Don't Stress Over Student Loans

The most straightforward repayment plan for federal loans is the standard ten-year plan. Under this arrangement, you pay the same amount each month until your loan is repaid. But that can be challenging for graduates with a lot of debt or a low-paying job. Borrowers who have $30,000 or more in loans can opt for the extended-repayment plan, which lowers the monthly bill by lengthening the re­payment period to as long as 25 years. The graduated repayment plan requires lower payments at first and then raises them, usually every two years, for up to ten years, presumably as your income increases. (With the extended and graduated plans, you’ll pay more interest than with the standard repayment plan.)

Or check out income-based repayment plans, such as Pay As You Earn, the newest of such options.

Income-based repayment is for borrowers with a lot of debt relative to income. You qualify if you have a “partial financial hardship”—that is, your monthly payments would be higher under the ten-year standard repayment plan than under the income-based plan.

With Pay As You Earn, you must also have taken your first loan on or after October 1, 2007, and received a disbursement of at least one loan on or after October 1, 2011. You put 10% of your “discretionary” income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

Borrowers in income-based repayment programs who work in public-service positions—for the federal government or a qualifying nonprofit, for example—also qualify for public-serv­ice loan forgiveness; federal loans are forgiven after ten years (or 120 on-time payments) instead of 20 years.

Consolidation lets you combine your federal loans under one interest rate and one bill (you can’t consolidate federal loans with private loans). The interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth point. Consolidating still gives you access to the range of repayment plans.

No matter which repayment plan you choose, sign up for automatic debit. You’ll qualify for a 0.25-percentage-point reduction on your federal interest rate.

Among graduates of the class of 2012 who borrowed, the average debt is $29,400—not a crippling amount, but no easy lift, either. Many graduates have a mix of federal loans at a variety of interest rates (federal Direct Loans, the most widely available, carried a 3.86% rate for the 2013–14 school year), and some borrowers also have private loans with variable rates as high as 11%. You can pick a repayment plan that fits your finances; if your circumstances change, you can always change the plan. (See which best fits your budget with the Department of Education's Repayment Estimator.)

The most straightforward repayment plan for federal loans is the standard ten-year plan. Under this arrangement, you pay the same amount each month until your loan is repaid. But that can be challenging for graduates with a lot of debt or a low-paying job. Borrowers who have $30,000 or more in loans can opt for the extended-repayment plan, which lowers the monthly bill by lengthening the re­payment period to as long as 25 years. The graduated repayment plan requires lower payments at first and then raises them, usually every two years, for up to ten years, presumably as your income increases. (With the extended and graduated plans, you’ll pay more interest than with the standard repayment plan.)

Or check out income-based repayment plans, such as Pay As You Earn, the newest of such options. Income-based repayment is for borrowers with a lot of debt relative to income. You qualify if you have a “partial financial hardship”—that is, your monthly payments would be higher under the ten-year standard repayment plan than under the income-based plan.

With Pay As You Earn, you must also have taken your first loan on or after October 1, 2007, and received a disbursement of at least one loan on or after October 1, 2011. You put 10% of your “discretionary” income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

Borrowers in income-based repayment programs who work in public-service positions—for the federal government or a qualifying nonprofit, for example—also qualify for public-serv­ice loan forgiveness; federal loans are forgiven after ten years (or 120 on-time payments) instead of 20 years.

Consolidation lets you combine your federal loans under one interest rate and one bill (you can’t consolidate federal loans with private loans). The interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth point. Consolidating still gives you access to the range of repayment plans.

No matter which repayment plan you choose, sign up for automatic debit. You’ll qualify for a 0.25-percentage-point reduction on your federal interest rate.

If you drop out of the program, you lose the benefit. Take the TEACH grant, which awards up to $4,000 annually to students who agree to work four years in high-need teaching positions, such as science and special education, in low-income areas. If you don’t complete your service, the grant converts to an unsubsidized Federal Direct Loan, or Stafford.

That means you will repay every dime of the grant at 6.8% interest starting from the day you received the award. And if you declined a subsidized Stafford loan—with a current rate of 3.4%—to accept a TEACH grant, you lose twice because the grant converts to the higher rate.

Some organizations, including AmeriCorps and Teach for America, offer grants after service is completed. Your federal loans go into forbearance during that time, meaning interest continues to add up. If you complete your service, the government will pay some or all of the interest, but you’ll pay it—on top of your loans—if you don’t.

