It is important to understand the basics of student loans and the types of loans available. The types of student loans you borrow will affect your eligibility for borrower protections and debt relief programs such as income-driven repayment plans and Public Service Loan Forgiveness. Refer to this chapter when making decisions about borrowing and loan consolidation.
Private Loans vs. Federal Loans
Law school can be financed entirely from federal loans (Stafford and Grad Plus). Financing a law school education this way will give the borrower numerous additional protections do not come with private loans. Private loans should be a last resort option.
Private or commercial loans are given out by lenders and are not associated with the federal government. Private and commercial lenders include banks, credit unions, state agencies and schools. Additionally, these types of loans generally come with the following stipulations:
- You may be required to make payments while in law school.
- They may have variable interest rates as high as 18 percent.
- Require excellent credit or a cosigner.
- Do not have loan forgiveness plans.
- Often have limited repayment options.
On the other hand, federal loans are provided by the Department of Education and serviced by private companies. Depending on the type of federal loan, these loans generally include the following:
- Fixed interest rates and tax-deductible interest
- Offer forbearance and deferment options,
- Rarely require a co-signer or excellent credit
- Can be consolidated with other federal loans
- Can be forgiven in certain circumstances
- Offer various repayment options, including options for payments based on income.
Direct Subsidized Loan: This type of loan is available only for those getting an undergraduate degree. It is given out in varying amounts, and is dependent on financial need. Students can borrow up to $23,000 in Subsidized Stafford Loans over the course of their undergraduate program. This includes up to $5,500 in the first year, $6,500 in the second year, and up to $7,500 in each subsequent year. These loans had fixed interest rates, of 2.75 percent for loans taken out for the 2020-2021 school year. (A new fixed rate is determined every year.) These loans require enrollment in an undergraduate program at least half time. Finally, you pay no interest on your Direct Subsidized Stafford Loans under three conditions:
- You must be in school at least half-time
- During your grace period.
- During a period of deferment.
Direct Unsubsidized Loan: This loan is available for those paying for a law school education. You can borrow up to $20,500 per year, but no more than $138,500 total. This $138,500 lifetime borrowing limit includes amounts you may have borrowed in Subsidized Stafford Loans while pursuing your undergraduate degree. Unlike Subsidized Stafford Loans, these loans do not require that you show financial need, however, interest does accrue unless you pay it while you are enrolled in school, during grace periods, or in periods of forbearance or deferment. Finally, these loans require you to be enrolled in school half-time and have a current fixed interest rate of 2.75 percent for undergraduate borrowers and 5.314.3 percent for graduate and professional borrowers for the 2020-2021 school year.
Perkins Loans: Perkins Loans are federal loans that can be used to pay for law school. These loans have fixed interest rates of 5 percent. Unlike other federal loans where the lender is the Department of Education, the lender for Perkins Loans is your individual law school. Perkins Loans allow you to borrow up to $8,000 annually, and up to $60,000 over your lifetime. Perkins Loans have no origination fees, a 9-month grace period, and generous cancellation provisions. For example, a Peace Corps member can have up to 70 percent of their Perkins Loans principal and accrued interest forgiven.
Be aware however, that under federal law, the authority for schools to make new Perkins Loans ended on Sept. 30, 2017, and final disbursements were permitted through June 30, 2018. As a result, students can no longer receive Perkins Loans. Finally, you cannot repay Perkins Loans under the Income-Driven Repayment (IDR) plans (unless you consolidate them into a Direct Consolidation loan) and Perkins Loans do not qualify for Public Service Loan Forgiveness.
Grad PLUS Loans: Grad PLUS Loans occupy a crucial spot in the lives of those attempting to fund law school via loans. Grad PLUS Loans allow you to borrow the full cost remaining after you have maxed out free money (scholarships and grants), Direct Unsubsidized Loans, and Perkins Loans. Grad PLUS Loans have a fixed interest rate of 5.30 percent for the 2020-2021 school year, no annual or lifetime borrowing limits, rather large origination fees (over 4 percent) and, unlike other federal loans, require a credit check.
Note: You should, and must, max out other federal financial aid options before applying for and receiving Grad PLUS Loans.
Unlike credit checks for private loans, you qualify for Grad PLUS Loans as long as you do not have an “adverse credit history.” You can receive an adverse credit history simply by being late on your bills. The Department of Education states that an adverse credit history results due to:
- Bankruptcy, repossession, foreclosure, wage garnishments or tax liens in the past five years
- Unpaid collection accounts
- Contracts terminated due to default
- Student loans being charged-off
- Current accounts being 90 days or more behind
However, a determination of an adverse credit history does not mean that you cannot receive Grad PLUS Loans. You can appeal this decision. To do so, you must document to the Department of Education’s satisfaction that you have an adverse credit history due to extenuating circumstances.
Documenting extenuating circumstances can be tricky. However, the Department of Education does provide some guidance by laying out a list of examples of extenuating circumstances for various situations. This list is by no means conclusive but is certainly instructive. A few items on the list include:
- For a charged off account, collection account, or a current account that is more than 90 days late, extenuating circumstances could include: evidence that the account has been paid in full, evidence that a repayment arrangement has been made, evidence that charged off student loans have been consolidated, evidence that the debt was charged off in bankruptcy, and evidence that debt is no longer in default.
- For wage garnishments, extenuating circumstances could include evidence that garnishment has been released.
- For repossessions, extenuating circumstances could include evidence that the financial agreement associated with the repossessed asset has been paid in full or that you have entered into a repayment arrangement.
The full list can be found here.
Note: The Department of Education does not consider unemployment, by itself, to be an extenuating circumstance. However, evidence of unemployment often serves as a contributing factor in documenting the appropriate extenuating circumstances.
In the event that you are unsuccessful in documenting extenuating circumstances, you will also be able to acquire an endorser. As long as your endorser does not have an adverse credit history, you will be able to get your Grad PLUS Loan. It should be noted that the endorser will not be able to document extenuating circumstances. While the endorser will be required to repay your Grad PLUS Loan in the event you do not, if you ever consolidate your Grad PLUS Loans into a Direct Consolidation Loan, your endorser will be removed from liability. This can often be a selling point in the event you have a potential endorser who is reluctant.
Note: You will be required to undergo a credit check for each Grad PLUS Loan you receive (usually no more than once a year). Thus, in the event you continue to possess an adverse credit history, you will be required to document extenuating circumstances or acquire an endorser for each separate Grad PLUS Loan.
Important note for borrowers who took out loans before July 1, 2010.
Your federal student loans may originate from one of two major federal student loan programs: the Federal Family Education Loan (FFEL) Program or the Federal Direct Loan Program. Loans from the FFEL Program were issued by private banks and lending institutions like Sallie Mae but are still federal student loans because they are guaranteed by the government. Federal Direct Loans are federal student loans issued directly by the U.S. Department of Education. Congress discontinued the FFEL Program as part of the Health Care and Education Reconciliation Act of 2010 and no subsequent loans were allowed under the program after June 30, 2010.
Your eligibility for repayment plans and loan forgiveness will be limited if you possess loans from the FFEL program. For example, you can only access one Income-Driven Repayment plan and do not qualify for Public Service Loan Forgiveness. If you wish to qualify for these programs and have loans from the FFEL program, you will need to consolidate your loans into the Federal Direct Loan Program.
Fixed v. Variable Interest Rates
Private loans typically have variable interest rates, while all federal loans have fixed interest rates that are determined annually. Fixed Interest Rates remain at the same percentage of your loan. Variable Interest Rates change as the market interest rate changes. Variable interest rates often start out lower than fixed rates, but often increase well above fixed interest rates in a short period of time. For example, the current fixed rate for Grad PLUS Loans is 5.30 percent while the average variable rate for private education loans is 1.04 to 12.40 percent.
Note: For a few borrowers with very good credit, a high salary and the financial ability to repay their loans on an accelerated schedule, these variable interest rates may provide some opportunity to save money in the short term.
Interest Rates for Direct Loans First Disbursed on or After July 1, 2020
|Loan Type||Borrower Type||Loan first disbursed on or after 7/1/2020 – and before 7/1/2021|
|Direct Subsidized Loans||Undergraduate||2.75%|
|Direct Unsubsidized Loans||Undergraduate||2.75%|
|Direct Unsubsidized Loans||Graduate or Professional||4.30%|
|Direct PLUS Loans||Parents and Graduate or Professional Students||5.30%|
Anytime a discussion of federal loans occurs, it is important to discuss origination fees. An origination fee is defined as: “an up-front fee charged by the Department of Education for processing a new loan application for a federal loan.” Due to these fees, the amount of money your educational institution will receive will be less than the amount you borrow. However, as the Department of Education notes, “you are responsible for repaying the entire amount you borrowed and not just the amount you received.” The amount of these fees vary by federal loan type. Presently, these fees can range from one to over four percent for new loans.
An example of how origination fees can affect your borrowing potential:
Nancy No-Fees is starting law school. Nancy fills out an application to borrow $35,000 in Direct PLUS Loans. Her loan will be disbursed January 25, 2017. This means her origination fee is 4.236 percent. While Nancy requested $35,000, her law school will only receive $33,517.40 to put toward the cost of Nancy’s legal education. This means that Nancy will have to pay back an additional $1482.60 on this single loan, just in fees.
|Loan Type||Borrower Type||Loan Fee|
|Direct Subsidized Loans and Direct Unsubsidized Loans||On or after 10/1/2020 and before 10/1/2021||1.057%|
|Direct Subsidized Loans and Direct Unsubsidized Loans||On or after 10/1/2019 and before 10/1/2020||1.059%|
|Direct Plus Loans||On or after 10/1/2020 and before 10/1/2021||4.228%|
|Direct Plus Loans||On or after 10/1/2019 and before 10/1/2020||4.236%|
Master Promissory Note (MPN)
The Master Promissory Note (MPN) is the document you sign in order to receive a federal loan from the Department of Education. An MPN is not required for each federal loan you receive. The same MPN can be used for up to ten years for Unsubsidized Stafford Loans, and for Grad PLUS Loans. This means all Unsubsidized Stafford Loans in a ten-year period use the same MPN while all the Grad PLUS Loans in a ten year period use another.
Note: If you require an endorser for a Grad PLUS Loan, you must fill out a separate MPN for each loan requiring an endorser, even if the endorser is the same for all loans.
The MPN is extremely important and should be read in full. All the terms and conditions of your federal loans is laid out in the MPN, and includes but is not limited to the following:
- Interest rates, and how interest is calculated, when interest accrues and capitalizes;
- Deferment/forbearance options, and what repayment plans are available;
- Loan cancellation provisions, information on loan acceleration and default
- Loan fees, how the loan proceeds may be used, and how loan disbursement will occur;
- What happens if payments are late;
- Protections for military personnel, options for loan discharge, how loan proceeds can be used;
- Your promise to repay (even if you cannot find employment, did not finish your degree, and/or are not satisfied with educational quality received).
Filling out the MPN
You can submit a hard copy MPN or fill out the MPN online. The electronic MPN is filled out by going to StudentLoans.gov. Additionally, StudentLoans.gov is where you may go to get a hard copy of the MPN. In either case, you will need an FSA ID and password. If you do not possess an FSA ID and password, you can acquire one at fsaid.ed.gov. For reference purposes, a sample MPN can be found here.
You will be asked to provide information about yourself and your school, as well as three references, and confirm that you have read the terms of the MPN, and lastly, sign the MPN.
You can submit a hard copy MPN by mailing it to:
U.S. Department of Education
P.O. Box 5692
Montgomery, AL 36103-5692
Once the MPN has been submitted, you will receive a disclosure statement. The disclosure statement provides information on when your loan will be disbursed, fees deducted prior to disbursement, and information about you and your school. Additionally, the disclosure statement will lay out how you may cancel your loans prior to disbursement. Just like with the MPN, you should read the disclosure statement in full.
Note: You will receive a disclosure statement for each separate federal loan, even if you are not required to sign a new MPN.
What are the COVID-19 Emergency Relief Measures?
