Lori Meadows
Federal student loans are a great way to fund your education, but it's important to understand the repayment process before taking one out. While federal loans offer more benefits than private loans, such as loan forgiveness and income-driven repayment plans, it's still crucial to carefully consider how much you borrow. This is because you will need to pay back any money you borrow, plus interest and fees. So, how low can your pay be for federal student loans? Well, it is recommended to keep your monthly student loan payment at around 10% of your projected after-tax income for your first year out of school. Additionally, there are several income-driven repayment plans available that can help keep payments manageable by capping them at a percentage of the borrower's income.
| Characteristics | Values |
|---|---|
| Recommended monthly student loan payment | 10% of projected after-tax income for the first year out of school |
| Federal student loan repayment options | 4 |
| Federal student loan forgiveness | Yes |
| Private student loan forgiveness | No |
| Private student loan credit check required | Yes |
| Federal student loan borrowing limit | Varies depending on factors like tuition cost, dependent status, etc. |
| Private student loan borrowing limit | Up to the total cost of attendance |
| Parent PLUS loan limit until July 2026 | Up to 100% of the cost of attendance |
| Parent PLUS loan limit after July 2026 | $20,000 per child, annually, and $65,000 per child in total |
| SAVE plan threshold for discretionary income | 225% of the federal poverty guideline |
| Repayment under the SAVE plan for undergraduate loans | 5% of discretionary income |
| Repayment under the SAVE plan for graduate school loans | 10% |
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What You'll Learn
Loan forgiveness
The US Department of Education offers several income-driven repayment (IDR) plans to help with federal student loan payments. These plans base your monthly payment on your income and family size, allowing you to make more manageable payments. If your income is low enough, your payment could be as little as $0 per month, and those $0 payments still count toward eventual loan forgiveness.
The IDR plans include:
- Income-Contingent Repayment (ICR): ICR calculates payments as either 20% of your discretionary income or a fixed payment over 12 years, whichever is lower.
- Income-Based Repayment (IBR): IBR calculates payments as either 10% or 15% of your discretionary income, depending on when your loans were first disbursed.
- Pay As You Earn (PAYE): PAYE limits payments to 10% of your discretionary income and is available to borrowers who took out loans after October 2007. The forgiveness timeline is 20 years.
- Saving on a Valuable Education (SAVE): The SAVE plan calculates payments as 10% of your discretionary income, but only on income above 225% of the federal poverty line, significantly lowering monthly payments. SAVE offers forgiveness after 20 years for undergraduate and 25 years for graduate loans.
After making payments for 20 or 25 years under an IDR plan, the remaining balance on your student loans may be forgiven. This forgiveness was made tax-free at the federal level through the end of 2025 as part of the 2021 American Rescue Plan.
Public Service Loan Forgiveness (PSLF) is another option for loan forgiveness. PSLF is available to government and qualifying nonprofit employees with federal student loans. Eligible borrowers can have their remaining loan balance forgiven tax-free after making 120 qualifying loan payments on an IDR plan and 10 years of full-time public service work. Teachers employed full-time in low-income public schools may be eligible for Teacher Loan Forgiveness after working for five consecutive years, with up to $17,500 in federal direct or Stafford loans forgiven.
The US Department of Defense also offers special benefits for military service members with federal student loans, including interest rate caps and loan repayment programs.
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Income-driven repayment plans
Federal student loan borrowers can choose from several income-driven repayment plans to keep their payments manageable. These plans are designed to cap monthly payments at a certain percentage of the borrower's income. The specific income-driven repayment plans available include the Income-Based Repayment (IBR) plan and the new IDR plan, called the Repayment Assistance Plan (RAP).
The Income-Based Repayment (IBR) plan is one of the existing repayment plans that borrowers with loans taken out before July 1, 2026, can access. This plan takes into account a borrower's income and family size to determine their monthly payment amount. Under IBR, borrowers are required to pay a certain percentage of their discretionary income, typically over a period of 20 or 25 years. After this period, any remaining loan balance may be forgiven.
The Repayment Assistance Plan (RAP) is the new IDR plan introduced by Republicans. This plan will be available to borrowers who take out student loans after July 1, 2026, and it will be one of the two repayment options offered, alongside the modified Standard Plan. While specific details of RAP are not yet clear, it is designed to provide assistance and flexibility in repaying federal student loans based on the borrower's income.
In addition to these plans, borrowers with federal student loans can also explore Public Service Loan Forgiveness and the Teacher Loan Forgiveness Program. Public Service Loan Forgiveness is available for those with Direct Loans who have made 10 years of qualifying payments and been employed in public service during that time. The Teacher Loan Forgiveness Program is applicable to both Direct and FFEL loans, and it may include loan cancellation for teachers who meet certain requirements.
