Douglas Olsen
Paying off student loans can be a daunting task, and as of 2025, over 43 million people in the United States are facing this challenge, with more than 5 million in default. It's important to understand your options and make informed financial decisions. Federal loans have unique traits, such as subsidized interest during enrolment and grace periods. There are also graduated and extended repayment plans to reduce early financial burden. Forbearance is an option to consider if you're struggling, but it can lead to higher interest rates and monthly payments later on. Understanding your loan type, repayment options, and potential pitfalls like defaulting will help you make a plan to manage your student debt effectively.
| Characteristics | Values |
|---|---|
| Interest accrual | Interest accrues daily, in most cases starting on the day the loans are disbursed |
| Interest payer | The government pays interest on subsidized federal loans while the borrower is enrolled in school or during the post-school grace period |
| The government also pays interest when loans are placed in deferment due to | half-time enrollment, economic hardship, unemployment, cancer treatment, or military deployment |
| Default | For most federal loans, default occurs after 270 days, and loans are sent to collections after 360 days of delinquency |
| Consequences of default | Loss of eligibility for federal student aid, garnishment of federal tax returns, wages, and Social Security payments, negative impact on credit score, potential lawsuit from the lender |
| Repayment plans | Graduated repayment plan, extended repayment plan |
| Temporary relief | The U.S. Department of Education offered a temporary program during the first 12 months after the pandemic payment pause, not reporting missed payments or placing loans in default |
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What You'll Learn
Loan forgiveness programmes
Public Service Loan Forgiveness (PSLF): PSLF is a programme offered by the U.S. Department of Education that allows qualifying federal student loans to be forgiven after 120 qualifying payments (10 years) while working for a qualifying public service employer. Public service employees, including firefighters, police officers, nurses, and teachers, can benefit from this programme. It's important to carefully review the requirements and use the PSLF Help Tool to ensure you're on track for loan forgiveness.
Income-Driven Repayment (IDR) Plans: IDR plans offered by the Department of Education base your monthly payment on your income and family size. If your income is low enough, your payment could even be as low as $0 per month. After 20 or 25 years of repayment, the remaining balance on your loans may be forgiven. The Loan Simulator can help you compare plans and estimate monthly payment amounts to see if you're eligible for an IDR plan.
Teacher Loan Forgiveness: Teachers can benefit from loan forgiveness programmes specifically designed for their profession. If you teach full-time for five complete and consecutive academic years in certain low-income schools or educational service agencies, you may be eligible for forgiveness of up to $17,500. Additionally, the Teacher Education Assistance for College and Higher Education (TEACH) Grant can help with loan repayment or grant certain service obligations.
Total and Permanent Disability (TPD) Discharge: If you have a physical or mental disability that severely limits your ability to work now and in the future, you may qualify for a TPD discharge. With this programme, you won't have to repay any of your federal student loans and may be released from certain service obligations. Automatic discharges are available for those identified as eligible by the Social Security Administration or Veterans Affairs.
It's important to remember that these are just a few examples of loan forgiveness programmes, and there may be other options available depending on your specific circumstances. Additionally, beware of scams; you should never have to pay a fee to receive help with loan forgiveness or discharge. Always work directly with the U.S. Department of Education and your loan servicers to explore your options and make informed decisions about your financial future.
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Graduated repayment plans
The Graduated Repayment Period (GRP) allows borrowers to make interest-only payments for 12 months after their separation or grace period ends. This benefit is available for students with eligible undergraduate, graduate, health professions graduate, MBA, law school, medical school, or dental school loans. It is important to note that the GRP is only available for loans disbursed on or after July 1, 2013, and used to pay for qualified higher education expenses at a degree-granting institution.
For those with federal student loans, the Department of Education's Loan Simulator can help determine if the graduated repayment plan is a suitable option. This plan differs from income-driven repayment (IDR) plans, where payments are contingent on income. With graduated repayment, even if your income doesn't increase, you will still be responsible for the increased payments near the end of your plan. Additionally, loans in graduated repayment have not been slated for future forgiveness, unlike income-contingent repayment plans, which offer forgiveness of any remaining balance after 10 to 25 years.
It is worth noting that the graduated repayment plan will not be a long-term option for student loan repayment. With the passage of the One Big Beautiful Bill, borrowers will no longer be able to access graduated or extended repayment plans after July 1, 2026. Therefore, borrowers should assess their current repayment plan against other available options. To aid in this decision, tools such as the Federal Student Aid Loan Estimator or a student loan calculator can help determine the best repayment strategy.