On March 20, 2020, the office of Federal Student Aid began providing the following temporary relief on federally held student loans:
- suspension of loan payments,
- stopped collections on defaulted loans, and
- a 0% interest rate.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law, extending the above relief measures through Sept. 30, 2020, which then again was extended through August 31, 2022.
On Jan. 20, 2021, the COVID-19 emergency relief measures were extended through at least Sept. 30, 2021. On March 30, 2021, the measures were expanded to federal student loans made through the Federal Family Education Loan (FFEL) Program that are in default. On August 6, 2021, the U.S. Department of Education announced a final extension of the student loan payment pause until January 31, 2022. In April, 2022, it was extended once more until August 31, 2022.
The pause includes the following relief measures for eligible loans:
- a suspension of loan payments
- a 0% interest rate
- stopped collections on defaulted loans
Delinquency and Default
Choosing a federal loan with more protections, over a private loan with less protections can be the difference between paying your loans on time, and having your loans being placed in a delinquent or default status.
When a current borrower fails to make required monthly payments on student loans, the loan first becomes delinquent and then later goes into default. A loan becomes delinquent the day after payment is due. A delinquency is reported to major credit bureaus after 90 days. Once the delinquent student loan has been late for 91 days (for private loans) or 270 days (for federal loans), the loan is considered to be in default.
If you default on your federal loans, the government can seize tax refunds, garnish your wages, and take a portion of Social Security payments – all without a court order – and you will lose eligibility for new student loans and grants. Private lenders’ collection powers are not as strong, but their collections process is persistent (and often harassing).
Note: On March 20, 2020, the office of Federal Student Aid stopped collections on defaulted federally-held loans in response to the COVID-19 pandemic. The COVID-19 emergency relief measures were later expanded to federal student loans made through the Federal Family Education Loan (FFEL) Program that are in default. These provisions will be in effect through August 31, 2022.
If you default on either your private or federal loans, it affects your credit and could prevent you from securing a credit card, car loan, mortgage, apartment or job. You may even lose your professional license. You are likely to face these consequences if you go into default because the extremely high standard and complex procedure required to receive bankruptcy protections for student loans, makes it an unfeasible option for many federal and private loan borrowers.
As a result, eligibility for federal relief and forgiveness programs like income-driven repayment plans and Public Service Loan Forgiveness, and protections such as fixed interest rates, deferment and forbearance, are vital safeguards for student loan borrowers who will be repaying their loans for at least ten years and often longer. A law student who must borrow beyond the Stafford Loan limits (currently $20,500 annually) should utilize Grad PLUS Loans to pay for their education, rather than relying on private loans.
On April 6, 2022, the Department of Education announced that borrowers with paused loans receive a “fresh start” on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing. If you were in student loan delinquency or default before the Covid-19 pandemic, the “fresh start” would rehabilitate your student loans and place you in good standing when the Student Loan Pause ends on August 31, 2022. Read the announcement here.
Being in default is a scary thing. Garnished wages. Persistent phone calls. Damaged credit. However, there are steps for both private and federal loans that can allow the borrower to restore their loans to a current status. If you find yourself in default on your federal loans, you can make your loans current again through one of four pathways:
One: Repay all of the unpaid loan balance immediately.
Two: Consolidate your loans. This option allows you to cure your default status on your loans by consolidating your defaulted loans into a Federal Direct Consolidation loan. However, this loan must be repaid under the PAYE, REPAYE, IBR or ICR plans. (See the discussion on Income-Driven Repayment Plans in Chapter 3.)
Three: Enter into loan rehabilitation. Loan rehabilitation involves entering into an agreement with the Department of Education to cure the default status on your loans. You will make a separate loan rehabilitation agreement for each loan that is in a default status. Access the U.S. Department of Education Loan Rehabilitation form here.
Under the rehabilitation agreement you must do the following:
- Make nine payments within ten consecutive months. These monthly payments will automatically be 15 percent of your discretionary income. However, in the event that such a payment is not affordable to you, you can fill out a Financial Disclosure for Reasonable and Affordable Rehabilitation Payments form. This form will allow your payments under the rehabilitation agreement to be as low as $5, based on the details provided about your financial situation.
- Make payments no later than 20 days after the due date for each payment.
Loan rehabilitation has many perks:
- Once five payments have been made according to the loan rehabilitation agreement, all wage garnishments are cancelled.
- Once nine payments have been made according to the loan rehabilitation agreement: (1) the default status is removed from your loans; (2) you regain access to deferments, forbearances, IDR plans, and loan forgiveness; (3) any record of your loans being in default are removed from your credit report with all three major credit reporting agencies; and (4) your access to more federal financial aid is restored.
Note: A loan can only be rehabilitated once during the life of the loan.
Four: Have your student loans discharged in bankruptcy. Bankruptcy is the only solution that can be used for getting private loans out of default. Federal loans can also use this option. While this is not an easy task, it is a possible one. The standard you must meet to have student loans discharged in bankruptcy is proving that your student loans are causing you an undue hardship. This requires proving to a federal court all of the following:
(1) That the debtor cannot maintain a minimal standard of living for him/herself and his/her dependents if forced to repay student loans. A minimal standard of living means that the borrower must have:
- shelter that is furnished, heated, cooled, and pest-free;
- basic utilities such as electricity, water, and natural gas;
- food and personal hygiene products;
- clothing and footwear; (5) access to a way of cleaning clothing;
- access to a vehicle (including money to pay for registration fees, gasoline, routine maintenance and unexpected repairs) for the purpose of traveling to work, stores and medical care providers;
- health insurance, including the ability to pay the required copays and/or deductibles and
- the ability to provide oneself with a source of recreation.
As one court put it, “a minimal standard of living mandates that a borrower not live in poverty…in order to qualify for a discharge of their student-loan obligation.”
(2) The presence of additional (and exceptional) circumstances that suggest the borrower will maintain an inability to repay their student loans for an extended period of time. Circumstances can include a disability, old age, large number of dependents, evidence that physical health makes it impossible for the borrower to work, or evidence showing a “total foreclosure of job prospects in the area of training.”
(3) That the debtor has made good faith efforts to repay the loans. Courts often look at six factors when determining whether one made a good faith effort to repay their student debt:
- Was the debtor’s failure to repay a student loan obligation truly because of factors beyond reasonable control? For this factor, courts often consider things like whether or not the borrower took part in IDR plans, forbearance/deferment options, or other potential payment arrangements offered per their student loan agreements.
- Has the debtor realistically used all resources to repay the debt?
- Is the debtor using his/her best efforts to maximize earning potential? This factor weighs in favor of the borrower if the borrower can prove that they have attempted to find work and/or are working in a position within their educational field/vocational profile that would allow them to maximize their earning potential.
- How long after the loan first became due did the debtor seek to discharge the debt? Courts have held that a bankruptcy discharge that is filed less than a year after student debt repayment initially begins would cause this factor to weigh against the borrower.
- What is the overall percentage of the student loan debt as compared to the borrower’s overall debt? Unfortunately, with regards to this factor, courts rarely discuss it.
- Has the debtor obtained any tangible benefit from the student loan obligations? This factor will almost always weigh against a borrower who has received college credit and/or a college degree in exchange for the educational debt borrowed. However, in the event that the student was unable to receive credit and/or degree (for example, say the university closed due to engaging in fraudulent practices), this factor would weigh in favor of the borrower.
A few additional points about student loan discharge via bankruptcy:
- Every federal circuit uses this test for determining whether student loans can be discharged in bankruptcy except the Eighth Circuit, which uses the “totality of the circumstances test.” This test looks at future financial resources, reasonably necessary expenses and any other relevant facts in order to determine whether your student debt qualifies for discharge in bankruptcy.
- Because there exists a strong presumption against the ability to discharge student loans in bankruptcy, failure to prove any one factor results in the borrower failing to prove the existence of an undue hardship.
Deferments and Forbearances
Sometimes, it can be hard to maintain your student loan payments. The benefit of federal loans is that the federal government offers options for current borrowers who are behind on their payments. Two available options are deferments and forbearances. Deferments and forbearances can be used to prevent a delinquent loan from going into default. They can also transform a loan in delinquent status to current status, and give the borrower additional time to pay due to various life circumstances. When certain requirements are met, such as being enrolled in school or becoming permanently disabled, a deferment or forbearance allows a borrower to delay making payments on student loans.
Note: On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law, suspending payments on federally held student loans in response to the COVID-19 emergency. The payment suspension is considered an “administrative forbearance.”. The COVID-19 administrative forbearance will be in effect through January 31August 31, 2022.
What is a Deferment?
A deferment is a period during which repayment of principal and interest of federal student loans is delayed. Deferments are available for the following federal loans:
- Federal Perkins Loans
- Direct Loans/Federal Stafford Loans
- Direct PLUS Loans
- Direct Consolidation Loans
- FFEL Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
Interest does not accrue during a deferment on Direct Subsidized Loans/Subsidized Federal Stafford Loans, the subsidized portion of Direct Consolidation Loans, or the subsidized portion of FFEL Consolidation Loans and Perkins Loans. However, interest does continue to accrue on all other federal loans.
To qualify for a deferment, the current borrower must meet one or more of the following criteria:
- Be enrolled at least half time in school
- During a half-time period, deferment is available as long as the current borrower remains enrolled at least half time. This includes the summer between school years.
- Be enrolled in a graduate fellowship program, or approved rehabilitation program for the disabled.
- Deferment is available as long as the current borrower is enrolled in the eligible fellowship or rehabilitation program.
- Be unemployed or unable to find full-time employment.
- The borrower must register with a public or private employment agency (if one is available within 50 miles), make at least six attempts every six months to locate full-time employment, and accept full time employment regardless of whether or not the borrower feels overqualified for the employment.
- Full-time employment is employment of at least 30 hours a week, lasting three months or more.
- The deferment is available for up to three years. This time can be used all at once or spread throughout the repayment period of the loan.
- Participation in the Peace Corps
- The deferment is available for up to three years. The current borrower must remain an active member of the Peace Corps program.
- Active military service duty during a war, military operation, and/or national emergency.
- The deferment is available as long as the current borrower remains on active duty during an eligible military event.
- Experiencing an economic hardship
- To prove an economic hardship, the current borrower must show that (1) Eligibility for a state or federal public assistance program, such as food stamps or (2) earnings are no more than 150 percent of the federal poverty rate, despite working more than 30 hours a week.
- The deferment is available for up to three years but requires an annual recertification of the economic hardship.
Note: Additional protections are available for federal loans that were disbursed before July 1, 1993. These include being a working mother, being on parental leave, being temporarily disabled, engaged in public service or working as an educator in an area where there is a teacher shortage. Information on these deferment opportunities can be found by contacting your loan servicer.
What is Forbearance?
A forbearance allows a current borrower of federal student loans to suspend repayment of loan principal and interest, in the event that the current borrower does not qualify for a deferment. No payments are due while loans are in forbearance, but interest will continue to accrue on all your federal loans. A forbearance can only be received for up to 12 months. Forbearances are available for the following federal loans:
- Federal Perkins Loans
- Direct Loans/Federal Stafford Loans
- Direct PLUS Loans
- Direct Consolidation Loans
- FFEL Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
A forbearance can be discretionary or mandatory. A discretionary forbearance can be granted by your loan servicer at any time, but the decision is the loan servicer’s to make. A discretionary forbearance can be requested based on (1) financial hardship, (2) natural disaster (90 days), and/or (3) illness.
Mandatory forbearances by law must be granted by the loan servicer, and can be requested for any of the following reasons:
- The current borrower is enrolled in a medical or dental residency program.
- The residency program must be required in order for the borrower to begin their profession.
- The monthly payment due by the current borrower is more than twenty percent of the borrower’s gross monthly income.
- This is considered an administrative forbearance and the length of the forbearance is usually only until the loan servicer is able to place the borrower within a more affordable repayment plan.
- The current borrower is enrolled in AmeriCorps or Peace Corps.
- The current borrower is an activated member of the National Guard, but not eligible for a military deferment.
A forbearance must be requested directly through the current borrower’s loan servicer. A forbearance is renewable as long as the current borrower remains eligible.