The Peace Corps forgives 15% of Perkins loans for each of your first two years of serv­ice and 20% for each of the next two, capping the forgiven amount at 70% of your combined loans. That’s helpful, but only if you’re willing to commit to several years of hard work for minimal pay—and only if you have Perkins loans to begin with.

AmeriCorps and Teach for America offer more flexibility. Volunteers are eligible for the Segal AmeriCorps Education award, tied to the Pell amount ($5,550 in 2012). To receive the award, members must generally complete their term of service—for AmeriCorps, typically 1,700 hours; for Teach for America, about one year. Two terms of service earn you the maximum amount of $11,100 (in 2012). But bowing out early for eligible reasons, such as serious illness, may qualify you for a prorated payout.

The Public Service Loan Forgiveness program also rewards service. If you work in the public sector—say, in public health or at a public school—the PSLF program forgives the remainder of your student loans after 120 on-time payments while you’re employed in the public sector.

The catch? To benefit from the program, you must also qualify for an income-based repayment plan, which reduces your monthly bill below what it would be under a standard ten-year repayment plan. After ten years, the remaining amount is forgiven. But lower monthly bills mean the loan principal stays larger longer and accumulates more interest. If you drop out of the public sector before making 120 payments, you’ll end up losing the forgiveness and paying more than if you had paid over ten years.

Your program may not last. The dependence of volunteer programs on congressional funds means that you pin your chances of loan forgiveness on Washington politics. For instance, funding for AmeriCorps was briefly on the chopping block in 2011, during the debt-ceiling debate.

And at just five years old, the PSLF program hasn’t yet forgiven anyone’s federal student loans. The first beneficiaries will emerge in 2017, giving Congress plenty of time to impose new restrictions or even eliminate the program.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

What You Should Know About Student Loan Forgiveness Programs

Two-thirds of students who receive bachelor's degrees leave college with debt in tow. Depending on the amount owed (the average among borrowers is $26,600), it can take decades to pay off the outstanding balance.

For help with paying down your student loans more aggressively, consider the many programs that reduce your debt in exchange for relocating to specific regions and/or providing needed services in underserved communities. From Kansas to Chad, and in fields from nursing to teaching, there are programs to help graduates slash college debt. But the programs aren’t always easy to get into -- nor easy to stick with. Here are nine things you should know:

1. There are two broad categories of loan-forgiveness programs. You can enroll in the federal government's Public Service Loan Forgiveness program and/or apply for a loan repayment assistance program (LRAP) run by an organization or state. Know the differences: Public Service Loan Forgiveness requires you to make ten years of monthly payments toward your loan via an income-based repayment plan while working in a qualified public-service job before the remaining balance will be canceled or "forgiven." To qualify for one of the income-based repayment plans, you must have high debt relative to your income.

An LRAP, in contrast, tends to require dedicated service to a specific organization for a relatively short period of time in exchange for a limited amount of loan forgiveness.

2. You can double-dip. You can join an LRAP such as AmeriCorps or the Peace Corps and receive loan-forgiveness benefits at the end of your program (after one year for AmeriCorps, two for the Peace Corps), and you can count your time as eligible employment toward the ten-year public-service requirement for the federal government's Public Service Loan Forgiveness.

3. Only federal loans are eligible for forgiveness in most of these programs. Few programs allow their money to go toward private loans.

4. You should apply early. Start assessing programs before the beginning of your senior year. Deadlines vary, but Teach for America accepts submissions through February 20, and the rolling application process for AmeriCorps takes about six months. The Peace Corps requires more records and medical clearance, so aim to submit your application seven to 12 months before you hope to start working.

5. It's a big commitment. In most of these programs, you'll spend two years working to serve the greater good -- teaching in Detroit's struggling schools, improving agricultural practices in Senegal or providing mental-health services in rural Minnesota. Some programs, such as AmeriCorps Vista and the Peace Corps, explicitly prohibit you from holding another job while you participate in the program. Usually, you'll have the option to extend your work in the program beyond the two-year term, which tends to reap even more loan-repayment help.

6. Yes, you'll earn a salary. In addition to the partial (or sometimes full) payoff of your loans, most LRAPs provide a small stipend (Teach for America is the highest, with a maximum salary of $51,000) and health benefits.

