Possible Repayment Options for Federal Loans
Standard or Extended Repayment Plans
With either the Standard or Extended plans, you will pay a fixed amount each month until your loans are paid in full. The monthly payment amount is based on your loan balance amortized over a period of 10-25 years and will likely be higher than it would be under the Income-Based Repayment or Pay As You Earn plans.
Income-Based Repayment (IBR) or Pay As You Earn (PAYE) Plans
With either of these plans, the required monthly payment is capped at an amount that is intended to be affordable, based on your income and family size. The repayment time span can be extended to as much as 25 years, if needed. You are eligible for IBR or PAYE if the monthly repayment amount under IBR or PAYE will be less than the monthly amount calculated under a 10-year Standard repayment plan. PAYE is available only on Direct loans.
IBR Monthly Payment Calculation
- Monthly payment = 15% of (monthly adjusted gross income - 150% of monthly poverty level based on family size)
PAYE Monthly Payment Calculation
- Monthly payment = 10% of (monthly adjusted gross income - 150% of monthly poverty level based on family size)
If you repay under either of these plans and meet other requirements, you may have the remaining loan balance canceled. Please note though that this is unlikely for medical practitioners and that the canceled amount would be considered taxable income by the Internal Revenue Service. If you pay an additional amount each month over and above your scheduled IBR or PAYE payment, your loan balance will be paid off much quicker and you will save a sizable amount of interest. Additionally, if you work in public service, your loan balance could be forgiven in as little as 10 years with the Public Service Loan Forgiveness program described below.
To determine whether or not you might qualify for IBR or PAYE, go to the Department of Education’s Repayment Simulator.
For an official determination of your eligibility for IBR or PAYE, you must contact the servicer(s) of your loan(s). You can view the servicer information for each of your loans through the Department of Education’s National Student Loan Data System (NSLDS) website.
You can view the servicer information for each of your loans on the studentaid.gov website. Under Manage Loans, see About Loan Repayment/Who’s my servicer.
Public Service Loan Forgiveness Program
This program was created to encourage employment in the public service sector and is usually the most financially savvy option. An added incentive is that the total amount of loan forgiveness will not be considered taxable income by the Internal Revenue Service. If the following conditions are met, a sizable portion of your federal loans can be forgiven:
- You must make 120 payments (approximately 10 years if paid monthly) to qualify. These payments can be on either the IBR or PAYE plan, which will result in a much lower monthly payment obligation. The 120 payments do not have to be consecutive, so if for a time period you use a forbearance or deferment and then return to IBR or PAYE, all of your previous payments will still count toward the total of 120.
- The payments must be made through Direct Loans (Department of Education,) so you may need to consolidate to Direct Loans in the very beginning before you apply for IBR or PAYE.
- While in repayment you must be employed with a qualifying employer, which would include a state or federal agency, a military branch, or any 501(c)(3) organization (see IRS website for a listing).
- You must be employed with that qualifying employer while making the 120 payments and when applying for the forgiveness.
If you decide FOR the Public Service Loan Forgiveness program, the following steps should be taken:
- Consolidate your federal loans into a Direct Consolidation loan, only if needed, through the Department of Education’s Consolidation website. The only borrowers who need to consolidate are those with multiple servicers who don’t think they can keep their payments to more than one servicer straight. This situation doesn’t apply to many borrowers.
- Apply for the IBR or PAYE plan, which will carry an obligation for only minimum monthly payments; even if your calculated monthly payment is zero, it will still count toward the 120 payments necessary for loan balance forgiveness. If you are financially unable to meet the minimum monthly payments of the IBR or PAYE plan, you have the option of putting your Direct loans into a Residency Forbearance status. In that status, you will not be required to make payments, though interest will continue to accrue and no progress will be made toward the 120 payments necessary for loan balance forgiveness. Since the monthly payments under the IBR or PAYE plan will be very low while in residency, repayment is recommended instead of Residency Forbearance.
- Toward the end of each year, you must renew your IBR or PAYE status through the servicer of your loan. Based on your updated adjusted gross income verification, your monthly payment will be recalculated and may change.
- Also at the end of each year, contact your servicer and request an Employment Certification Form to make sure the payments you have made are accounted for.
- Keep your Direct loan(s) in the IBR or PAYE plan until you have reached the 120 payment goal and continue working for a state or federal agency, a military branch , or any 501(c)(3) organization.
- When you have reached the 120 payment goal you can then apply for the forgiveness of the loan balance. Continue working at the qualifying agency until your application is approved and your balance is forgiven.
If you decide AGAINST the Public Service Loan Forgiveness program, the following steps should be taken to minimize your interest cost during repayment:
- Do not consolidate your loans. In consolidation, all of your loans are converted into one loan - the Consolidation loan - and the original loans cease to exist and are paid off. The interest rate on the Consolidation loan is determined using a weighted average of the interest rates of the original loans. This prevents you from individually paying off your higher interest rate loans first.
- Apply for the IBR or PAYE plan, which will carry an obligation for only minimum monthly payments, possibly as low as zero. It is advisable to complete the IBR or PAYE application process as soon as possible since it will be easier to qualify when your income is at its lowest. Once you are approved for IBR or PAYE, you remain approved no matter how high your income becomes. As your income increases, your monthly payments may increase but your approval for IBR or PAYE remains.
- Make voluntary payments to lower the principal balance of your highest rate loan. This is critical for saving money on interest charges. If you are financially unable to meet the minimum monthly payments of the IBR or PAYE plan, you do have the option of putting your loans into a Residency Forbearance status. Keep in mind that interest still accumulates during a Residency Forbearance, so making payments of any amount you can is highly encouraged.
- When your income increases after the completion of your residency, the monthly IBR or PAYE payment most likely will also increase. At this point, it is advisable to compare the IBR or PAYE plans with other government plans offered at that time. Regardless of the plan however, it is strongly advised that you continue to make voluntary payments against your highest rate loan, over and above what your payment obligation is; this practice will ensure you’re paying off your student loans in the least amount of time using the least amount of money.
Public Service Loan Forgiveness Program:
- After 120 payments (10 yrs. if paid monthly) your remaining loan balance is forgiven
- Must use the IBR or PAYE plan
- Calculated IBR or PAYE monthly payments of $0 also count toward the 120 payments
- The 120 payments do not have to be consecutive
- The forgiven amount is not taxable as income
- Your loans must be in the Direct Loan program, which may require consolidation of older Federal Stafford loans (to get them into a Direct Consolidation loan so that they are eligible for forgiveness)
- Must verify your income each year and renew your payment status
- Must be employed with a qualifying organization
- The most financially beneficial way to pay off your student loans
Income-Based Repayment and Pay As You Earn Plans:
- Monthly payment amounts are based on your income and family size
- No restrictions on place of employment
- After 20-25 years of payments your loan balance is forgiven
- The forgiven amount will be considered taxable income
- Loan consolidation is not required and not recommended if you are not going for Public Service Loan Forgiveness
- Must verify your income each year and renew your payment status
- Paying a voluntary additional amount each month is highly encouraged
Standard and Extended Repayment Plans:
- Monthly payment amounts do not consider your income or family size
- Loan balances are amortized over 10-25 years with equal monthly payments
- No opportunity to have any amount forgiven
- Loan consolidation is not required nor recommended
- Yearly renewal is not required
- The aggregate dollar amount paid back will likely exceed the amount repaid in the IBR or PAYE plan with voluntary additional payments or the Public Service Loan Forgiveness program, but will be less than other repayment plans