Note: While a forbearance or deferment can seem ideal for those struggling to make monthly payments, consider using an Income-Driven Repayment (IDR) plan as an alternative. An IDR plan allows monthly payments for student loans based on your income, so in the event a reduction in your income affects your ability to make monthly payments, an IDR plan can be a helpful option. The monthly payments can be as low as $0. If you qualify for such reduced monthly payments, you should consider the option before opting for forbearance or deferment, because your loan payments (even $0 payments) count toward loan cancellation and Public Service Loan Forgiveness, while periods of forbearance and deferment (with the exception of the COVID-19 forbearance and hardship deferments, which do count toward loan cancellation) generally do not. Furthermore, IDR plans can be better when it comes to interest accrual, as certain IDR plans allow the government to pay off part of your interest, which forbearance does not have. Visit Chapter 3 for more information on IDR plans.
Keep Track of Your Loans
If you are a current borrower, it is important to know the specific types of loans you have borrowed so that you are able to determine what you need to qualify for federal programs like income-driven repayment plans and Public Service Loan Forgiveness.
To learn what loans you are eligible for, or what loans you currently have, follow these easy steps.
- Go to the StudentAid.gov
- Click on “Log-In”
- Enter your FSA ID and password. If you do not have an FSA ID and password, click “create an account”. Follow the instructions to set up your FSA ID and password.
- Once you log in, hover over your name in the top right corner. Select “My Aid” from the dropdown menu. The Loan Breakdown will display the type of loan, whether the loan is a Direct or FFEL loan, the balance, disbursed amount, outstanding principal, outstanding interest, total amounts for each type of federal loan you possess, and the loan date
Note: StudentAid.gov will only provide information about federal loans. Information about private loans can be found by contacting the lender or checking your credit report.
When law school is over, you may find yourself juggling multiple federal loans. In this situation, a federal consolidation loan may be helpful. A consolidation loan may allow you to lower your monthly payment while repaying on an extended schedule. Plus, a federal consolidation loan provides continued access to many of the protections given by individual federal loans, such as a fixed interest rate, income driven repayment options, loan cancellation, and even Public Service Loan Forgiveness.
Note: In the past, federal consolidation loans may have been obtained through FFEL lenders or through Federal Direct, therefore your consolidation loan may be from either program. Any federal consolidation loan borrowed after June 30, 2010, will be Federal Direct Consolidation Loans.
The Department of Education allows existing federal student loans to be consolidated into one loan via a Direct Consolidation Loan. When loans are consolidated, the existing individual loans are paid off and the current borrower will make one payment on the consolidation loan beginning within 60 days after the loan is disbursed. This loan will have a fixed interest rate. This interest is calculated using the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of 1 percent. This interest rate has no cap. It costs you nothing to consolidate via a Direct Consolidation Loan, and there is no credit check.
|Total Loan Debt||Repayment Period|
|$60,000 or more||30 years|
Repayment periods under the Standard or Graduated Repayment plans for consolidation loans vary according to the amount of your outstanding federal loans that exist at the time you apply for a Direct Consolidation Loan.
Note: Under the IDR plans (REPAYE, PAYE, IBR, and ICR), payment is over a maximum of 20 or 25 years, depending on the plan regardless of the amount of outstanding federal loans you have at the time of consolidation.
With interest rates, Federal Direct Consolidation Loans use a weighted average interest rate.
A weighted average interest rate ensures that when the interest rates on your new consolidation loan is the same as the interest rates on your earlier loans.
Example: Andy has two loans. One loan is for $10,000 at 6 percent and the other loan is for $15,000 at eight percent. To calculate Andy’s weighted interest rate, we do the following:
Step 1. Multiply each loan amount by its interest rate to obtain the loans weight factor.
$10,000 x .06 = $600
$15,000 x 0.08 = $1,200
Step 2. Add the weight factors together.
$600 + $1200 = $1,800
Step 3. Add the loan amounts together to obtain the total loan amount.
$10,000 + $15,000 = $25,000
Step 4. Divide the total from Step 2 by the total from Step 3.
$1,400 / $25,000 = 0.072
Step 5. Multiple the number from Step 4 by 100. Add a percent sign.
0.056 x 100 = 7.2 percent
Step 6. Then round the number from Step 5 to the nearest 1/8 percent
7.2 percent rounded to the nearest 1/8 percent is 7.25 percent. This would be Andy’s fixed rate for his consolidation loan.
Federal Loans Eligible for Consolidation
The following federal loans are eligible for consolidation:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct PLUS Loans
- All loans from the Federal Family Education Loan (FFEL) Program (except for FFEL Spousal Consolidation Loans)
- Federal Perkins Loans
Note: It is important to know that a Direct Consolidation Loan restarts the clock for ALL forgiveness programs. For example, the Public Service Loan Forgiveness plan requires the current borrower to make 120 payments (in addition to other criteria discussed later) in order to have their loan balance forgiven. So a borrower who consolidates their existing loans into a Direct Consolidation Loan still has to make 120 payments on the Direct Consolidation Loan, regardless of how many payments the borrower had made on the separate loans prior to the consolidation.
Consolidating FFEL Loans
FFEL Loans, including FFEL Consolidation Loans (except FFEL Spousal Consolidation Loans) can be consolidated into a Direct Consolidation Loan in order to take advantage of Public Service Loan Forgiveness and the PAYE, REPAYE, and ICR plans (all loan benefits only available for Direct Loans).
Consolidating Parent PLUS and Perkins Loans
Parent PLUS and Perkins Loans generally are only eligible for programs like income-driven repayment plans and Public Service Loan Forgiveness when part of a Direct Consolidation loan.
Borrowers of Parent PLUS Loans who entered repayment on or after July 1, 2006 are eligible to consolidate into a Direct Consolidation loan. However, that loan is only eligible for ICR, not for IBR, PAYE, or REPAYE. Thus, consolidating a Parent PLUS loan and enrolling in ICR is the only path to Public Service Loan Forgiveness for borrowers with Parent PLUS Loans.
NOTE: Borrowers who include non-Parent PLUS loans in a Direct Consolidation loan that includes Parent PLUS Loans will also only be eligible for ICR plan. Consolidate your Parent PLUS Loans separately if it will be advantageous for you to enroll in an income-driven repayment plan other than ICR for your non-Parent PLUS Loans. You can read about major differences between these plans in Chapter 3.
Federal Perkins Loans include their own cancellation provisions for different professions and categories of public service that may be more advantageous than Public Service Loan Forgiveness; you may be able to defer payments while you are performing service that qualifies for Perkins cancellation. These provisions will be lost if you consolidate your Perkins Loan. Therefore, while you will need to consolidate Perkins Loans for those to be eligible for an income-driven repayment plan or Public Service Loan Forgiveness, you always should consult with the school from which you obtained a Perkins Loan to find out whether you qualify for Perkins cancellation before consolidating.
Private Loans and Loan Consolidation
Private loans cannot be consolidated into a federal direct consolidation loans. However, private consolidation loans are often available by private lenders. For more information on these, contact your lender or an outside private institution of your choice. These loans are typically linked to factors like your credit score and present income but may help lower your existing monthly payments. More information on private lenders offering consolidation loans can be found here.
|Total Education Loan Indebtedness||Maximum Repayment Periods|
|Less than $7,500||10 years|
|$7,500 to $9,999||12 years|
|$10,000 to $19,999||15 years|
|$20,000 to $39,999||20 years|
|$40,000 to $59,999||25 years|
|$60,000 or more||30 years|
How to Consolidate Your Loans
(1) Go to StudentAid.gov.
(2) Log in with your FSA ID and password. If you do not have an FSA ID and password, you can acquire one at https://fsaid.ed.gov.
(3) Select the “Manage Loans” option from the top menu.
(4) Select “Consolidate My Loans”
(5) Click “start” on the next screen.
(6) Read the “Instructions for Completing Federal Direct Consolidation Loan Application and Promissory Note..” A copy of those instructions can be found here.
(7) Provide the personal information required on the application. You will be asked to provide your full name (Item 1), any former names (Item 2), social security number (Item 3), date of birth (Item 4), permanent address (Item 5), telephone number (Item 6), email address (Item 7), driver’s license information (Item 8), employer information (Item 9), and work phone number (Item 10).
(8) Provide contact information for two references (Items 11-12) who have known you for at least three years, and live at separate addresses (does not live at your address), and live in the United States.
(9) Provide information on the loans you desire to consolidate. All of your existing federal loans are populated automatically, but you can opt-out of having any individual federal loans consolidated.
A few reminders when deciding which loans to consolidate:
- Consolidating FFEL loans make them eligible for Public Service Loan Forgiveness and participation in all the income-driven repayment plans (normally, FFEL loans can only participate in the IBR plan).
- If you consolidate a Parent PLUS Loan, you must repay this loan under the ICR plan in order for payments on the new consolidation loan to count toward PSLF.
- You can never consolidate a spousal FFEL Consolidation Loan into a Direct Consolidation Loan.
- Consolidating Perkins Loans will result in the Perkins-specific loan protections (including cancellation provisions) being forfeited on those loans.
- If you are consolidating a loan that is in a default status, the new consolidation loan must be repaid under the IBR, ICR, REPAYE or PAYE plan.
- You can consolidate a single Direct Federal Loan, FFEL Federal Loan, Direct Consolidation Loan, or FFEL Consolidation Loan (excluding spousal consolidation loans) into a Direct Consolidation Loan in order to (1) participate in Public Service Loan Forgiveness, (2) remove your loan from a default status, or (3) remove your loan from a default aversion status.
- Previous payments made on loans being consolidated and not the newly formed Direct Consolidation Loan will not count toward (1) the number of years of repayment required for loan cancellation under the IBR, PAYE, ICR or REPAYE plans or (2) the 120 qualifying payments required for Public Service Loan Forgiveness.
- Accrued interest on all loans consolidated become capitalized, as the accrued interest on the loans consolidated adds to the new principal of the consolidation loan.
(10) Once you have decided on what loans you want to consolidate or not consolidate (Items 13-16), then you can decide whether you want to forfeit any existing grace period remaining on the individual federal loans you are desiring to consolidate (Item 17). Under law, once individual loans are consolidated, you lose any remaining portion of the grace period on those loans. However, in the event you want to retain your remaining grace period(s) on individual loans, fill out Section 17. This will result in the processing of your Direct Consolidation loan application being delayed for approximately thirty days prior to the end of the grace period(s).
Note: Leaving Item 17 blank will result in your application being processed immediately and the automatic forfeiture of remaining individual grace period(s).
(11) Provide information on any loans you decided not to include in your Direct Consolidation Loan (Items 18-22).
Note: Loans included in Items 18-22 are still used to determine the length of the repayment period under the Standard and Graduated plans for your Direct Consolidation Loan. This means that the total outstanding loan balance (on both consolidated and nonconsolidated loans) determines repayment period.
(12) Next, you must select your repayment plan. If you desire to enroll in the Standard, Graduated, or Extended repayment plans, fill out and sign a Repayment Plan Request: Standard Repayment Plan/Extended Repayment Plan/Graduated Repayment Plan. If you desire to enroll in the PAYE, REPAYE, IBR, or ICR plans, fill out and sign an Income-Driven Repayment (IDR) Plan Request form.
(13) Finally, you must read and sign the MPN.
(14) Once the MPN and corresponding repayment request form have been filled out and signed, the Direct Consolidation Loan application can be submitted for processing. Processing of the application takes 30-60 days. You must continue to make any payments due on your individual loan(s) during this processing period. In the event you cannot make these payments, your loan servicer is obligated to provide you with a 60-day forbearance period during which no payments are required.
(15) Once the application has been processed, your loan servicer will provide you with a payment schedule. Your first payment will be due in 60 days or less.
(16) Congratulations! You now have a Direct Consolidation Loan.
The best way to deal with the burden of educational debt is to minimize your borrowing and not incur unnecessary debt. It is important to consider your future career plans and likely income when deciding where you want to go to school and how you will be able to pay for it. Your repayment options, the availability of educational debt relief, and what type of debt you borrow should factor into your decisions.
