Exploring Federal Loan Repayment Plans
The repayment process for federal loans begins when you sign the Master Promissory Note (MPN), which is a legal document binding you to the terms of the loan. Should you have questions about the terms of your loan, contact the Financial Aid Office at your college. As part of the exit loan counseling process, you will be assigned a loan servicer and select a repayment plan for your federal loans. The standard repayment plan is 10 years or 120 payments. However, federal loans provide some flexibility to choose a different payment plan that spreads the payment out over a longer period of time or calculate the payments based on your income. Keep in mind that the longer you stretch out the payments, the more interest that you will need to pay over time. You also have the option to change your payment plan during the repayment process as your life circumstances change.
Prior to receiving any funds for your education, you will be required to sign a Master Promissory Note (MPN)
. The MPN discloses all the requirements of your loan and legally binds you to repaying the principal balance and any accrued interest to the U.S. Department of Education.
When you graduate, leave school, or drop below half-time enrollment, you are required to participate in exit counseling. The purpose of the counseling is to make sure you understand your rights and responsibilities. Your college may have its own exit counseling tool, or they may refer you to the complete the counseling at studentloans.gov . You will need to log in with your FSA ID. FSA provides an Exit Counseling Guide (PDF) to give you an overview of the repayment process.
When you exit school, your loan will be assigned to a loan servicer by the federal government. They help with selecting or changing your repayment plan, setting up billing, and providing online account access to your loans. The only time you can request to change your loan servicer is when you consolidate the loan. In addition, the federal government has the right to transfer your loan to another loan servicer. If this occurs, the new loan servicer will reach out to you and assist you with all your account needs. If you apply for certain loan forgiveness or discharge programs, your loan may be transferred to the loan servicer designated to operate loans through those programs. If you aren't sure who is your loan servicer, you can log into My Federal Student Aid to find who they are and their contact information. There are currently nine loan servicer for all Direct or FFEL loans. FSA publishes a list of the loan servicers along with their contact number. Loan servicers are paid to help you manage your loan. Should someone contact you and offer fee-based services to manage your loan and enroll you in loan forgiveness programs, contact your servicer first to see what they can do to help.
Depending on the type of loan you received, you do have multiple repayment options. FSA provides an overview chart of all the options for Direct and FFEL loans. They also provide a repayment checklist to ensure you have a smooth repayment experience. If you do not select a repayment options, the default Standard Repayment Option of 120 monthly payments is chosen for you. As your life circumstances change, you can change your repayment plan at no cost by contacting your loan servicer. Keep in mind that transferring to a new repayment plan may require a short-term forbearance, which can result in accrued interest on your loan. Loan servicers handle the billing, help you select a repayment plan, and provide customer service for any problems or concerns you have with your student loan. You can also use the Repayment Estimator to calculate the best option for you before you contact your loan servicer.
If you think that your loan payments are high compared to your income, you may want to consider switching to an IDR plan. In some cases, if your income is low enough, you could have a $0 per month payment. IDR is a more proactive option than forbearance and keeps you on track to paying off your loan or working towards loan forgiveness. You can apply for IDR through the FSA web site. Once you apply, you will need to recertify your income annually. If you are struggling with your student loan payments, consider working with your loan servicer to choose an IDR over a short-term forbearance. Forbearance may provide a break from payments, but the loan will be higher when you resume repayment because of capitalized interest.
Borrowers with more than one federal loan can combine them into one loan, leaving them with one monthly payment. This can occur, even if your loans are with multiple servicers. The application process is free. Borrowers can also use this option to combine older loans, making them eligible for additional loan repayment plans and loan forgiveness programs. Keep in mind that if you are already working towards loan forgiveness, consolidation may eliminate any previous qualifying payments. When you contact your loan servicer about loan consolidation, make sure you let them know about any loan forgiveness programs you are pursuing.
PSLF is one of the most popular loan forgiveness programs, because it forgives the remaining balance on loans for borrowers who choose to work for the government or for a qualifying non-profit organization. FSA has a PSLF Help Tool to help you determine if you meet all the qualifications. To qualify, a borrower must:
- Have the correct type of loans.
- Make 120 qualifying payments under a qualifying repayment plan.
- Work full-time (30 or more hours a week) for a qualifying employer or part-time at multiple qualifying employers that add up to 30 or more hours.
Borrowers are encouraged to complete the Employment Certification Form (PDF) annually to ensure initial eligibility for the program and to monitor continued progress towards program completion. Once the 120 payments have been completed, the borrower completes the PSLF Application (PDF) to have their remaining balance forgiven. The program has very specific requirements, so the best way to ensure you are on track is to complete the Employment Certification Form.
If you applied for PSLF and were rejected because you met all the requirements except having the correct repayment plan, the TEPSLF program is available for a limited time to borrowers. The application process is fairly simple, but it does require a borrower to be rejected from PSLF first.