Know Your Student Loan Options

Updated 10.21.22

Financing a college education for you or your adult child? If so, you will likely consider student loans to help pay for it. In this blog, we will discuss different types of student loan options.

Broadly speaking, there are two types of student loans: federal or private. Federal student loans are funded by the federal government. Private student loans are provided by a lending institution such as a bank or credit union, a state agency or the school that the student attends. Even though both federal and private loans serve the same purpose — helping pay for higher education — there are big differences between the two, especially in their repayment options.

Federal Student Loans

The most common federal student loans are known as “Direct Loans.” Within this category, there are 4 types.

1. Direct Subsidized Loans, aka “Direct Stafford” or simply “Stafford.” Interest does not accrue on these while the student is enrolled in school.
2. Direct Unsubsidized Loans, also called “Direct Stafford” or “Direct.” Interest does accrue on the loans while in school.
3. Direct [Graduate] PLUS Loans. These loans are for graduate or professional students.
4. Direct [Parent] Plus Loans. These are taken out in the parent's name for the student's education.

For all federal student loans, borrowers typically do not have to make payments while attending school. This is known as “In-School Deferment” and is often automatic. Borrowers can opt-out of In-School Deferment and make payments at any time if they so choose. More often, students will choose to start repayment after graduation, when they are likely to have increased income to afford payments. Once the college student graduates or drops below half-time enrollment, loans are in the “Grace Period,” a 6-month time frame where no payments are due. This allows borrowers to become further settled into their post-graduation life.

Repayment Plans for Federal Loans

There are several different ways to repay federal loans. I like to categorize the first group of options as Time-Based Repayment Plans. Under these plans, the borrower’s income is not relevant to the payment amount; instead, the loan is repaid over a designated length of time. There are no loan forgiveness options with these plans.

• Standard Repayment Plan. Loans are automatically set up in this payment plan, unless the borrower chooses otherwise. It is a 10-year plan with a fixed payment amount.
• Graduated Repayment Plan This is also a 10-year repayment plan. Unlike the Standard Repayment Plan, payments under this plan start out low and generally increase every two years.
• Extended Fixed or Extended Graduated Repayment Plan. These plans are the same as above — either fixed or with incremental payment increases; however, the repayment period is increased to 25 years. To be eligible for either extended repayment option, the borrower must owe at least $30,000 on Direct Federal Student loans.

The second group of repayment plans are the Income Driven Repayment (IDR) Plans. With these plans, the payment amount is based on a person’s adjusted gross income. There is also a chance for loan forgiveness under certain circumstances. Forgiveness means any amount remaining on the loan would be eliminated after a specific time frame and number of payments made.

• Revised Pay As You Earn (REPAYE):  The monthly payment is set by calculating 10% of the borrower’s household “discretionary” income. Discretionary income is determined by looking at the Federal Poverty Level for the borrower’s area and family size, multiplying that by 1.5 (150%), and then subtracting that figure from the household adjusted gross income. Forgiveness of any loan balance will happen after 20 years of payments for borrowers with only undergrad loans and 25 years for those with graduate loans.
• Pay As You Earn (PAYE): The standard used to calculate PAYE payment amount is also 10% of discretionary income. This figure will never be more than what the total Standard Repayment Plan amount would be over 10 years. After 20 years of payments, the remaining loan balance would be forgiven. To be eligible for PAYE, you must either: 1) have no outstanding balance on a federal loan on or after October 1, 2007; or 2) have received a disbursement of a direct loan on or after October 1, 2011.
• Income Based Repayment (IBR) Plan: The monthly payment is calculated at either 10% or 15% of discretionary income, depending on when the loans were originated. Like PAYE, IBR plans will not be more than the Standard Repayment Plan amount over 10 years. Forgiveness on loans would occur after either 20 or 25 years, again depending on the loan origination date.
• Income Contingent Repayment (ICR) Plan: The payment is based on the lesser of either 20% of discretionary income or the amount the borrower would have paid with a fixed repayment plan over 12 years (adjusted according to the borrower’s income). Any remaining balance after 25 years of repayment will be forgiven. The ICR is the only type of IDR offered for Parent Plus Loans.

Public Service Loan Forgiveness

If the borrower’s remaining loan is forgiven under any of the Income Driven Repayment (IDR) Plans, that individual might have to pay income taxes on the amount forgiven. Under Public Service Loan Forgiveness (PSLF), loans are forgiven without tax consequences.

To qualify for PSLF, a borrower must:

• Have federal Direct Loans.
• Work 30 hours or more per week at qualifying 501(c)(3) non-profit organizations or government entities (i.e., city, county, state, or federal government). The 30 hours do not have to be with the same employer.
• Be on an Income Driven Repayment Plan. It is possible, though not guaranteed, that a borrower could qualify under a Graduated Repayment Plan or Extended Fixed Plan.
• Remain in a qualifying position/field for at least 120 months (10 years), but the 120 months do not have to be consecutive.

It is recommended that borrowers working towards this type of loan forgiveness complete the Public Service Loan Forgiveness Employment Certification Form (ECF) every 1-2 years. Both you and your qualifying employer(s) must fill out the ECF.

Private Student Loans

Private student loans are basically loans from a bank or lending institution. As with a regular bank loan, there are few or no alternative repayment options, no Income Driven Repayment (IDR) Plans and no loan forgiveness. Unlike most federal student loans, the borrower’s credit rating can greatly affect the loan’s interest rate. If the student does not have an extensive credit history, they might need a co-signer on the loan. Unlike federal student loans, payments are generally not automatically deferred while still in school, although some lenders offer this.

Typically, refinancing is the only option for a borrower to get their payment amount changed on private student loans. The individual’s credit is checked, and if the score is low, refinancing might not even be an option. The borrower will likely have to increase their credit score before refinancing to a lower payment.

Payments on federal student loans have been paused since March 2020. The U.S. Department of Education issued a statement on November 22, 2022, announcing that the pause will be extended into 2023, due to open litigation surrounding the proposed student loan forgiveness program. In its statement, the department said:

"Payments will resume 60 days after the Department is permitted to implement the program or the litigation is resolved, which will give the Supreme Court an opportunity to resolve the case during its current Term. If the program has not been implemented and the litigation has not been resolved by June 30, 2023 – payments will resume 60 days after that."

Read the department's full press release here.

Despite this latest extension, it’s still a good idea to prepare yourself now for the day federal student loan payments begin again. Call us at 888.577.2227 to schedule your phone appointment today with one our NFCC-certified financial student loan counselors!

Author Dan Park is a Student Loan Counselor with LSS Financial Counseling