Future Income and Borrowing
It is generally a good rule of thumb to cap the amount of money borrowed for law school at what you expect to make in a year. The idea behind this rule is that it would allow you to pay off your loans in ten years while only requiring you to make payments at 10 percent of your income. This is not an exact science since one cannot truly know their future income until actually receiving a job. However, companies like Glassdoor and Monster can provide average estimates for jobs in legal fields for which you may have interest. Additionally, talking to a career services officer or to professionals who work in your desired legal position can be a good way to estimate your future salary. Practically speaking, the real purpose of the rule is so that a person wanting to work a public service job making $50,000 does not end up with $160,000 in debt.
Determining the Real Cost of a Law School Education
Law school tuition is the starting point in assessing what your debt load may be, and it can vary dramatically from school to school. However, tuition is not the only factor in how much school will cost. You should look at the net price of each law school; net price includes tuition, fees, room and board and is a more accurate projection of what your total costs will be. You may find that schools with higher tuition have a lower net price – making those schools more affordable.
Law School Transparency provides an accurate depiction of what every ABA accredited law school would cost you. Additionally, consider sitting down or having a phone call with a financial aid officer at each of the law schools you are thinking of applying to; this will provide you with a better understanding of the cost of attending each institution. Ask those officers if there are any students that would be willing to speak with you as well. If you are able to speak with a student, ask questions regarding how much is spent yearly on books, the amount in rent they pay, what is an estimated monthly cost of groceries, and weekly gas costs. Any information you can receive will help you to better understand the total cost of attending a law school.
Residency and Law School Cost
One important consideration in determining law school cost is residency requirements. Fortunately, residency only affects tuition at state-supported schools (private schools generally have the same tuition regardless of where a student lives). If you are considering a state-supported school, learn its residency rules. You may be able to establish residency before applying or after your first year, which will impact your financial calculations. This can save you a lot of money in the long run, as state supported law schools, on average, charge non-residents $13,125 more in tuition. Currently, the only state supported law schools that do not charge nonresidents more than residents in law school tuition are Texas A & M, Penn State University – Dickinson, University of Akron, and Penn State University – University Park.
In California, Colorado, Florida, Kentucky, Missouri, New Jersey, Utah, North Carolina, Missouri, New Jersey, Utah, Ohio, and Tennessee, a student can become a resident after living in the state for 12 months. In the remaining U.S. states, residency can be accomplished, but many maintain a practice of excluding non-residents who are full-time students from becoming a resident.
Working While in Law School
Working to earn extra income while attending school can be a great help and may help minimize the amount you need to borrow. Presently, the American Bar Association allows law students to work up to 20 hours a week while enrolled in 12 hours of classes or more. Take advantage of these 20 hours; use them to gain experience in a legal environment, or to learn valuable skills.
Chances are your law school has a career site, usually via Symplicity.com or a similar platform, that posts part-time jobs. You could consider becoming a Research Assistant for a law professor, or student representative for a bar-prep company, such as Kaplan or Barbri. These companies, in exchange for student outreach, often provide a semester stipend in addition to discounted or free access to their bar-prep courses.
Free Application for Federal Student Aid
You should explore the availability of financial aid at any law school to which you apply, and never assume you won’t qualify. To minimize your debt load, exhaust all financial aid options before turning to loans.
The first step you must take is to fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA is required to secure access to federal student aid (this includes federal grants in addition to federal loans). Many states and institutions also use information from the FAFSA to determine eligibility for their different grant and loan programs. If you don’t fill out the FAFSA, you will lose the opportunity to receive this assistance.
Don’t make the mistake of thinking the FAFSA is not worth your time. Many students qualify for some form of aid. Even if you are not eligible for a grant or scholarship, you cannot borrow federal loans without filling out the FAFSA.
How to fill out the FAFSA?
(1) Know the deadlines: Each year, beginning October 1, a new FAFSA is available at www.fafsa.ed.gov. The federal deadline for submission of the application is generally the end of June, but some states and institutions have earlier dates, so make sure you file by any applicable deadlines. You can find individual state deadlines here. For individual law school deadlines, contact the school’s financial aid office.
Note: For those who have filled out a FAFSA previously, you may be used to the FAFSA opening January 1. However, starting with the 2016-2017 FAFSA, the application opens on October 1. Please make note of this earlier deadline, as many schools and state grant programs have moved up their deadlines as a result of the FAFSA application opening date change.
(2) Access the application by going to fafsa.ed.gov.
(3) Provide either your name and FSA ID, or your full name, social security number, and date of birth.
Note: If you do not have an FSA ID, you can acquire one at https://fsaid.ed.gov/. The FSA ID took the place of the FAFSA pin code in 2015.
(4) Click the year applicable to the school year you are requesting funds. For students borrowing for fall of 2022, the application year would be 2022-2023.
(5) Upon selecting the appropriate application year, you will be brought to an introduction page with a series of links that provide you additional information about the FAFSA. Click next.
(6) You will then access the “Student Demographic” page. This page will require you to provide basic information about yourself including name, address, state of residency, email address, and phone number. Once this information is filled out, click next.
(7) You will then come to the “Student Eligibility” page. This page will require you to provide information about your citizenship, high school graduation year, the type of educational program you will be entering, whether you want to be considered for work-study, whether you were ever in foster care, how much education was completed by your parents, and whether you have prior criminal convictions that could stand in the way of you receiving federal financial aid. Click next.
Note: Being convicted of selling or possessing drugs is a potential bar to receiving federal financial aid. More information on how drug crimes affect your ability to receive federal financial aid can be found in the FAQs section.
(8) You will then be asked to provide information about your high school. Provide this information and click next.
(9) You will now be asked to add up to 10 law schools where you would like your application results to be sent. It is recommended that you send this information to every law school you have sent an application. Additional schools can be added later. Choose your law schools and then click next.
(10) You will then be asked to list your housing plans for each of the law schools selected. You can choose between on-campus, off-campus, or with parent. Select the applicable choice and click next.
(11) You will be asked about your dependency status, and will have to answer questions about your children, and whether anyone still claims you as a dependent on their taxes. Once you answer these questions, you will be classified as either independent or dependent. If you are considered dependent, you will be required to answer questions about your parents or legal guardians. If you are considered independent, you will be able to skip the parent/legal guardian information. In either case, click next.
(12) Next, you will be asked to provide information from your most recent tax return. This information can be auto-filled by clicking the “Link to IRS” button at the bottom of the page. You will be asked to provide your FSA ID and password. Then, you will be transferred to the IRS website, asked security questions, and will then be given an option to transfer your most recent tax information back to the FAFSA.
Note: You will not be using your prior year tax return but the tax return from two years prior.
(13) Upon returning to the FAFSA website, double check the transferred information, and fill in any missing information. Click next.
(14) You will then be able to electronically sign your FAFSA. Upon doing that, click “submit my FAFSA now.”
(15) You will then be taken to a confirmation page. This page will also be sent to the email address that you provided in the application. At the bottom of the page, you will be provided with an “Estimated Expected Family Contribution (EFC).” This number is a rough estimate of how much the federal government estimates you can provide out-of-pocket toward your law school education.
(16) You’re done! Lean back and relax. Law schools generally receive the results of your FAFSA information within 10-14 business days. Within 3-5 business days you will receive an email stating that your FAFSA has been processed. This email will contain a link where you may access your Student Aid Report (SAR), which is the official information used by law schools to calculate your financial aid package.
- Many grants – which is aid that does not need to be repaid – are limited and may be distributed early in the year, therefore you should submit your FAFSA as soon as possible.
- The FAFSA must be submitted every year that you seek to receive federal financial aid.
- This process may seem complicated when laid out in multiple steps, however the entire process (minus waiting for the actual application results to return) takes only about 15-20 minutes to complete. There are currently discussions among members of Congress on how to simplify this process for the future using four easy steps. However, for the current financial year, the steps outlined above are required.
- The Department of Education has a FAFSA guide that provides guidance for each individual FAFSA question. You can access the guide here.
Scholarships and Grants
As noted above, the FAFSA is a great first step for finding scholarships and grants. However, the application will only determine whether you are eligible for funding from the federal government. It is also a good idea to research private sources of funding to determine what additional funds may be available.
A good place to start is the financial aid offices of the law schools to which you are applying. If you decide to call schools to discuss law school costs, (as recommended above), this would be a good time to inquire about scholarship opportunities as well. Make sure to get information about the requirements for academic performance, diversity, or financial need, as well as any and all deadlines. Write this information down and keep a separate list for each school.
In evaluating any law school’s scholarship program, consider the following:
- The total amount of financial aid available;
- How competitive you will be for the number of slots available;
- Any obligations you will have in exchange for the funds.
Outside of scholarships offered by law schools, many independent, private scholarships exist with organizations like Discover Law, the American Bar Association, Scholarships.com, FastWeb, MALDEF, and Sallie Mae – each which offer their own scholarships programs and provide information about existing scholarships.
Additionally, the U.S. Department of Labor manages a scholarship database called Career One Stop. This program maintains listings for more than 700 different law school scholarships at any one time.
Federal Work-Study allows you to acquire a part-time job while in law school, provided that your FAFSA results determine you to be eligible. You will either work directly for your law school or outside the university, doing something in the public interest. Public interest work is “work performed for the welfare of the nation or community, rather than…for a particular interest or group.” This means that you cannot work in a position that results in displacing existing employees, involved in religious worship or sectarian instruction, or involving politics. However, you can be employed with a state legislature if the work performed is of a non-partisan fashion.
The law school will pay you at least once a month and you must earn at least minimum wage. However, you can also permit the school to allocate your work study compensation to pay expenses relating to attending law school, such as books or fees. Currently, work study recipients receive between $1,500 and $1,800 per semester.
Consider Relief That Can Help with Repayment
If you must borrow student loans, there are programs that can provide significant relief to ease the burden of repaying these loans. These include income-driven repayment plans and forgiveness for federal loans, as well as loan repayment assistance programs that help provide funds to make payments on your loans. Read Chapters 3, 4, and 5 to learn more. Also, review the differences between private and federal loans in Chapter 1: Understanding Your Student Loans to make sure you are borrowing eligible loans. To learn what you should look for in these programs and how they can significantly reduce your educational debt burden, register for a free informational webinar hosted by Equal Justice Works.
- Law School Admission Council’s Law School Financial Aid Guide: A general overview on financing law school.
- The Department of Education’s Federal Student Aid Center
- The Department of Education’s College Affordability and Transparency Center
- Studentloans.gov: Your source for information from the U.S. Department of Education about how to manage your student loans. You can complete counseling (Entrance, Financial Awareness and Exit), manage repayment, and more.
- The Consumer Financial Protection Bureau’s (CFPB) Student Debt Repayment Assistant
- The Washington School of Law at American University maintains a great database of outside scholarships that can be found here.
Graduating from law school is bittersweet. A sense of accomplishment and the chance for new experiences can be sweet, but upcoming loan repayment may present a bitter counterpart. Fortunately, income-driven repayment (IDR) plans can relieve the stress of coping with law school debt by allowing you to repay loans with monthly payments based on a percentage of your income.
There are two broad categories of repayment plans; balance based plans and IDR plans. This e-book will discuss balance based plans briefly for your reference, but the majority of this chapter will focus on IDR plans.
Balance Based Plans
Balance based plans are plans where payments are not based on income; they are calculated at amounts guaranteed to pay off the entire loan within a fixed period of time. There is no loan forgiveness under balanced based plans. These payment plans apply to both Direct and FFEL loans, including consolidation loans.
- Standard: Under the standard balance based plan, you would make fixed payments over the course of 10 or more years. The payments would be a minimum of $50, regardless of loan balance. Payments will always be enough to cover accrued interest.
- Graduated: Under the graduated based plan, payments start out low and increase every two years. Like the Standard plan, payments under this plan are made for ten years. Payments will always be enough to cover accrued interest. Graduated payments may triple with every increase, so borrowers considering this plan should keep in mind that the ability to afford the initial payment amounts may not indicate the ability to afford subsequent payments.
- Extended: The extended balanced based plan is an option for borrowers who have had no federal loans as of October 7, 1998, and who have a loan balance of more than $30,000. If you qualify, you can repay your loans with either fixed or graduated payments with a repayment term of up to 25 years.
