Ibrahim Gardner
Student loan repayment can be a daunting and confusing process for many. The first step is to understand the terms of your loan agreement, as this will dictate your repayment start date and conditions. It's important to be proactive and aware of your finances, creating a budget to manage your monthly cash flow. You can also seek help from your school's financial aid office or loan servicers' helplines. In the US, federal student loan payments were reinstated in October 2023, after a pause during the pandemic, with interest accruing from September 1, 2023. This affected almost 43 million people, making student loan debt the second-highest household debt in the country.
| Characteristics | Values |
|---|---|
| Number of borrowers in default | 5 million+ |
| Number of borrowers in delinquency | 4 million |
| Percentage of borrowers in repayment | 38% |
| Date of resumption of loan collections by FSA | May 5, 2025 |
| Date Congress mandated student loan repayment | October 2023 |
| Date the previous administration paused processing applications | August 2024 |
| Date the previous administration paused collections | March 2020 |
| Private student loan grace period | 6 months |
| Forbearance period | Up to 12 months |
| Deferment period | 6 months to 3 years |
| IDR availability | Federal student loans only |
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What You'll Learn
Income-Driven Repayment (IDR) plans
IDR plans exist because standard student loan repayment plans often fail both borrowers and lenders. Fixed payment schedules may not align with graduates' earnings trajectories, leading to loan defaults and poor repayment outcomes. IDR plans, therefore, act as insurance in the event of unexpectedly low earnings.
There are several types of IDR plans, including Income-Based Repayment, Income-Contingent Repayment, PAYE, and REPAYE/SAVE. The SAVE plan, which opened to enrollment in August 2023, is a new IDR plan introduced by the Biden administration. However, it has been closed to new enrollment since July 2024 due to legal challenges. Despite this, borrowers who were already enrolled in SAVE remain in interest-free forbearance.
It is important to note that IDR plans differ significantly in borrower eligibility, repayment terms, and cost to taxpayers. As a result, careful coordination and communication are required to address the complex structural issues of the student loan program.
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The SAVE Plan
Firstly, the SAVE Plan will see the resumption of collections on defaulted federal student loans. This will protect taxpayers from the burden of irresponsible lending practices and ensure borrowers honour their debts. Since March 2020, no collection has been made on defaulted loans, and this initiative will be supported by a comprehensive outreach campaign to help borrowers understand their repayment options and get out of default.
Secondly, the SAVE Plan will provide clear and regular communications to borrowers about their payment options. FSA will conduct a two-month communications campaign to engage borrowers, reminding them of their obligations and providing resources and support. This will include emails, social media campaigns, and extended call times with service agents. Borrowers will be encouraged to contact the Default Resolution Group to discuss their options, which may include enrolling in an income-driven repayment plan or loan rehabilitation.
Thirdly, the SAVE Plan will see the processing of applications for enrolment in repayment plans. Since August 2024, there has been a pause on processing applications for Income-Based Repayment, Income-Contingent Repayment, and PAYE plans. The Department of Education is working to resolve this issue and expects to resume processing applications by next month. This will provide borrowers with more options to manage their debt and find a repayment plan that suits their financial situation.
Finally, the SAVE Plan will authorize guaranty agencies to begin involuntary collection activities on loans under the Federal Family Education Loan Program. This action is required by the Higher Education Act and will only be undertaken when borrowers have been provided with sufficient notice and opportunity to repay their loans. By implementing the SAVE Plan, we aim to provide borrowers with the support and resources they need to manage their student loan debt effectively and prevent further financial hardship. It is important for borrowers to understand their options and take action to get back on track with their repayments.
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Loan forgiveness
The US student loan system is a complex topic, and loan forgiveness is a crucial aspect for borrowers to understand. With the Biden-Harris Administration's refusal to lift the collections pause in October 2023, many borrowers have been left in limbo. As of May 2025, the US Department of Education's Office of Federal Student Aid (FSA) has resumed collections on defaulted federal student loans. This shift aims to protect taxpayers from the burden of federal student loans.