7. There’s no partial credit. If you don't fulfill the entire commitment, you won't earn any money toward paying off your student loans. You might even face penalties from employers such as the National Institutes of Health research program and Nurse Corps if you breach your contract. In 2010, 12.4% of TFA teachers left the program after the first year.

8. You'll pay taxes on the loan-forgiveness awards. AmeriCorps, for instance, awards a lump sum equal to the largest Pell Grant you could receive ($5,645 in 2013). You won't actually receive a check, but you can make payments toward your loan directly from your profile on the AmeriCorps Web site. You have seven years to apply the award. Any amount you use is considered taxable income that year. For example, a young adult in the 15% tax bracket who applies $5,645 in loan-forgiveness awards toward a loan will trigger $847 in taxes due the following spring.

9. You may not get accepted. Most programs accept only 15% to 30% of their applicants, with Teach for America and the Nurse Corps Scholarship Program taking even fewer candidates. Other programs aren't as restrictive: Kansas's Rural Opportunity Zones relocation program, for example, awards a maximum of $15,000 for living in one of 50 rural counties for five years and simply requests proof of a degree from an accredited college or university and an outstanding student-loan balance.

The Growing Consensus on Fixing Student Loans 

Sixty percent of graduates from the class of 2011-12 entered the real world with student-loan debt -- having borrowed $26,500, on average.

That's not small change, especially when you consider that interest charges will add thousands to debt payments over the life of the loans. It pays -- literally -- to understand your payment options.n

Repayment is a mountain you can climb, with the right guide. Here are seven things that can help (or maybe hinder) your debt repayment:

1) You can cut the interest rate on your federal student loans by 0.25 percentage points immediately with one simple step. Sign up to make your monthly loan payments via automatic debit, and your interest rate drops. It's that easy.

2) You can extend your repayment period on your federal loans. Borrowers who have $30,000 or more in federal loans can choose the extended repayment plan, which lowers your monthly bill by lengthening the repayment period to as long as 25 years.

3) You can make smaller federal student-loan payments -- and even have some of your debt forgiven -- if you don't earn much money. Income-based repayment plans, such as Pay As You Earn, are available for borrowers who have a lot of debt relative to income. The plans allow you to put 10% of your "discretionary" income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

4) Dropping out of your repayment program could cost you. For example, consider the federal TEACH grant, which provides up to $4,000 for those who commit to teaching low-income students in high-need fields for at least four years. If you don't complete your service, the grant converts to an unsubsidized Federal Direct Loan, or Stafford. That means you will repay every dime of the grant with interest starting from the day you received the award. And if you decline a subsidized Stafford loan -- with a current rate of 4.66% -- to accept a TEACH grant, you lose twice because the grant converts to the higher rate.

5) Small towns can offer big debt relief. For example, in exchange for moving to one of 77 rural counties in Kansas, recent college grads receive up to $3,000 per year (for a maximum of five years) to help pay back loans. Other struggling regions are following suit.

6) You'll pay taxes on loan-forgiveness awards from those Kansas counties or from organizations such as the Peace Corps and AmeriCorps. For example, a young adult in the 15% tax bracket who applies $5,645 in loan-forgiveness awards toward a loan will trigger $847 in taxes due the following spring.

7) Interest rates on some of your subsidized Staffords may kick in sooner than you think. Until recently interest was deferred during the six-month grace period that new grads have before they must start repaying student loans. But for loans issued between July 1, 2012, and July 1, 2014, interest starts accruing the moment grads hit the real world. This year's crop of grads will likely have a combination of loans that gain interest during the grace period and those that don't.

Student Loan Rates Inch Up

First, the bad news: Federal student loans are more expensive this year. Undergraduate Stafford loans disbursed after July 1, 2014, carry a 4.66% interest rate, up from 3.86%. Rates on Staffords for graduate and professional students are now 6.21%, and PLUS loans for graduates and parents now charge 7.21%. But there’s good news: The hikes are manageable.

Valerie Cathcart, a rising senior at Marymount Manhattan College, in New York City, isn’t too worried. She borrowed $6,500 in unsubsidized Stafford loans last year (the loans accrue interest while students are still in school) and plans to take out $7,500 (the maximum for dependent undergraduate third years and above) this year. But the higher rate will add only about $3 per month to a $7,500 loan, or about $345 over a standard ten-year repayment period. And last year’s debt will remain at the old rate of 3.86%—no retroactive rate change there. “I’m just happy that it’s happening my last year of college,” says Cathcart.