Note: The Standard Repayment Plan term is ten years unless you have consolidation loans. In this case, the term length extends up to thirty years depending on how much you possess in loan balance at the time you apply for consolidation. For more information, visit the section on loan consolidation.
Income-Driven Repayment (IDR) Plans
With IDR plans, your monthly payments are based on a percentage of your discretionary income. The more income a borrower has, the higher the payments will be; less income brings lower payments. The unpaid loan balance is cancelled after payments are made for a period of time.
There are four types of IDR plans:
Revised Pay As You Earn “REPAYE Plan”
Pay As You Earn “PAYE Plan”
Income Based Repayment “IBR Plan”
Income Contingent Repayment “ICR Plan”
All IDR plans calculate monthly payments at a percentage of a borrower’s discretionary income. So, what is discretionary income?
The federal student loan definition of discretionary income is:
“For Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn, discretionary income is the difference between your adjusted gross income (as determined by your most recent tax return or alternative documentation) and 150 percent of the poverty guideline for your household size and state of residence. For Income-Contingent Repayment, discretionary income is the difference between your adjusted gross income (as determined by your most recent return or alternative documentation) and 100 percent of the poverty guideline for your household size and state of residence.”
For 2022, the federal poverty guidelines were:
Household Size: Be sure that you understand how to calculate your household size. Your household size includes you, your spouse – if applicable, and your children, provided that the children will receive more than half their support from you, regardless of whether you claim them for tax purposes. This includes unborn children who will be born during the year for which you certify your household size. Household size also includes other people who currently live with you, people who currently receive more than half their support from you, and who will continue to receive this support from you for the year that you certify your household size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs.
Loan Cancellation Provisions
All IDR plans provide for taxable loan cancellation after you have made payments while enrolled for either twenty or twenty-five years. Once the applicable payments have been made, ALL unpaid loan principal and interest is cancelled. The full amount cancelled is then reported to the IRS via a 1099-C, commonly called the “cancelled debt form.” This may result in a tax bill during the tax year when the Department of Education files the 1099-C on your behalf. Note that the Consolidated Appropriations Act of 2021 provides for tax-free loan cancellation through December 31, 2025.
While any remaining loan principal and interest will be cancelled at the end of the repayment period that corresponds to your enrolled IDR plan, you could end up paying off the loan in full prior to receiving cancellation. The Department of Education notes “whether you will have a balance left to be forgiven at the end of your repayment period depends on a number of factors, such as how quickly your income rises and how large your income is relative to your debt. Because of such factors, you may fully repay your loan before the end of your repayment period.”
Income Driven Repayment (IDR) Plan Request Form
If there is one form you should be familiar with when considering repaying your loans under IDR plans, it is the Income Driven Repayment (IDR) Plan Request Form. A sample version of this form can be found here.
Note: When selecting an IDR plan in “Section 2: Repayment Plan or Recertification Request,” you may choose the “I want the income-driven repayment plan with the lowest monthly payment” option. However, if you select this option, your loan servicer may place you in the wrong payment plan for your current situation.
This most often occurs with the REPAYE and PAYE plans. Both plans require that you pay 10 percent of your discretionary income. However, the REPAYE plan possesses no payment cap like the PAYE plan, so over time, you may pay more, even though the payment amounts are the same today. The PAYE plan provides cancellation after 20 years, while the REPAYE plan requires 25 years for cancellation for borrowers with graduate and professional loans, and 20 years for borrowers with only undergraduate loans. Additionally, if you switch into a different repayment plan later, all your accrued interest capitalizes. It is advisable to select what you project will be your best long-term option.
The Repayment Plan or Recertification Request form can also be filled out electronically by:
- Going to StudentAid.gov
- Logging in with your FSA ID and password.
- Choosing “Manage Loans” from the upper menu
- Clicking the arrow for “Applying for an Income Driven Repayment Plan” and following the instructions. This form is then sent directly to your loan servicer for processing.
The Repayment Plan or Recertification Request form is important for several reasons:
- To enroll in an IDR plan for the first time.
- To submit information required for the annual recertification of income.
- To have your monthly payment amounts under your IDR plan recalculated, (based on a change in financial circumstances or household size) between annual re-certifications.
- To change IDR plans.
Selecting an Income Driven Repayment (IDR) Plan for the First Time
When you enter repayment for the first time, and you decide an IDR plan is the way to go, you must formally enroll in the IDR of your choice. Enrollment happens in a few easy steps.
(1) Get an FSA ID and password. You can do this at https://fsaid.ed.gov/
(2) Determine what types of federal loans you have. You can do this via StudentAid.gov
(3) Determine what IDR plans you qualify for. You can find out how to qualify for various repayment plans in the individual IDR sections below.
(4) Decide on an IDR plan.
(5) Fill out an Income-Driven Repayment (IDR) Plan Request Form. If possible, this form should be filled out within the last two months of your grace period, in order to provide time for processing. However, in the event you do not possess such a grace period, your loan servicer can also grant a forbearance for up to 60 days, in order to give the loan servicer time to process your request form.
(6) This form can be filled out on paper and mailed to your loan servicer, or filled out online at the Federal Student Aid website. StudentAid.gov website. The most common way to verify income is by providing your loan servicer with your most recent tax return. In the event you fill out the Income-Driven Repayment (IDR) Plan Request Form online, you can simply provide verification of your income information via the IRS Data Retrieval Tool. This tool electronically fills in your tax information from your most recently filed return in lieu of you having to provide your loan servicer with an official copy of your return.
(7) Provide your loan servicer with proof of your income. Income includes money earned from any taxable source including employment, unemployment income, dividend income, interest income, and tips, but does not include income from untaxable sources such as Supplemental Security Income, child support, food stamps, or other state of federal public assistance.
Note: If you cannot provide your loan servicer with a tax return, or if your income has changed since you filed your last tax return, you can provide alternative documentation of your income. Alternative documentation can include a pay stub, letter from an employer that lists your gross pay, or a signed statement explaining each source of your income that lists the name and address of each source of income.
(8) After your request form has been processed, your loan will determine your eligibility for your requested plan. If approved, the loan servicer will calculate your monthly payment and create for you a 12-month payment schedule. You can then retrieve your payment schedule from your loan servicer (typically by logging into your account with the loan servicer).
(9) After completing steps 1-7, you are officially enrolled in an IDR plan. Make your payments on time!
Federal law requires you to provide your loan servicer with an annual recertification of your income. For this reason the loan servicer only creates a 12-month payment schedule when you enroll in an IDR plan.
This recertification requires filling out a new Income-Driven Repayment (IDR) Plan Request form and sending it to your loan servicer. When filling out the form, select the option that states “I am submitting documentation for the annual certification of my income-driven repayment” where the form asks you to “select the reason you are submitting this form.” Failure to choose the correct option can result in your request form being processed incorrectly, and you being placed under a different plan with potential higher payments. You must accompany this form with your most recent tax return (or alternative documentation). As noted above, the request form can be filled out on paper or online at the Federal Student Aid website. If filled out online, you may also use the IRS Data Retrieval tool to provide the necessary income information for the recertification.
Note: Failure to provide your loan service with an annual recertification of income can have severe consequences.
PAYE: The borrower continues to repay their loans under the PAYE plan, however monthly payment amounts increase to what they would have been had you entered into the Standard Repayment Plan, (ten years) instead of the PAYE plan initially. Payments remain at this heightened amount until you recertify your income. Accrued interest also capitalizes.
ICR: The borrower continues to repay their loans under the ICR plan, however monthly payment amounts increase to what they would have been had you entered into the Standard Repayment Plan, (ten years) instead of the ICR plan initially. Payments remain at this heightened amount until you recertify your income. Accrued interest also capitalizes.
REPAYE: The borrower is removed from the REPAYE plan and placed in the REPAYE Alternative Plan. This plan calculates the monthly payment amount at a figure necessary to repay the outstanding loan balance in the shorter of ten years or the period remaining under the original REPAYE plan. The borrower remains in this alternative repayment plan until income is recertified. Accrued interest also capitalizes.
IBR: The borrower continues to repay their loans under the IBR plan, however monthly payment amounts increase to what they would have been had you entered into the Standard Repayment Plan (10 years) instead of the IBR plan initially. Payments remain at this heightened amount until you recertify your income. Accrued interest also capitalizes.
Changes in Financial Situation/Household Size
You are only required to recertify your income annually. However, in the event your financial situation or household size changes between annual certifications, you can request your loan servicer to recalculate your payments. You would need to provide the loan servicer with a new Income Driven Repayment (IDR) Plan Request form as well as evidence documenting your change in financial circumstances.
Documentation must be included for all current taxable sources of income. This can include pay stubs, a letter from an employer, or evidence documenting loss of employment. Documentation of a change in household size is not necessary, but it must be marked on the request form. Recalculated payment amounts remain in place until your next required annual certification.
When filling out the request form, select the option that states “I am already in an income-driven repayment plan and am submitting documentation early because I want my loan holder to recalculate my payment immediately” as the reason you are filling out the form. Failure to select the correct reason could result in undesired changes to your monthly payment amount or the repayment plan you are enrolled within.
The loan simulator, provided by the Department of Education, allows borrowers to calculate their monthly loan payments for federal student loans under any of the balance based or income-driven repayment plans. To use the loan simulator, simply input your annual gross income (AGI), family size and the amount of loans where indicated and the calculator does the rest. The calculator even allows you to log in with your FSA ID and password to have your loan amounts populated automatically to ensure the accuracy of the monthly payment amounts.
A few tips for using the loan simulator:
- To get the most realistic results, provide complete and accurate information when using Loan Simulator.
- Keep in mind, this tool can’t predict your future payments with 100% accuracy.
- In order to make these predictions, Loan Simulator makes several assumptions as it calculates monthly repayment amounts.
- Learn more about the assumptions here: https://studentaid.gov/loan-simulator
Income-Based Repayment (IBR) Plan Established by the College Cost Reduction and Access Act of 2007, the income-based repayment (IBR) plan can reduce your monthly payments and help make repaying your educational debt manageable. Borrowers are eligible for two forms of repayment terms under the IBR plan depending on if they are a “new borrower” or not. A new borrower is a borrower who has had no federal loans under the FFEL or Direct Loan program as of July 1, 2014. A new borrower can have no federal loans if you didn’t take out a loan before July 1, 2014 or if you had previously taken out a loan and it is now paid in full.
If you are not a new borrower, the IBR plan will max out monthly payments at 15 percent of your discretionary income, and cancel the unpaid balance of your loans after twenty-five years. If you are a new borrower, the IBR plan will cap monthly payments at ten percent of your discretionary income and cancel the unpaid balance of your loans after twenty years.
Qualifying for the Income-Based Repayment Plan
To qualify for the IBR plan, you must have a (1) partial financial hardship and (2) eligible loans.
You have a partial financial hardship if the annual amount due on all of your eligible loans under a standard 10-year repayment plan would exceed 10 percent of your discretionary income if you are a new borrower, and 15 percent if you are not a new borrower. Think of partial financial hardship in these terms: If your monthly loan payment under an IBR plan will be lower than your monthly payment under a Standard Repayment Plan with a 10-year repayment period, then you have a partial financial hardship.
Eligible IBR loans include:
- Loans borrowed under the FFEL or Direct Loan Program with the exception of loans borrowed by a parent or guardian to fund a child’s education, or Direct Consolidation loans used to repay these loans, and loans in a default status.
- Federal Perkins Loans are only eligible when part of a FFEL or Federal Direct Consolidation Loan. However, Perkins Loans include their own cancellation provisions. Before consolidating a Perkins Loan, you should consult with the school from which you obtained the loan, to find out whether you can benefit from cancellation. These provisions will be lost if Perkins Loans are consolidated.
Note: Loans from state or private lenders are never eligible for federal income-driven repayment plans or Public Service Loan Forgiveness. Avoid borrowing private loans if you want to preserve the ability to enroll all of your loans in an IBR plan.
Paying under the IBR Plan
As long as you are in a partial financial hardship status, and remain in the IBR plan, the amount you pay monthly will be capped at either 10 percent of your discretionary income (for new borrowers), or 15 percent (for non-new borrowers).