It is important to note that the availability and specifics of income-driven repayment plans can change over time due to updates in legislation and budget reconciliation. Therefore, borrowers are advised to refer to official sources, such as studentaid.gov, for the most up-to-date information on these plans and their eligibility criteria.
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Private lenders
Private student loans are offered by banks, lenders, and other private institutions, and they generally have higher interest rates than federal loans. These interest rates are set based on market conditions and other factors, and they can be either fixed or variable. Private lenders also require a credit check as part of the application process, and having a good credit history can positively impact the interest rate offered to you.
To apply for a private student loan, you need to go through a bank or lender and fill out their application form. Some private lenders may require you to have a cosigner if your credit history is not strong enough to meet their requirements. Applying with a creditworthy cosigner can increase your chances of approval and potentially secure you a lower interest rate.
Unlike federal loans, private student loan lenders are not required to offer you relief if you are struggling to make payments. However, they may be willing to reduce your payment if you can demonstrate your capacity to pay. It is recommended to organize your evidence, including bank statements and other bills, to make a case for lower payments.
If you are considering refinancing your federal student loan into a private loan to obtain a lower interest rate, keep in mind that you will lose the flexible repayment options and borrower protections offered by federal loans. Therefore, it is generally recommended to explore federal loan options first before turning to private lenders.
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Interest rates
There are two primary types of Direct Federal Loans: subsidized and unsubsidized. Subsidized loans are reserved for students with financial needs, and they do not accrue interest while the student is enrolled in college. To qualify for these loans, students must complete the Free Application for Federal Student Aid (FAFSA) annually. On the other hand, unsubsidized loans are available to any student who completes the FAFSA, regardless of their financial situation. These loans start accruing interest immediately while the student is still in college.
The interest rates for subsidized and unsubsidized loans have historically varied, with rates between 3% and 4% from 2013 to 2018. In the 2018-19 academic year, interest rates jumped to over 5%, with unsubsidized loans surging to over 6%. The following year, interest rates dropped significantly due to the Coronavirus pandemic, reaching a historic low of 2.75% for both subsidized and unsubsidized loans in 2020-21. However, rates have been on an upward trajectory since then, with undergraduate federal student loans disbursed between July 1, 2025, and June 30, 2026, carrying an interest rate of 6.39%.
It is worth noting that federal student loans offer several benefits beyond interest rates, such as subsidized interest, flexible repayment options, and support during financial hardships. These advantages often make federal loans a preferred choice over private loans for many borrowers. Additionally, federal loans typically have lower interest rates than private student loans, making them a more cost-effective option for students and their families.
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Borrowing limits
Dependent undergraduates (most students under the age of 24) can borrow up to $5,500 as freshmen (including up to $3,500 subsidized), $6,500 as sophomores (including up to $4,500 subsidized), and $7,500 as juniors and beyond (including up to $5,500 subsidized). Independent undergraduates (students age 24 or older) and dependent students whose parents cannot obtain PLUS Loans have higher limits: $9,500 as freshmen (including up to $3,500 subsidized), $10,500 as sophomores (including up to $4,500 subsidized), and $12,500 as juniors and beyond (including up to $5,500 subsidized).
For graduate students, the borrowing limit is $20,500 (or $40,500 for certain medical training). Dependent students can borrow up to $31,000 (including up to $23,000 subsidized), while independent undergraduates and dependent students whose parents cannot obtain PLUS Loans have a limit of $57,500 (including up to $23,000 subsidized).
There are also aggregate loan limits, sometimes referred to as cumulative limits, which can be refreshed by repaying the debt. The aggregate loan limit for undergraduate students with graduate degrees may vary depending on their specific circumstances. Additionally, health profession students, such as those enrolled in medical school, are eligible for higher Direct Loan limits.
It's important to note that these limits are for federal student loans and do not include other types of loans or financial aid. The loan amounts counted toward a borrower's aggregate loan limits include any outstanding Direct Subsidized Loan, Direct Unsubsidized Loan, and Federal Stafford Loan amounts.
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Frequently asked questions
It is recommended that your monthly student loan payment should be around 10% of your projected after-tax income for your first year out of school. For example, if your take-home pay is $2,800 a month, your student loan payments should not exceed $280.
The SAVE plan is a new federal student loan repayment option. It places the threshold for discretionary income at 225% of the federal poverty guideline. It also lowers the repayment amount for borrowers with undergraduate loans to 5% of discretionary income.
Income-driven repayment plans can help keep payments more manageable by capping them at a percentage of the borrower’s income. There are several income-driven repayment plans available, including the SAVE plan.
Federal student loans have benefits such as loan forgiveness opportunities and income-driven repayment plans, while private student loans usually require a hard credit check and may have higher interest rates and more fees.
