Savanna Hoffman
Student loans can be a helpful tool for financing education, but they are not the only option. Scholarships, grants, and work-study programs can also provide financial assistance and do not need to be repaid. Student loan repayment is a significant concern for many, with only 38% of borrowers current on their loan repayments. The repayment terms for private student loans can vary, and interest on these loans can accumulate even while the borrower is still in school. The Income-Based Repayment (IBR) plan, which is one of four Income-Driven Repayment plans, has been paused, causing concern among borrowers. The US Department of Education is taking steps to assist borrowers in getting back into repayment, but there are worries about a breakdown in trust between borrowers and the government.
| Characteristics | Values |
|---|---|
| Number of borrowers in the US | 42.7 million |
| Number of borrowers who haven't made a monthly payment in over 360 days | 5 million+ |
| Percentage of borrowers in repayment and current on their student loans | 38% |
| Number of borrowers unable to begin repayment due to processing pause | 1.9 million |
| Number of borrowers on the Biden-era SAVE plan | 7.7 million |
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What You'll Learn
Student loan repayment plans
New Repayment Plans
From July 1st, 2026, new borrowers will have two primary options: a revised standard plan and a new income-driven repayment plan called RAP (Repayment Assistance Plan). This plan calculates base payments as a percentage of adjusted gross income, with a minimum monthly payment of $10. The rate is divided by 12, and $50 is subtracted for each dependent. RAP cancels loans after 30 years of payments.
Changes to Existing Plans
The new law also introduces changes to existing plans. Direct unsubsidized loans now have lifetime maximums: $257,500 per student for all loans (excluding parent PLUS loans), $100,000 for graduate students, and $200,000 for professional students. Direct PLUS loans for graduate and professional students are also being eliminated.
Impact of Changes
While these changes offer updated repayment options, they have caused confusion, especially for lower-income students. Some borrowers may switch from plans like SAVE to PAY to get back into repayment, but PAY will also be phased out in a few years. Additionally, income-contingent repayment plans will be sunset, impacting borrowers' options.
Getting Back into Repayment
The US Department of Education is working to help borrowers return to repayment. They are urging borrowers in default to contact the Default Resolution Group to explore options like enrolling in an income-driven repayment plan or signing up for loan rehabilitation. FSA will also restart the Treasury Offset Program and authorize guarantee agencies to begin involuntary collection activities on specific loans.
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Student loan forgiveness
That being said, there are some options for student loan forgiveness for borrowers who meet specific criteria. The Public Service Loan Forgiveness (PSLF) Program allows federal student loans to be forgiven after 120 qualifying payments (10 years) while working for a qualifying public service employer. Qualifying employers include government, military, state, local, tribal, or certain non-profit organizations.
Income-driven repayment (IDR) plans are another option, where monthly payments are capped according to income and family size. Under IDR plans, the remaining balance on loans may be forgiven after 20 or 25 years of repayment. This includes any months with time in repayment status, consecutive or cumulative forbearance, economic hardship or military deferments, and deferment periods prior to 2013.
It's important to note that only federal student loans managed by the Department of Education qualify for IDR adjustments. Borrowers with Direct Loans or federally-managed FFELP loans will automatically benefit from the one-time account adjustment. Borrowers with FFELP loans held by commercial lenders or Perkins loans not held by the Department of Education can benefit by consolidating into Direct Loans before June 30, 2024.
There are tools available, such as the PSLF Help Tool, to help borrowers navigate the process and determine their next steps toward loan forgiveness.
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Student loan interest
In the context of student loan interest, it's important to distinguish between different types of interest rates. There are fixed interest rates, which remain constant throughout the loan period, and variable interest rates, which can fluctuate based on market conditions or other factors determined by the lender. Variable interest rates may start lower than fixed rates but can increase over time, leading to higher monthly payments.
The interest rate assigned to a student loan can significantly impact the total cost of the loan. Even a small difference in interest rates can result in thousands of dollars saved or added to the overall repayment amount. Therefore, borrowers should carefully review the interest rates offered by different lenders before committing to a student loan.
Additionally, borrowers should be aware of the tax implications associated with student loan interest. In some jurisdictions, the interest paid on student loans may be tax-deductible up to a certain limit. For example, in the context of the Internal Revenue Service (IRS), there is a student loan interest deduction. This deduction allows individuals to reduce their taxable income by the amount of student loan interest they have paid during the tax year, subject to certain conditions and income limits.