Because your monthly payment amount is based on your income and household size, rather than the amount you owe, your monthly payment increases as your income increases. If your income decreases, your monthly payment amount will also decrease.
However, if your income increases to a point where you no longer have a partial financial hardship, your payment amount will no longer be based on your income. Instead, it will be set at what you would have paid if you had entered a standard 10-year repayment plan when you first entered the IBR plan. In this case, switching to either the graduated or extended repayment plans would lower your monthly payments; however it would also remove your eligibility for loan forgiveness and potentially result in accrued interest capitalizing.
In addition to lowering your monthly payments based on income, if you enroll in the IBR plan and still are repaying your loans after twenty or twenty-five years (excluding time spent in forbearance or deferment other than an economic hardship deferment) any principal and interest remaining on your loans will be cancelled.
Note: The federal poverty rate is updated annually. Examples in this report make reasonable assumptions regarding expected increases in the poverty rate over time, but actual increases may vary.
A Look at How the IBR Plan Helps Dara Defender
The IBR plan has two versions. One for “new borrowers” and one for everyone else. As discussed above, a “new borrower” is a person without any unpaid loans from the federal Direct or FFEL programs as of July 1, 2014. For the following example, we are assuming that Dara is not a new borrower.
Dara has an adjusted gross income of $35,000. She has $75,000 in Direct PLUS Loans. Dara is single and thus has a household size of 1. Could Dara benefit from the IBR plan?
First, let’s see if Dara is eligible for IBR.
Does Dara have eligible loans?
Yes. Dara has $75,000 in Direct PLUS Loans.
Does Dara have a partial financial hardship?
Yes. Dara has a partial financial hardship as long as her payments under the standard 10-year repayment plan exceed 15 percent of her discretionary income. Using the loan simulator Dara determined that 15 percent of her discretionary income would be $215.00 while her Standard Repayment Plan amount would be $844. Since $215.00 is lower than $844, Dara has a partial financial hardship and may repay her loans under the IBR plan.
Reminder: If the loan simulator does not provide a figure for the IBR monthly payment amount, this means you do not have the required partial financial hardship necessary to enter into the IBR plan.
Since Dara is eligible to participate in IBR, let’s explore how much money Dara could save using this plan, compared to other repayment options. To do so, we will use the loan simulator provided by the Department of Education.
|Repayment Plan||First Monthly Payment||Last Monthly Payment||Total Amount Paid||Projected Loan Forgiveness||Repayment Period|
|Extended Fixed||$497||$497||$149,122||$0||300 months|
|Extended Graduated||$394||$733||$161,985||$0||300 months|
|Revised Pay As You Earn (REPAYE)||$143||$681||$107,639||$72,055||300 months|
|Pay As You Earn (PAYE)||$143||$507||$71,171||$98,329||240 months|
|Income-based Repayment||$215||$844||$156,953||$25,508||300 months|
|IBR for New Borrowers||$143||$507||$71,171||$98,329||240 months|
|Income-Contingent Repayment (ICR)||$385||$745||$137,149||$0||226 month|
The benefits and disadvantages for Dara in using the IBR plan include:
- Her payments start out as low as $215. Under the Standard 10-Year, Graduated or Extended repayments plans, payments start out between $394 and $844 per month
- She can get over $25,000 in unpaid loan and interest cancelled after making payments for 25 years
- Dara will pay more over time ($156,893) under the IBR plan than she would pay under the Standard 10-year ($101,280) repayment plan.
- She will also have a much longer repayment period – 25 years under IBR, compared to ten years under Standard 10-year repayment plan.
The PAYE Plan was first proposed in October of 2011, and officially unveiled at Colorado University by then President Obama, and then First Lady Michelle Obama. At the unveiling, President Obama noted that his inspiration for creating the repayment plan was his own personal experience paying off $120,000 in debt. The plan became effective on December 21, 2012.
The PAYE plan requires you to pay 10 percent of your discretionary income for 20 years. After 20 years, all outstanding loan balance is cancelled.
Qualifying for the PAYE Plan
There are three requirements that borrowers must meet to be eligible for the repayment provisions offered by the PAYE plan: (1) They must be considered a new borrower under the plan, (2) They must have a “partial financial hardship,” and (3) they must have eligible loans.
Requirement #1: The borrower must be considered a “new borrower” under this plan. Only borrowers who take out loans after a certain date are eligible for the plan. This requirement has two prongs:
- First, you must borrow your first federal loan on or after Oct. 1, 2007. If you had federal loans from before Oct. 1, 2007, you still can meet this test if you completely repaid those loans before taking out a new loan on or after Oct. 1, 2007.
- Second, you must either receive a new loan, receive a disbursement on an existing loan, or consolidate your loans on or after October 1, 2011.
As a result, many borrowers with loans from 2007 or earlier, as well as students who graduated in 2011 or earlier, and borrowers already in repayment will not be able to benefit from these changes. However, if you do not meet these requirements, you still may be eligible for the REPAYE, IBR or ICR plans.
Requirement #2: Eligible borrowers must also have a partial financial hardship in order to enroll in the plan. You meet this threshold if the annual amount due on your outstanding Federal Direct and FFEL Loans, under a standard 10-year repayment plan would exceed 10 percent of your “discretionary income.”
Note: The inability to enter into the PAYE plan now due to a lack of a partial financial hardship, does not mean you can never repay your loans under this plan. Any decrease in income or increase in household size may result in you possessing a partial financial hardship in the future.
Requirement #3: PAYE can only be used to repay eligible loans. Eligible loans include:
|Direct Subsidized||Direct Unsubsidized||Direct Grad PLUS||Direct Consolidation||FFEL Loans If converted into a Direct Consolidation|
Loans that are not eligible include the following:
- Unlike IBR, FFEL Loans are not eligible for repayment in the PAYE plan. Any FFEL Loans must first be consolidated into a Direct Consolidation loan before you may enroll in the PAYE plan.
- Parent PLUS Loans are not eligible for repayment in the PAYE plan.
- Federal Perkins Loans are only eligible for repayment in the PAYE plan when they are part of a Federal Direct Consolidation Loan. Remember to consult with the school from which you obtained your Perkins Loan before consolidating it in order to find out whether you can benefit from Perkins cancellation. These provisions will be lost if Perkins Loans are consolidated!
- Federal loans in default cannot be repaid under the PAYE plan.
Paying under the PAYE Plan
As long as you maintain a partial financial hardship, you will never pay more than 10 percent of your discretionary income toward your student loan payments under the PAYE Plan.
Because your monthly payment amount is based on your income and household size, rather than the amount you owe, your monthly payment increases as your income increases. If your income decreases, your monthly payment amount will also decrease.
In addition to lowering your monthly payments based on income, if you enroll in the PAYE plan and still are repaying your loans after 20 years (excluding time spent in forbearance or deferment other than an economic hardship deferment) any principal and interest remaining on your loans will be cancelled.
However, if your income increases to a point where you no longer have a partial financial hardship, your payment amount will no longer be based on your income. Instead, it will be set at the amount you would have paid if you had entered a standard ten-year repayment plan when you first entered the PAYE plan. In this case, switching to either the graduated or extended repayment plans might lower your monthly payments, but would also remove your eligibility for Public Service Loan Forgiveness, removing the possibility of loan cancellation in 20 years, and potentially result in accrued interest capitalizing.
A Look at How the PAYE Plan Helps Dara Defender
Dara Defender graduated with $65,000 in eligible unsubsidized federal loans. She has a disabled sister for whom Dara provides 80 percent of support. Dara is single and has two children. This means Dara has a household size of 4. Her loans have a 6.8 percent interest rate. Dara took a job earning an adjusted gross income of $60,000.
Does Dara qualify to repay her loans under the PAYE plan?
Remember that Dara must meet three requirements to enroll in the PAYE plan: (1) have a partial financial hardship, (2) be a new borrower, (3) have eligible loans.
Does Dara have a partial financial hardship?
Yes. Under the Standard repayment plan, Dara would have monthly payments of $748 but would only have payments under the PAYE plan of $196. Because Dara’s payments under the PAYE plan would be lower than her payments under the Standard plan, Dara has a partial financial hardship.
Reminder: You can easily use the loan simulator to determine whether you have a partial financial hardship. As noted above, if you log in and the loan simulator does not provide a monthly payment for PAYE plan (using your provided information), then you do not possess the required financial hardship and cannot repay your loans under the PAYE plan.
Is Dara a new borrower?
Yes. Dara had no unpaid federal loans as of October 1, 2007, AND she took out a Direct Loan after October 1, 2011. Because she meets both requirements, Dara is a new borrower for PAYE plan purposes.
Does Dara have eligible loans?
Yes. Because Dara took out her federal loans after 2011, Dara can only have Direct Loans. FFEL loans (the other type of federal loan that cannot be repaid under the PAYE plan) were no longer made after 2010.
Dara meets all three requirements for a PAYE plan and can repay her loans under this plan.
How will Dara benefit from the PAYE plan?
During her first year in the PAYE plan, Dara’s monthly payments will be $196 (almost $100 less than IBR for a non-new borrower). As noted above, Dara would pay more than three times as much – around $748 per month – under the Standard plan.
Let us assume Dara receives annual salary increases of five percent, with gradually rising monthly payments. She remains in the plan for 20 years and in year 20, Dara pays about $748 per month.
At the end of year 20, Dara has paid about $106,000 and her remaining balance of principal and interest (about $43,807) is cancelled.
Under a standard 10-year plan, Dara would have paid about $89,763 and would have had to pay about $748 per month, every month. Under an extended plan, Dara would have paid about $135,344 (twice the amount she borrowed) over 25 years and would have had to pay about $451 per month regardless of income. Under a graduated plan, Dara would initially pay about $431 per month, but these payments would rise gradually regardless of her income and she would pay about $96,590 over ten years.
Established by the Department of Education on October 27, 2015, the Revised Pay as You Earn (REPAYE) plan is a new income-driven repayment plan. The Department of Education made the plan available to student loan borrowers on December 17, 2015.
The REPAYE plan caps your monthly payment amount at 10 percent of your monthly income. If you are enrolled in the REPAYE plan, any outstanding balance is cancelled after 20 years of qualifying repayment if all loans were received for undergraduate study. For those with any graduate or professional study loans, any outstanding balance will be cancelled only after 25 years of qualifying repayment.
Qualifying for the REPAYE Plan
Like the ICR plan, the only qualification for entering into the REPAYE plan is having eligible loans. There is no requirement for when the loans were taken out and no requirement that borrowers have a partial financial hardship.
Eligible loans include:
|Direct Subsidized||Direct Unsubsidized||Direct Grad PLUS||Direct Consolidation||FFEL Loans If converted into a Direct Consolidation|
Loans that are not eligible include:
- Loans from state or private lenders are never eligible for repayment under the REPAYE (or any IDR) plan. Avoid borrowing private loans if you want to preserve the ability to enroll all your loans in REPAYE.
- Parent PLUS Loans are not eligible for repayment under the REPAYE plan. Federal consolidation loans that repaid Parent PLUS Loans are also ineligible.
- Federal Perkins Loans are only eligible when part of a Federal Direct Consolidation Loan. However, Perkins Loans include their own cancellation provisions. Before consolidating a Perkins Loan, you should consult with the school from which you obtained the loan to find out whether you can benefit from cancellation. These provisions will be lost if Perkins Loans are consolidated.
- Federal loans in default cannot be repaid under the REPAYE plan.
Paying under the REPAYE Plan
Under the REPAYE plan, payments are always 10 percent of your discretionary income, regardless of payment amount. This differs from the PAYE and IBR plans, where payments are capped at the amount you would have paid in a 10-year Standard Repayment Plan at the time you entered repayment. Borrowers with higher incomes may want to consult the loan simulator to ensure that remaining in the REPAYE plan would not result in a payment amount above what one may otherwise be able to pay under any of the other repayment plans.
Like the other IDR plans, the REPAYE plan also offers loan cancellation provisions. If you only have eligible loans from undergraduate studies, all unpaid loan principal and interest is forgiven after payments have been made for twenty years. However, if you have eligible loans for graduate or professional study, the cancellation period is extended from twenty years to twenty-five years.