Income-Driven Repayment (IDR) plans are another avenue for loan forgiveness. These plans are based on income and family size, potentially resulting in monthly payments as low as $0. Depending on the specific IDR plan, the remaining balance on loans may be forgiven after 20 or 25 years of repayment. It's worth noting that borrowers with Direct Loans or federally-managed FFELP loans don't need to take any additional action to benefit from the one-time IDR adjustment. However, those 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.
It's important to be vigilant as there are scams related to loan forgiveness. Remember, no legitimate student loan forgiveness program will ever ask for payment to receive forgiveness. With careful planning and staying informed, borrowers can navigate their student loan obligations and explore the possibilities of loan forgiveness.
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Interest accrual
Interest on student loans accrues daily, which means that the amount of unpaid accrued interest changes every day. This daily interest accrual can be calculated by multiplying the interest rate by the principal balance and then dividing it by the number of days in a year. For example, if you have a principal balance of $20,000 with an interest rate of 4.5%, your daily interest accrual would be $2.67 [(20,000 x 0.045) / 365]. This amount, when multiplied by the number of days in a month, gives you the monthly interest accrual.
During periods when payments are not required, such as deferment, forbearance, grace periods, or in-school statuses, interest continues to accrue. This accrued interest is usually capitalized, meaning it is added to the principal balance when the loan enters repayment. Capitalization increases the total cost of the loan because future interest accrues on the new, higher outstanding principal amount. For certain federal student loans, such as unsubsidized, Parent PLUS, and GradPLUS loans, federal law allows unpaid interest to be capitalized at specific times during the loan term.
To minimize the impact of interest accrual, borrowers can make voluntary interest payments during periods when payments are not required. This strategy can help reduce the overall cost of the loan. Additionally, some repayment plans, such as the Saving on a Valuable Education (SAVE) plan, offer income-driven repayment options that allow borrowers to pay based on their discretionary income. These plans can help make payments more manageable and potentially reduce the total interest paid over the life of the loan.
It's important to note that the resumption of student loan payments and interest accrual has been subject to changes and extensions. In April 2025, the Department of Education announced that student loan repayments for defaulted federal student loans would resume in May 2025, after a pause on collections since March 2020 due to the COVID-19 pandemic. Borrowers should stay informed about the latest developments and contact their loan servicers to discuss repayment options and explore alternatives if needed.
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Alternative repayment plans
There are four versions of alternative repayment plans offered by federal loan servicers. The first two plans are variations on level amortization, where the borrower picks a particular monthly payment or repayment term, subject to regulatory restrictions. These include a maximum repayment term of 30 years, excluding periods of authorized deferment and forbearance, and compliance with the three-times rule, where no payment is more than three times the smallest payment.
Alternative repayment is often used as a mechanism to provide defaulted Parent PLUS Loan borrowers with an income-based repayment plan. This is despite them not usually being eligible for Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay-As-You-Earn Repayment (PAYE), or Revised Pay-As-You-Earn Repayment (REPAYE).
The U.S. Department of Education's Office of Federal Student Aid (FSA) resumed collections of its defaulted federal student loan portfolio on May 5th, after a pause on collections since March 2020. The Biden-Harris Administration had refused to lift the collections pause, but the previous administration failed to process applications for borrowers who applied for income-driven repayment plans.
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Frequently asked questions
Interest on federal student loans will start accruing again on August 1, 2025, for borrowers who enrolled in the Saving on a Valuable Education (SAVE) income-driven repayment plan. However, monthly payments will remain paused for those borrowers for now.
The Department of Education is urging borrowers with SAVE Plan loans to switch to another payment plan. Currently, borrowers have two options: the standard repayment plan or the income-based repayment plan.
To change your repayment plan, log in on studentaid.gov/idr and follow the prompts to provide personal, contact, and loan information. You can also allow the FSA to collect your income information directly from the Internal Revenue Service. If you're unsure of the best plan for your situation, you can use Federal Student Aid's Loan Simulator tool.