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Extended repayment plans
An extended repayment plan is a strategy to repay student loans that lowers monthly payments by extending the loan term beyond the standard 10-year period, up to 25 years. This plan is designed for borrowers with federal student loans who are seeking more manageable monthly payments. It is beneficial for those with substantial loan balances who are struggling to meet the higher payments required under the standard 10-year repayment plan.
Under an extended repayment plan, borrowers can choose between fixed or graduated payments. Fixed payments remain the same throughout the life of the loan, offering predictability. Graduated payments, on the other hand, start lower and gradually increase, typically every two years. This plan is best suited for those who need immediate relief from high monthly payments and are less concerned about the total cost over time.
While extending the repayment term can make loan payments more affordable in the short term, it is important to note that borrowers will ultimately pay more in interest over the life of the loan compared to the standard plan. This means that while monthly payments are lower, the total cost over the extended term is higher. For example, a borrower with $35,000 in federal student loans at a 4.5% interest rate would pay around $363 per month under the standard 10-year plan. With an extended repayment plan and a 25-year term, their monthly payment could be reduced to about $184. However, they would end up paying more in interest over the longer term.
Additionally, it's important to consider the trade-offs and alternatives. The extended repayment plan does not offer loan forgiveness, which is available with other repayment options like the Revised Pay As You Earn (REPAYE) plan or the income-based repayment (IBR) plan. Furthermore, borrowers with Parent PLUS loans or consolidated loans that include Parent PLUS loans are not eligible for graduated payments under this plan. Therefore, it is essential to carefully evaluate your financial situation, goals, and alternatives before opting for an extended repayment plan.
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Understanding interest accrual
Interest accrual refers to the accumulation of interest on a loan or financial obligation over time. In the context of student loans, interest accrual begins once the loans are issued. This means that interest starts adding up daily from the day your student loans are disbursed.
Interest accrual is calculated based on the specific terms of your loan. Lenders typically use a formula that takes into account the principal amount, the interest rate, and the time period over which the interest is accruing. This calculation determines the total amount of interest that will be added to your loan balance over time.
Accrued Interest
Accrued interest is the interest that has been incurred on a loan but has not yet been paid. In the context of student loans, accrued interest can lead to a higher overall repayment amount. This is because the accrued interest is added to the principal balance, and subsequent interest calculations are based on this new, higher amount.
Impact on Student Loan Debt
Strategies to Manage Interest Accrual
To minimize the impact of interest accrual, it's advisable to make payments towards your student loans as early as possible. Even paying small amounts during your studies can help reduce the overall interest accumulation. Additionally, consider making payments towards the interest itself during any grace periods or deferment periods to prevent it from capitalizing and increasing your loan balance.
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Forbearance
If you are struggling to make your student loan payments, you may be able to ask your loan servicer for a forbearance. A forbearance allows you to temporarily pause or reduce your student loan payments. Forbearance is generally not as helpful as a deferment, as interest usually continues to accrue while the loan payments are postponed. This means your loan balance can increase very quickly with all the added interest. Before you ask for a forbearance, you may want to consider an income-driven repayment (IDR) plan.
There are certain types of forbearances where the loan servicer is required by law to put your loans in forbearance if you request it. These forbearances are very limited and are typically reserved for borrowers who are working or volunteering in certain programs, such as AmeriCorps or the National Guard. If the total amount you owe each month on your federal student loans is 20% or more than your monthly income, you may be eligible for a mandatory forbearance of up to three years.
The Department of Education has also put all SAVE plan borrowers into forbearance as court cases challenging the legality of the income-driven student loan repayment plan move forward. Borrowers enrolled in the SAVE plan will not have to make payments and will not accrue interest on their loans until further notice.
In addition, the U.S. Department of Education announced a one-time temporary program that offers benefits to borrowers with federally-owned student loans who fall behind on their payments during the first 12 months following the end of the pandemic payment pause. From October 1, 2023, to September 30, 2024, missed monthly payments on eligible loans will not be reported to credit reporting companies, placed in default, or referred to debt collection agencies. The Department of Education has directed its servicers to apply administrative forbearances to accounts that become delinquent during this "on-ramp" period.
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Frequently asked questions
Student loan borrowers are responsible for paying off their student loans.
If you are unable to pay your student loan debt, your loan will eventually enter default. For most federal loans, this occurs after 270 days or approximately 9 months. Once your loan is in default, the lender can file a lawsuit against you to collect the debt.
If your loan is in default, get in touch with the Federal Student Aid Office's Default Resolution Group, which can help get your loan sorted. You can pay the loan in full, consolidate the defaulted loans, or rehabilitate the loan.
As of recently, 42.7 million borrowers owe more than $1.6 trillion in student debt. More than 5 million borrowers have not made a monthly payment in over 360 days, and 4 million borrowers are in late-stage delinquency.