Reminder: The amount cancelled is reported to the IRS via a 1099-c, or “cancelled debt” form. This could result in your assuming a tax liability in the year the cancellation occurs.
How Judy Justice Could Benefit from the REPAYE Plan
Judy Justice owes $165,000 in Direct Plus loans. Her loans have a 7.9 percent interest rate. She has a spouse, Tommy Tort, and two children, Susie and Jack. This means Judy has a family size of four.
Judy makes $75,000 a year, while her husband Jack remains at home with the children. Judy and Jack reside in Alabama.
Using the loan simulator, Judy gains the following benefits from the REPAYE plan:
- Under the REPAYE plan, Judy pays $318 a month. Assuming a five percent average increase in income annually, Judy can expect to pay $233,755 over the life of her loan. However, after making payments for 25 years, Judy can have $170,476 in loans cancelled.
- Judy would pay $1,812 under the Standard Repayment Plan (10 year), $1,058 under the Graduated Plan (with payments eventually rising to over $3,000), and $988-$1,543 under the Extended Repayment Plan (depending on whether or not Judy used the fixed or graduated payment option). Overall, Judy saves between $700 and $1,500 on her monthly payments by using the REPAYE plan, versus one of the balance based plans.
- While Judy will pay longer under the REPAYE plan than she would under the Standard Repayment Plan, she will pay a little more over the life of the loan while having much lower payments. Under the Standard Repayment Plan, Judy pays $217,000 over the life of the loan, while she pays $233,000 over the life of the loan under the REPAYE plan. The gains become even more prominent when you compare the total cost of the loan under the REPAYE plan to the total cost of the loan under the Extended or Graduated Payment plans. Under the Extended Repayment Plan, Judy will pay between $345,000 and $370,000 over the life of loan while making payments just as long as she has to make them under the REPAYE plan. Similarly, under the Graduated Plan, Judy pays $236,000 over the life of the loan. This is only $3,000 more than Judy pays over the life of the loan under the REPAYE plan. However, Judy would have to pay the $236,000 under the Graduated Repayment Plan in 120 months versus 300 months under the REPAYE plan.
- However, it is important to compare REPAYE to PAYE. Her initial payments start at the same $318 a month. But because REPAYE is not capped at the amount she would have paid in a 10-year Standard Repayment Plan, her estimated payments grow to $1,473 in REPAYE versus $1,098 in PAYE. Also, because she has PLUS Loans, Judy would receive cancellation five years later in REPAYE. As a result, she would pay far less overall in PAYE ($154,842) versus REPAYE ($233,755)
The ICR plan is the oldest IDR plan and payments under this plan tend to be higher than in other income-driven repayment plans. However, this plan is good for some borrowers. Most significantly, this is the only IDR plan that is accessible to borrowers with Parent PLUS loans and is their only path to earning Public Service Loan Forgiveness. In order to enroll in ICR and be eligible for Public Service Loan Forgiveness, borrowers must first consolidate their Parent PLUS loans into a Federal Direct Consolidation Loan. But, as noted earlier, borrowers may want to avoid combining Parent PLUS and non-Parent PLUS loans in the same consolidation loan.
Qualifying for the ICR Plan
Like the REPAYE plan (and unlike IBR and PAYE), the ICR plan requires no partial financial hardship. This means anyone can enroll in the ICR plan as long as they have eligible loans.
Eligible loans for the ICR plan include:
|Direct Subsidized||Direct Unsubsidized||Direct Grad PLUS||Direct
(Including consolidation loans
taken out after July 1, 2006
that were used to pay off
Parent PLUS Loans
Loans That Cannot Be Repaid Under the ICR Plan
- Loans from state or private lenders are not eligible for repayment under the ICR plan. Avoid borrowing private loans if you want to preserve the ability to enroll your loans in the ICR plan
- FFEL Loans are not eligible for repayment in the ICR plan. Any FFEL Loans must first be consolidated into a Direct Consolidation Loan before you may enroll in the ICR plan.
- Parent PLUS Loans are not eligible for repayment in the ICR plan. However, unlike the IBR plan, Direct Consolidation Loans taken out after July 1, 2006, that repaid Parent PLUS Loans are eligible for repayment in the ICR plan.
- Federal Perkins Loans are only eligible to be repaid under the ICR plan when they are first consolidated into a Direct Consolidation loan. Remember to consult with the school from which you obtained your Perkins Loan before consolidating it to find out whether you can benefit from Perkins cancellation. These provisions will be lost if Perkins Loans are consolidated.
Paying under the ICR Plan
Your lender or servicer will calculate your monthly payment amount using your discretionary income (including your spouse’s income if you file your taxes jointly), household size, and total outstanding eligible federal loans.
The ICR plan has special rules for calculating monthly payment amounts. Monthly payment amounts will be the lesser of:
- A monthly payment amount that would result in your federal loans being paid off in twelve years; OR
- A monthly payment amount that is equal to twenty percent of your discretionary income.
You can estimate your loan payments using the Department of Education’s Loan Simulator
As noted above, the ICR plan also has a cancellation provision that cancels any principal and interest remaining on your loans if you enrolled in the ICR plan and are still repaying after 25 years (time spent in forbearance or deferment other than an economic hardship deferment does not count).
Interest Accumulation and Capitalization
IDR Plans, have many perks, but also have some downsides. Two of these are interest accrual and capitalization.
Because IDR plans calculate your monthly payments based on a percentage of your discretionary income, rather than the amount necessary to pay off interest every month, you may accumulate large amounts of unpaid interest (often termed accrued interest). And since your monthly payments are required to be allocated to accrued interest first, it is possible that you could be paying off very little of the actual loan principal.
Aside from accrued interest, another downside to IDR plans is capitalization. Capitalization is defined as “the addition of unpaid accrued interest to the principal balance of your loan.” Capitalization results in an increase in the actual amount you pay, over the total life of the loan. Capitalization can be thought of as paying “interest on interest.”
Capitalization does not normally occur in IDR plans, but can occur in five circumstances with an IDR plan:
- Your discretionary income rises to a point where you no longer have a partial financial hardship (IBR and PAYE plans).
- You switch from an IDR plan to another repayment plan.
- You fail to recertify your income annually.
- While enrolled in an IDR plan, you enter into a forbearance or deferment. Upon the ending of each forbearance and/or deferment period, all accrued interest capitalizes.
- When enrolled in the ICR plan – but subject to the restrictions in the note below.
Note: Both the PAYE and ICR plans possess capitalization restrictions. Under these plans, capitalization will cease when the outstanding principal balance on your loans is 110% of what it was when you initially entered the PAYE or ICR plan(s).
Interest Accrual Protections under the IDR Plans
The PAYE, REPAYE and IBR plans do provide interest accrual protections. Under each plan, the government pays all accrued interest on subsidized loans or the subsidized portion of a consolidation loan for the first three years of repayment. The REPAYE plan provides an additional protection as the government also pays 50 percent of accrued interest after the three-year period ends.
- The ICR plan provides no interest accrual protections but does, as noted above, limit the amount of interest that can be capitalized.
- The COVID-19 emergency relief measures set the interest rate on federally-held student loans to zero percent from March 20, 2020, through August 31, 2022.
Married Borrowers and the IDR Plans
If you are married while repaying your federal student loans, it is important to understand how your spouse’s federal student debt and income can affect your monthly payments under an IDR plan.
For the purposes of determining a partial financial hardship (PAYE and IBR): Your spouse’s annual gross income (AGI) and federal student debt is combined with yours to determine if you have the necessary partial financial hardship to enroll in the plan. However, this only occurs if you file your taxes “married jointly.” If you file your taxes married separately, then only your AGI and federal student debt will be considered.
If you do decide to file your taxes “married jointly”:
When calculating a partial financial hardship, you add the total federal loan amount for you and your spouse, add your AGIs, and then calculate as normal. You simply consider: would the Standard Repayment Plan (10 years) monthly payment on the combined federal student debt be more than ten percent (PAYE and IBR-new borrowers) to fifteen percent (IBR-old borrowers) of combined discretionary income? If so, you and your spouse possess the necessary partial financial hardship, and both of you can repay your loans under the PAYE and/or IBR plans.
For the purposes of calculating monthly payments (all plans):
REPAYE: Both you and your spouse’s income and federal student loan debt is used to calculate monthly payment amounts, regardless of whether you file your taxes “married jointly” or “married separately.”
PAYE, IBR, and ICR: Both you and your spouse’s income and federal student loan debt is used to calculate monthly payment amounts if you file your taxes “married jointly,” and not “married separately.”
Even if your spouse’s income and debt is considered, your monthly payments are based on your own portion of the total federal student loan debt and your spouse’s are based on his/hers. Consider the following example:
Bob and Sherry, a married couple, possess a household AGI of $160,000, each making $80,000 a year. Bob has $150,000 in federal loans, and Sherry has $300,000 in federal loans. What would each person be required to pay under the IDR plans?
- First, ask how much you want to pay under an IDR plan based on combined federal student loan debt and combined AGI.
Bob and Sherry have a combined AGI of $160,000 and a combined federal loan debt of $450,000. They would pay $1,695 under IBR, $1,130 under PAYE, $1,130 under REPAYE, and $2,076 under ICR.
- Second, you must determine what portion of the total monthly loan payment each person is responsible for.
To do this, as noted above, you ask what portion of the combined federal loan balance you are responsible for, then multiply that amount by the total loan payment.
Since Bob has $150,000 of the $450,000 in total loans, he has one-third of the total loan debt. This means that Bob pays one-third of the required monthly payment under each of the IDR plans. Bob would be responsible for monthly payments of $377 under REPAYE, $377 under PAYE, $565 under IBR, and $692 under ICR.
Sherry has $300,000 of the $450,000 in total loans and occupies two-thirds of the total loan debt. This means that Sherry pays two-thirds of the required monthly payment under each of the IDR plans. Sherry would be responsible for monthly payments of $754 under REPAYE and PAYE, $1,130 under IBR, and $1,384 under ICR.
Reminder: The loan simulator can also do calculations for married borrowers. This example is for informative purposes.
Another point to emphasize when discussing the effect of spousal income and debt on your monthly payments under the IDR plans is the Repayment Plan exception.
As noted above, all IDR plans except the REPAYE plan only consider the spouse’s income and debt if taxes are filed married jointly and not married separately. This gives you more choice to decide when you want to use your spouse’s information and when you do not.
However, for the REPAYE plan, the spouse’s information is ALWAYS used. This can sometimes make the REPAYE plan undesirable, despite the plan requiring you pay the lowest amount of discretionary income (ten percent) on your federal student loan payments.
Example: Suzie and Jeff, a married couple, possess a household AGI of $150,000, each making $75,000 a year. Suzie has $120,000 in federal loans; Jeff has no federal student loans. What would Suzie be required to pay under the IDR plans?
Under the PAYE plan, if Suzie files her taxes married separately, she would pay $422 a month on her loans. However, under the REPAYE plan, Suzie would pay $1,047 a month in student loans, regardless of how she files her taxes.
The REPAYE plan’s requirement of always considering the spouse’s information can get expensive. In cases where the spouse is a high earner, it may be worthwhile to consider other IDR plans, even where the percentage of discretionary income you pay is higher. For example, under the IDR plan, which requires fifteen percent of discretionary income as compared to the ten percent required by the REPAYE plan, Suzie still only pays about $633 a month if she files taxes “married separately.”
Note: Regardless of how you file your marital tax returns, if you are separated from your spouse or unable to reasonably access your spouse’s income information, only your individual income will be used to calculate your monthly payment amount under any of the IDR plans.
An IDR plan may not work for you throughout the entire repayment of your loan(s). It is important to understand not only when you can switch plans, but also what are the consequences associated with switching an IDR plan.
Generally, you can switch between payment plans at any time. You can switch between IDR plans, from an IDR plan to a balance based plan, or from a balance based plan to an IDR plan. In fact, the only restriction on switching between plans is that when switching from an IDR plan to a balance based plan, or from a balance based plan to another balance based plan, you cannot switch to a balance based plan with a length of time less than the time you have already spent in repayment.
