Savanna Hoffman
Student loans are a common way for people to finance their post-secondary education. In the United States, federal student loans are financed by taxpayers, and the government has a responsibility to ensure that borrowers repay their loans. While most borrowers understand the obligation to repay their student loans, there are various challenges and concerns associated with the repayment process. Some borrowers struggle to make progress on the principal amount due to financial constraints, while others face issues with the loan collection mechanisms employed by the government. The COVID-19 pandemic also impacted loan repayment, with temporary pauses and relief measures affecting the repayment timeline for many borrowers. Ultimately, the complex dynamics surrounding student loan repayment in the United States highlight the financial pressures faced by borrowers and the broader implications for taxpayers and the economy.
| Characteristics | Values |
|---|---|
| Student loan repayment options | Income-Driven Repayment (IDR) plans such as ICR, PAYE, SAVE, IBR, Standard, Extended, Graduated, and RAP |
| Federal student loan collections | The U.S. Department of Education resumed collections on defaulted federal student loans on May 5, 2025 |
| Payment pause during the pandemic | The Trump and Biden administrations paused student loan repayment requirements during the pandemic, but the payment pause expired in the fall of 2023 |
| Loan forgiveness | The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on Direct Loans after 120 monthly payments under a qualifying repayment plan and working 30 hours per week for the government or nonprofit employers |
| Defaulted loans | Defaulted loans can lead to wage garnishment, tax refunds and social security payments being taken by the government, and negative impacts on financial health and retirement planning |
| Borrower concerns | Lack of clear information about repayment options, affordability, and progress in repaying the principal loan amount |
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What You'll Learn
Student loan repayment plans
The two new repayment plans are the Income-Driven Repayment (IDR) plan and the RAP plan. The IDR plan includes options such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), or Income-Contingent Repayment (ICR). Under the IBR plan, borrowers pay 10% of their discretionary income toward their balance for 20 years, and any remaining balance is forgiven. The PAYE and ICR plans have similar terms. The RAP plan, on the other hand, requires even people with no income to make a token payment of $10, which has been criticised as potentially detrimental to distressed borrowers.
Borrowers in the SAVE Plan are encouraged to transition to a legal repayment plan as soon as possible. The Department of Education is providing outreach and instructions to help borrowers move to a new plan. The SAVE Plan forbearance will end on August 1, 2025, after which borrowers will be responsible for making monthly payments that include accrued interest and their principal amounts.
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Interest accrual
There are two main types of interest that may apply to student loans: simple interest and compound interest. Most federal and private student loans use simple interest, which is calculated based on the original loan amount. For example, if you have a $15,000 student loan with a 4% interest rate and a five-year repayment term, the simple interest would be calculated as 15,000 x 0.04 x 5 = $3,000. So, in this case, you would repay a total of $18,000.
However, some private loans use compound interest, which can significantly increase the overall cost of the loan. Compound interest is calculated based on the original loan amount plus any unpaid interest that has accrued. In other words, you are charged interest on the interest that has already accumulated. For example, if you have a $15,000 loan with a 4% interest rate, but the interest is compounded annually, you would owe more in interest than with a simple interest loan. This is because the interest is calculated on the growing balance of the loan, making it more expensive over time.
It is important to note that if you have a Direct Subsidized Loan from the government, they will cover any interest that accrues while you are in school, during your grace period, and during deferment periods. This means you won't have to worry about capitalized interest being added to your principal loan balance. However, with Direct Unsubsidized Loans, you are responsible for all the interest that accrues, and it may be capitalized and added to your principal balance if you don't pay it during your time in school, grace periods, or deferment periods.
To minimize the cost of your student loan, it is generally advisable to start with federal Direct Subsidized Loans, as the government covers the interest during certain periods. Additionally, making interest payments during deferment periods can help prevent interest capitalization on unsubsidized loans. Understanding how interest accrual works and the type of interest applied to your loan can help you make informed decisions about managing your student debt effectively.
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Loan forgiveness
Generally, student loans must be paid back. However, there are some options for loan forgiveness that can ease the burden of debt.
The Public Service Loan Forgiveness (PSLF) program allows qualifying federal student loans to be forgiven after 120 qualifying payments (equivalent to 10 years) while working for a qualifying public service employer. Qualifying employers include government agencies (federal, state, local, or tribal) and certain non-profit organizations. Public service employees in roles such as firefighting, policing, nursing, and other emergency services may be eligible for the PSLF program. To apply for PSLF, individuals can use the PSLF Help Tool provided by the U.S. Department of Education to determine their next steps and document their qualifying employment. It is important to note that only federal Direct Loans can be forgiven through PSLF.