Understanding student loan interest is crucial for borrowers to make informed financial decisions. By considering interest rates, repayment plans, and potential tax benefits, individuals can better manage their student loan debt and minimize its long-term financial impact.
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Student loan alternatives
While student loans are a common way to finance a college education, they are not the only option available. Here are some alternatives to consider:
Scholarships and Grants: Scholarships and grants are a form of financial aid that does not need to be repaid. Scholarships are typically awarded based on merit, while grants are often need-based. There are a variety of scholarships and grants available, offered by various organizations, institutions, and government programs. Students can explore options based on academic achievement, financial need, athletic or artistic talent, community service involvement, or other specific criteria.
Work-Study Programs: Work-study programs offer students the opportunity to work part-time while attending college, providing a source of income that can help cover tuition and living expenses. These programs are often offered through the college's financial aid office and may include on-campus or off-campus employment opportunities.
Part-Time Employment: Students can consider working part-time during their studies to generate income that can be used towards tuition and other expenses. Many colleges offer on-campus jobs tailored to students' schedules, and there may also be opportunities for remote work or freelance gigs that provide flexibility.
Tuition Reimbursement Programs: Some employers offer tuition reimbursement programs as a benefit to their employees. Under these programs, employees can receive financial assistance or reimbursement for their education-related expenses, provided they meet certain criteria and often with the agreement to continue working for the company for a specified period.
Income-Share Agreements (ISAs): With an ISA, students receive funding for their education in exchange for agreeing to pay back a percentage of their future income over a defined period. The terms of ISAs vary, and they are typically offered by specific educational institutions or private funding organizations.
Family Assistance and Savings: Students can explore the possibility of financial support from family members, whether through gifts or loans. Additionally, starting early with a dedicated college savings plan, such as a 529 plan, can help accumulate funds for future education expenses.
It is important to carefully consider the terms and conditions of each alternative, as well as the potential impact on your financial situation and future obligations. Combining multiple alternatives may also be an effective strategy to minimize student loan debt.
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Student loan repayment assistance
Student loan debt is a significant issue in the US, with 42.7 million borrowers owing more than $1.6 trillion in student debt. To address this issue, Congress has passed the Repayment Assistance Plan (RAP), which consolidates the various repayment choices into a single main option for new loans. RAP considers an individual's entire adjusted gross income (AGI) and charges a small percentage of every dollar. For example, a flat rate of $10 per month is charged for an AGI of $10,000 or less, with the rate increasing by 1 point for every additional $10,000 bracket and capping at 10% for those with an AGI above $100,000. This means that even the lowest-income borrowers must contribute at least $10 per month, ensuring that there are no $0 student loan payments. RAP also includes an interest-waiver feature, cancelling any unpaid interest each month and preventing balances from growing. After 30 years, any remaining balance is forgiven.
While RAP simplifies repayment rules, it may result in higher minimum payments and stricter borrowing limits for graduate school. Additionally, it could lead to a longer journey to loan forgiveness. To prepare for RAP, individuals can estimate their potential RAP bill, consider strategies to lower their AGI, and ensure that all paperwork is up to date.
The US Department of Education is also taking steps to assist borrowers in returning to repayment. This includes encouraging borrowers in default to contact the Default Resolution Group and providing clear information about repayment options. The Department of Education also intends to work with various partners, such as states, institutions of higher education, and financial aid administrators, to promote the message that student borrowers are responsible for repaying their loans.
In Canada, individuals experiencing financial difficulty can apply for the Repayment Assistance Plan (RAP). Depending on their income, they may qualify for reduced payments or no payments. The Canadian government will pay any interest owing on the federal part of the loan that the individual's reduced payment does not cover. After 60 months of RAP or 10 years after completing school, the government will start paying down the principal and any remaining interest. To remain eligible, individuals must re-apply for RAP every 6 months.
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Frequently asked questions
Only 38% of borrowers are in repayment and current on their student loans. Most of the remaining borrowers are delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment.
There are a few repayment options for student loans, including Income-Based Repayment, Income-Contingent Repayment, or PAYE. Additionally, many lenders offer hardship programs or temporary payment reductions for borrowers facing financial difficulties.
While some people do pay back their student loans, there are cases where borrowers are unable to keep up with their payments and default on their loans. It is important to note that there are resources available to help borrowers get back on track with their repayments.