Borrowers can’t dodge higher rates, but they can borrow wisely. Reduce the need for loans by tapping savings, working part-time and cutting your cost of living. After graduation, sign up for automatic debits to repay your loans, which will cut your interest rate by 0.25 percentage point. Avoid private loans. Their rates are typically variable, and the loans don’t offer the same protections as federal debt.

Among graduates of the class of 2012 who borrowed, the average debt is $29,400—not a crippling amount, but no easy lift, either. Many graduates have a mix of federal loans at a variety of interest rates (federal Direct Loans, the most widely available, carried a 3.86% rate for the 2013–14 school year), and some borrowers also have private loans with variable rates as high as 11%. You can pick a repayment plan that fits your finances; if your circumstances change, you can always change the plan. (See which best fits your budget with the Department of Education's Repayment Estimator.)

What types of student loans can be consolidated?

• Most federal student loans, including the following, are eligible for consolidation:

• Direct Subsidized Loans

• Direct Unsubsidized Loans

• Subsidized Federal Stafford Loans

• Unsubsidized Federal Stafford Loans

• Direct PLUS Loans

• PLUS loans from the Federal Family Education Loan (FFEL) Program

• Supplemental Loans for Students (SLS)

• Federal Perkins Loans

• Federal Nursing Loans

• Health Education Assistance Loans

• Some existing consolidation loans

• Private education loans are not eligible for consolidation. If you are in default, you must meet certain requirements before you can consolidate your loans.

• A PLUS loan made to the parent of a dependent student cannot be transferred to the student through consolidation. Therefore, a student who is applying for loan consolidation cannot include the PLUS loan the parent took out for the dependent student’s education.

What are the requirements to consolidate a loan?

Here are some tips on qualifying for a Direct Consolidation Loan:

• You must have at least one Direct Loan or FFEL Program loan that is in a grace period, in repayment, deferment, forbearance, or in default. It cannot show loan originated as the last status.

• If you want to consolidate a defaulted loan, you must either make satisfactory repayment arrangements on the loan with your current loan servicer before you consolidate, or you must agree to repay your new Direct Consolidation Loan under the Income-Contingent Repayment Plan or the

Income-Based Repayment Plan.

• Generally, you cannot consolidate an existing consolidation loan again unless you include an additional Direct Loan or FFEL Program loan in the consolidation. However, under certain circumstances you may re-consolidate an existing FFEL Consolidation Loan without including any additional loans.

Advantages of Consolidating

There are several potential advantages to consolidating your student loans including:

1.    With more than one student loan, you probably have to remember multiple due dates for your monthly repayments. With just one loan, you have only one repayment due date to remember and one check to write.

2. Extending your repayment term. If you are having difficulty repaying your loans or you anticipate a change in your income or expenses, you may want to consolidate so that you can lengthen the amount of time you have to repay your loans. However, extending the repayment term, or life of the loan, comes at a cost since you will be paying interest on the new loan for a longer period of time.

     3. Lowering your interest rate. If you have one or more private student loans and have improved your credit score since obtaining your loan you may be able to qualify for a consolidated loan with a lower interest rate.

4     4. Switching from a variable to fixed-rate loan. If you have private student loans at differing variable rates of interest, you may be able to consolidate and get one new loan with a fixed rate of interest.

 5 Lowering the monthly payment amount. Lengthening the term of your loan means that you will be paying less each month. 

6. Getting into an alternate repayment plan. Your life circumstances may have changed since you first took on your student loan and the repayment plan you have - for example, the typical 10-year standard repayment plan for most federal loans - may not best fit your current financial situation.

Consolidation offers a way to select among other repayment plans such as the following federal consolidation loan repayment options:

• Extended repayment stretches your loan repayment period from 10 to between 12 and 30 years (depending on your loan balance)
• Graduated repayment allows you to begin payments at a lower monthly amount and then gradually increases that repayment amount each two years.
• Income-contingent repayment plans determine your monthly repayment amount based on your income and total outstanding debt and then periodically change that amount as your income changes.
• Income-sensitive repayment plans calculate your monthly payment amount as a percentage of your pretax monthly income.

7. Getting borrower benefits. Lenders will often offer loan holders certain benefits for being a good borrower. If your lender does not provide any benefits, you may want to consider consolidating your loans with a lender who does. Types of benefits can include discounts on interest rates for automatic payments made from your bank account and/or paying on time.

