstances; including the “Defense To Repayment” process which has risen from obscurity within the last year.

Federal loan settlements for defaulted borrowers are hard to come by and are certainly not “pennies on the dollar” situations, but some defaulted borrowers who have a lot of accrued interest and fees may wish to utilize a lump sum settlement even for a relatively minor reduction; if they can afford it and don’t want to utilize Direct Consolidation or Rehabilitation to get out of default.

There are also lesser used payment plans such as “ISR” (Income Sensitive Repayment), and career-specific federal forgiveness programs such as Nurse Loan Forgiveness and Teacher Loan Forgiveness in addition to the main Public Service Loan Forgiveness program.

Because of a lack of proper exit counseling, inefficient loan servicing, and multiple sources of conflicting information; far too many borrowers default without knowing their options, or fall victim to unscrupulous “student debt relief” companies that deceptively charge upfront fees and misrepresent these free federal programs as their own.

When signing up for a third party “student debt relief” company for help applying for federal loan programs, people unknowingly pay hundreds or even thousands of dollars without realizing that it can all be done on their own for free, without paying a penny. And most likely, borrowers are talking to someone at a federal “student debt relief” company that doesn’t have any type of official financial certification.. just some random dude who thinks he’s good at sales and is trying to pay his rent or save up for that Mercedez-Benz lease.

I know from experience –  I’ve attempted to train many sales agents back in my consulting days, when I worked with 7 different companies to improve compliance and steer them toward a legitimate federal loan counseling model.

It turns out you can’t turn a run-of-the-mill salesperson into an accredited financial counselor very easily.. many of them simply don’t care and just want to hit your credit card as fast as possible, and move on to their next “lead” – not provide actual holistic financial counseling.

 By simply knowing what their main options are and how to apply for them, graduates can avoid falling for a deceptive student debt relief sales pitch and find a great repayment method on their own.

But What About Private Student Loans?

While I enjoy writing about federal student loans and have advised over 1,000 borrowers on different aspects of federal loan repayment, my true specialty and passion is private student loan settlement negotiation. While there’s no actual “private student loan forgiveness” program, settlement is the next closest thing. It can be the fastest and least expensive way to pay off a private student loan; since private loans are often exempt from bankruptcy and private lenders offer very little in the way of different repayment plans.

If you’re interested in settling your private loans for less with a professional negotiator, fill out my evaluation form here to request a free consult. It just takes a few minutes. Many of our clients experience reductions on their private loans of 50% or more.

Forget the “old school” debt relief companies that want to charge a huge portion of your debt for minimal savings – their era has come and gone. My performance based private student loan negotiation program is designed to give you the maximum amount of savings with the lowest negotiation charges in the financial counseling industry. I’m proud to say that my fast track private loan settlement model is far superior to the obsolete, fee heavy “traditional” debt settlement model that takes years to complete, and exposes borrowers to unnecessary interest accrual and heightened risk of a creditor lawsuit.

But if federal loan repayment help is all you need, this article should definitely get you pointed in the right direction. For more information, check out my federal student loan resource page. Alternatively, you can click the following link if you’d like to know “is Navient a federal loan“? Don’t get overwhelmed – you have options, and you can make them happen!

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About Andrew Weber, NACCC Certified Student Loan Counselor

Andrew Weber is a NACCC Certified Credit Counselor and a NACCC Certified Student Loan Counselor. He is the only certified student loan Counselor who specializes exclusively on private student loan issues in the US. He's helped hundreds of borrowers drastically reduce their debts.