Income-Driven Repayment (IDR) plans are another option that can lead to loan forgiveness. These plans cap monthly payments based on income and family size, and if an individual's income is low enough, their payment could be as low as $0 per month. Under IDR plans, the remaining balance on loans may be forgiven after 20 or 25 years of repayment. The U.S. Department of Education has made efforts to improve IDR options, such as allowing borrowers to link their federal tax information to automatically recertify their IDR plans annually. Additionally, the Department has implemented a one-time adjustment to count certain periods, such as deferment and forbearance, towards loan forgiveness. To benefit from this adjustment, borrowers with FFELP loans held by commercial lenders or Perkins loans not held by the Department of Education must consolidate their loans into Direct Loans by June 30, 2024.
It is worth noting that there have been controversies and legal disputes surrounding student loan forgiveness. The Trump Administration criticized the Biden Administration for making "loan forgiveness" promises that federal courts ruled as unlawful, arguing that such promises shifted the financial burden to taxpayers.
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Income-Driven Repayment (IDR)
Generally, student loans have to be paid back. However, there are various repayment plans available to borrowers, including Income-Driven Repayment (IDR) plans.
IDR plans are available to borrowers with federal student loans, including those with federal parent PLUS loans, although the ICR plan is the only one that accepts these. Borrowers can apply for an IDR plan at StudentAid.gov or by contacting their federal student loan servicer and sending them a paper request form. The application requires information about family size and income, which can be provided through a federal income tax return or other proof of income, such as a letter from an employer.
It is important to note that recent changes to the IDR system through Trump's budget reconciliation bill, signed into law on July 4, 2025, will impact future borrowers. Those taking out federal student loans on or after July 1, 2026, will not be able to access any IDR plans. Additionally, three of the current IDR plans (SAVE, PAYE, and ICR) will be discontinued by July 1, 2028, leaving only the IBR plan for existing borrowers. Parent PLUS loan borrowers must consolidate their loans and sign up for the ICR plan before July 1, 2028, to stay on an IDR plan.
Borrowers should also be aware that they may have to pay taxes on any forgiven loan amounts, although a temporary provision eliminates federal taxes on forgiven student loans through the end of 2025. Additionally, Public Service Loan Forgiveness may provide tax-free forgiveness after 10 years in an eligible public service job.
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Student loan debt impact
Student loan debt has a significant impact on borrowers' lives, affecting their economic mobility, career choices, spending habits, and even their health.
One of the most prominent effects of student loan debt is the burden it places on borrowers, particularly those from marginalized and low-income backgrounds. The weight of student debt can be a heavy financial constraint, leading to postponed or forgone graduate studies and influencing early career decisions. For instance, graduates with debt are more inclined to pursue higher-paying positions and less inclined to opt for lower-paying public interest roles. This can have a knock-on effect on various sectors, including the public sector, which may struggle to attract talent.
Student loan debt also impacts borrowers' spending habits and their ability to achieve significant milestones. Economists have compared the rise in student loan debt to the housing bubble that precipitated the 2007-2009 recession, noting that it can reduce consumer spending, business growth, and homeownership. Data shows that a significant number of borrowers delay major purchases, such as cars or homes, due to their student loan debt. Additionally, student debt can deter individuals from starting their own businesses, with small businesses being especially vulnerable to the economic impact of this type of debt.
The psychological and physical health of borrowers can also be influenced by student loan debt. Research has indicated a link between student loans and poorer psychological functioning, with an increase in depressive symptoms and health problems as borrowers enter repayment. However, it is important to note that the impact of student debt on health may vary depending on individual circumstances and life stages.
The absence of debt relief policies exacerbates the challenges associated with student loan debt. Loan forgiveness has been found to provide financial relief and alleviate distress among borrowers. Without such interventions, the economic and social consequences of student loan debt can be far-reaching, affecting not just individuals but also communities and the economy at large.
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Frequently asked questions
Yes, if you take out a loan, you have to pay it back. However, there are different repayment plans available, such as income-driven plans, that can make repayment more manageable.
If you don't make payments on your student loans, you will eventually go into default. This can have serious consequences, including wage garnishment and the government taking any federal money you may be entitled to, such as tax refunds and social security payments.
In certain situations, you may be eligible for loan forgiveness. For example, the Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on Direct Loans after 120 monthly payments while working for the government or specific nonprofit employers.
Many federal loans have a standard repayment plan with a 10-year term. However, there may be options to extend this period, which can lower your monthly payments but result in higher total loan costs.
Yes, there may be options to temporarily pause or defer your student loan payments. For example, during the COVID-19 pandemic, the Trump administration paused student loan repayment requirements, and similar circumstances may allow for future deferments.