For example, if a borrower made 11 years of payments under the PAYE plan, that borrower could not switch to a Standard Repayment Plan (10 years). Similarly, a borrower who made 12 years of payments under the Extended Repayment Plan could not switch to the Standard Repayment Plan (10 years).
What are the consequences if I switch plans?
There are three matters to consider when it comes to switching plans:
- First, accrued interest always capitalizes when switching between plans. When switching from a balance based plan to an IDR plan, this is not relevant since balance based plans prevent interest from accruing. However, capitalization should be considered when switching between IDR plans or from an IDR plan to a balance based plan since IDR plans often result in large amounts of accrued interest.
- Second, if you switch from the IBR plan to another IDR plan or balance based plan, you must switch to a Standard Repayment Plan (10 year) first, make one payment under the Standard Repayment Plan (10 year), and then switch to the plan you desire (unless of course the Standard Repayment Plan was your desired plan). If you cannot afford the required Standard Repayment Plan (10 year) payment, you can request your loan servicer reduce the required payment to $5 via a reduced payment forbearance. Only the IBR plan requires this step. Individuals in the PAYE, REPAYE and ICR plans may switch to another IDR plan or balance based plan without making this additional Standard Repayment Plan (10 year) payment.
- Third, if you switch from an IDR plan to a different IDR plan, or from a balance based plan to an IDR plan, you must certify your income. If you request an IDR plan via the Income Driven Repayment (IDR) Plan Request Form, but do not certify your income, you will automatically be removed from your existing plan and placed in the Standard Repayment Plan (10 years) until you certify your income. Once certification of income is completed, you are then placed in the IDR plan you desired.
If I switch plans, what will my new repayment period be?
Your new repayment period will depend on the plan you have chosen to switch to. For the standard, extended, and graduated plans, the repayment period is the period provided under the new repayment plan, calculated from the day your federal loan first entered repayment. For example, if you have been repaying under the ICR plan for 5 years, and switch to a standard ten-year payment plan, your new payments will be calculated at an amount necessary to pay off your remaining loan balance in five years.
Note: Switching from an IDR plan to a balance based plan, means that you forfeit access to the loan cancellation provisions offered under those IDR plans as well as access to Public Service Loan Forgiveness.
Under the IDR plans, which have cancellation provisions, the rules are similar but slightly different. If you switch from an IDR plan to another IDR plan, or balance based plan to an IDR plan, your repayment period for the new IDR plan is the amount of time necessary to receive cancellation under the new IDR plan (including time spent in repayment in other plans). For example, if you made payments under the PAYE plan for 4 years then switched to the REPAYE plan, you would achieve loan cancellation after 21 years (as the REPAYE plan provides for loan cancellation after 25 years).
Note: The rules for IDR plan repayment periods are the same, regardless of how many times you switch plans. For example: If Peter Prosecutor made 2 years of monthly payments under the Standard 10-Year Repayment plan, then switched to the REPAYE plan where Peter made 7 years of monthly payments, Peter would qualify for loan cancellation after 11 years if Peter switched to the PAYE plan (which offers loan cancellation after 20 years).
Below are a few examples that compare IDR plans. All of these examples use the loan simulator. Unless otherwise noted in the example, we assume that your income will grow 5% each year, that your family size will remain the same during the life of the loan, and that the poverty guidelines will increase based on the Congressional Budget Office’s estimation of inflation. In the event income changes, so will monthly payment amounts under the IDR plans will also change.
Paul is single with $100,000 in FFEL Grad Plus Loans. He has a household size of 1. What will Paul pay under the various payment plans?
- Standard: $1,110 per month for 120 months with a total loan cost of $133,225.
- Graduated: $635-$1905 for 120 months with a total loan cost of $142,120.
- Extended (fixed payments): $644 per month for 300 months with a total loan cost of $193,290.
- Extended (graduated payments): $500-$970 per month for 300 months with a total loan cost of $210,289.
- IBR (at 15 percent): $586 per month for 300 months with a total loan cost of $175,800.
Reminder: Since Paul has FFEL loans, he cannot participate in the PAYE, REPAYE and ICR plans.
As you can see from the example above, Paul benefits greatly from the IBR plan, as he makes half the monthly payment he would be required to make under the Standard Repayment Plan. Though he pays approximately $30,000 more over the life of the loan under the IBR plan than he would under the Standard plan, he has 64 more months to pay it.
Paul marries and converts his $100,000 in FFEL loans to a Direct Consolidation Loan. Paul’s wife makes $50,000 a year and has no federal student debt of her own. Paul and his wife file their taxes as married filing separately. What would Paul pay on his loans under the various repayment plans?
- Standard: Paul pays $600 per month for 360 months with a total loan cost of $215,838.
Graduated: Paul pays $500-$818 per month for 360 months with a total loan cost of $232,868. Since Paul consolidated his loans, his Standard and Graduated Repayment Plan periods extend from 10 years to 30 years.
- Extended (fixed payments): Paul pays $644 per month for 300 months with a total loan cost of $193,290.
- Extended (graduated payments): Paul pays $500-$970 per month for 300 months with a total loan cost of $210,289.
- REPAYE: Paul pays $755 – $ 1,376 per month for 141 months with a total loan cost of $141,643.
- PAYE: Paul pays $339 – $1,051 per month for 240 months with a total loan cost of $153,433.
- IBR (at fifteen percent): Paul pays $508 – $1,110per month for 206 months for a total loan cost of $172,927.
- ICR: Paul pays $813 – $1,087 per month for 144 months for a total loan cost of $142,829.
If Paul pays his new consolidation loan under the PAYE plan, he saves as much as $300 per month while making only 240 monthly payments and paying $62,000 less over the life of the loan, versus going into the Standard Repayment Plan (30 years) where Paul would pay $600 per month for 360 months.
Notice that Paul pays more per month under the REPAYE plan since his wife’s income is counted toward his AGI, even though Paul filed his taxes as “married separately.” In this case, the IBR plan might be better for Paul (or at least cheaper), even though the IBR plan requires fifteen percent of discretionary income; this is assuming Paul is not a new borrower under the plan, versus the REPAYE plan which only requires ten percent.
Before entering repayment on his new Direct Consolidation Loan, Paul and his wife have twins. Paul’s wife decides to stay at home for a while, making Paul’s household AGI $65,000. As reminder, Paul has $100,000 in Direct Consolidation Loans at six percent. What will Paul pay on his loans under each of the repayment plans?
- Standard: Paul pays $600 per month for 360 months with a total loan cost of $215,838.
- Graduated: Paul pays $500-$818 per month for 360 months with a total loan cost of $232,868. Since Paul consolidated his loans, his Standard and Graduated Repayment Plan periods extend from 10 years to 30 years.
- Extended (fixed payments): Paul pays $644 per month for 300 months with a total loan cost of $193,290.
- Extended (graduated payments): Paul pays $500-$970 per month for 300 months with a total loan cost of $210,289.
- REPAYE: Paul pays $234 – $1,205 per month for 300 months with a total loan cost of $186,028.
- PAYE: Paul pays $234 – $887 per month for 240 months for a total loan cost of $121,776.
- IBR (at 15 percent): Paul pays $351 – $1,110 per month for 264 months with a total loan cost of $203,739.
- ICR: $673 – $1,111 per month for 161 months for a total loan cost of $151,040.
Paul pays $350 less monthly initially under the PAYE plan, as compared to the Standard Repayment Plan (thirty years) and makes 120 fewer payments. Under the REPAYE plan, Paul saves the same amount of money, and makes 60 less payments than he would make under the Standard Repayment Plan (thirty years).
This example also demonstrates how household size can affect monthly payments. As a general rule, an increase in household size will decrease monthly payments under an IDR plan, whereas a decrease in household size will increase monthly payments. This is because every person added to a household decreases discretionary income by about $6,000 for the IBR, PAYE and REPAYE plans and by about $4,000 for the ICR plan. Since Paul had twins, his household size went from two to four, and his discretionary income decreased by roughly $8,000-$12,000.
Let’s discuss a few more examples.
Deborah graduates from law school with $61,500 in Direct Unsubsidized Loans at four percent, and $65,000 in Direct Grad PLUS Loans at six percent. However, Deborah cannot secure employment. What will Deborah pay under the various repayment plans?
- Standard: $1,343 per month for 120 months with a total loan cost of $161,213.
- Graduated: $760-$2,281 per month for 120 months with a total loan cost of $170,174.
- Extended (fixed payments): $742 per month for 300 months with a total loan cost of $222,464.
- Extended (graduated payments): $530-$1,204 per month for 300 months with a total loan cost of $242,970.
- REPAYE: $0 per month for 300 months with a total loan cost of $0.
- PAYE: $0 per month for 240 months with a total loan cost of $0.
- IBR (at 15 percent): $0 per month for 300 months with a total loan cost of $0.
- ICR: $0 per month for 300 months with a total loan cost of $0.
The example above was meant to emphasize that since IDR plans tie your monthly payments to your income, if you have no income, or very limited income, you pay $0 per month, and it will still qualify as an on-time monthly payment.
David has three children. For his three children, David has $350,000 in Parent PLUS Loans which he has consolidated into a Direct Consolidation Loan after July 1, 2006, with an interest rate of 6%. David has an AGI of $65,000. What will David pay under the various repayment plans?
- Standard: David pays $2,098 per month for 360 months with a total loan cost of $755,434.
- Graduated: David pays $1,750 – $2,862 per month for 360 months for a total loan cost of $815,038.
- Extended (fixed payments): $2,255 per month for 300 months with a total loan cost of $676,516.
- Extended (graduated payments): $1,750 – $3,394 per month for 300 months with a total loan cost of $511,131.
- ICR: $813 to $3,017 per month for 300 months with a total loan cost of $539,269. Since David consolidated Parent PLUS loans, he cannot access the PAYE, REPAYE, or IBR plans.
Note: Since David consolidated Parent Plus loans, he cannot access the PAYE, REPAYE, or IBR plans.
By consolidating Parent PLUS Loans, David initially saves a lot of money on his monthly payments using the ICR plan. Without consolidation, David would be required to pay $2,098 under the Standard Repayment Plan for 360 months. This monthly payment would require David to spend almost 100 percent of his after-tax income on his student loans. By consolidating, David initially saves over $1,200 per month on his monthly loan payments.
Dana has an AGI of $85,000 a year and has $55,000 in Direct PLUS Loans at six percent. She is single with no children or dependent persons in her home. How much will Dana pay on her loans under the various repayment plans?
- Standard: Dana pays $611 a month for 120 months with a total loan cost of $73,274.
- Graduated: Dana pays $349 – $1,048 a month for 120 months for a total loan cost of $78,166.
- Extended (fixed payments): Dana pays $354 a month for 300 months with a total loan cost of $106,310.
- Extended (graduated payments): Dana pays $275 to $533 a month for 300 months for a total loan cost of $115,659.
- REPAYE: Dana pays $558 to $865 a month for a total of 104 months with a total loan cost of $72,061.
- PAYE: Dana pays $558 – $611 per month for 123 months with a total loan cost of $73,940.
- IBR (at 15 percent): Dana does not qualify for this IBR plan due to not possessing the required partial financial hardship.
- ICR: Dana pays $617 to $676 per month for 113 months for a total loan cost of $72,313.
This example demonstrates that while IDR plans do not save Dana much money (versus being in balance based plans), given her higher income and lower loan balance. However, the example does demonstrate how valuable payment plans without partial financial hardships can be. As you can see, Dana cannot qualify for the IBR plan due to her lack of a partial financial hardship, but can still access ICR and REPAYE (as neither plan require a partial financial hardship).
Note: Payment plans with partial financial hardships require the capitalization of all accrued interest, once the borrower no longer has a partial financial hardship. (Remember that you are not required to leave the plan at that point and are not automatically removed from it.) If your income puts you on the cusp of being disqualified for a partial financial hardship, you may soon have your accrued interest capitalized. In those cases, it might be worthwhile to consider entering into either the ICR or REPAYE plans from the start, since the plans do not require you to have a partial financial hardship.