Advantages of Federal Loan Consolidation

Receive a single monthly bill for all loans you consolidate. Lock in a fixed interest rate for your entire repayment period. You can lock it in for your entire repayment period if you consolidate after July 1, when the new variable rates are changed.  Reduce your monthly payment Depending on the amount you consolidate, extend your repayment period up to 30 years, and lower your monthly payment. Note: You may not need to consolidate to reduce your monthly payment: Direct and Direct Grad PLUS Loans already provide for extended or graduated payment options. Check with your lender for further details on these options. If you qualify for income-based repayment (IBR) your monthly payments will be capped. Have your loans forgiven under the new Public Service Forgiveness Provisions The new Public Service Forgiveness provisions apply only to Federal Direct Loans (not to FFELP Loans, such as Direct, Direct Grad PLUS, etc.). Therefore, if you think you may be eligible for Public Service Forgiveness, you MUST consolidate your existing loans into a Federal Direct Consolidation Loan after July 1 to be eligible. To read about Public Service Forgiveness Provisions,

Why Consolidate?

This page discusses the pros and cons of consolidation. Although the switch to fixed interest rates on Stafford and PLUS loans eliminated one of the financial incentives to consolidate, there are still several reasons why borrowers may want to consolidate their education loans.

The key benefits of a consolidation loan include the following:

• Single monthly payment. Consolidation replaces the multiple payments on multiple loans with a single payment on the consolidation loan. A student might graduate with as many as a dozen loans or more. Consolidation combines these into a single loan with a single monthly payment. This simplifies the repayment process.
• Alternate repayment plans. (More-manageable monthly payments.) Consolidation provides access to alternate repayment plans, such as extended repayment, graduated repayment, and income contingent repayment. Although these plans may be available to unconsolidated loans, the term of an extended repayment plan depends on the balance of the loan, which is higher on a consolidation loan.

Alternate repayment plans often reduce the size of the monthly payment by as much as 50% by increasing the term of the loan. This can make the monthly payments more affordable and management, but it does increase the total interest paid over the lifetime of the loan.

• Reduces the interest rate on some PLUS loans. Consolidating an 8.5% fixed rate PLUS loan reduces the interest rate by 0.25% because of the lower 8.25% interest rate cap on consolidation loans. To maximize the interest rate reduction, the PLUS loans must be consolidated by themselves. However, one must also consider the impact of consolidation on available student loan discounts.
• Resets the clock on deferments and forbearances. Consolidation resets the 3-year clock on certain deferments and forbearances. A consolidation loan is a new loan, with its own fresh set of deferments and forbearances.

This is a useful tool for medical school students, who do not get an in-school deferment during the internship and residency periods. They are, however, eligible for an economic hardship deferment for up to three years. If they need more than three years, consolidation is a useful tool for getting up to another three years of deferment.

• Restarts the loan term on loans already in repayment. Even if you stick with standard ten-year repayment, when you consolidate loans that are already in repayment, it resets the loan term on those loans, since a consolidation loan is a new loan. This can give you some of the benefits of an alternate repayment plan, such as a lower monthly payment, without extending the term as much as typically occurs with extended repayment.

On the other hand, if you are close to the end of your repayment term, you might want to avoid consolidation because the savings will not be great enough for it to be worth the bother.

• Switch lenders for better loan discounts. Consolidating your loans allows you to switch from one lender to another. You can also switch from Direct Loans to FFEL and vice versa. If you shop around, you might be able to get a better discount on loan interest rates and better rebates on the fees.

With the switch to fixed rates on Stafford and PLUS loans first disbursed on or after July 1, 2006, the ability to lock in the interest rate on a variable rate loan is no longer relevant for most borrowers. Students could also previously consolidate during the in-school or grace period to lock in the lower in-school interest rate using the in-school interest rate loophole, which was repealed in 2006.

Nevertheless, borrowers who still have unconsolidated variable rate loans may wish to consider consolidating during the grace period to lock in the lower in-school rate. (The interest rates on variable rate loans also change each July 1, based on the last 91-day T-bill auction in May. Depending on whether the rates are increasing or decreasing, borrowers might want to consolidate before or after July 1. Many lenders will hold the consolidation loan application to provide borrowers with the best rate and to maximize the grace period. But when interest rates are less volatile, consolidating during the grace period is often more important than the July 1 change in rates.)

Some graduate students have found it necessary to consolidate their educational loans when applying for a mortgage on a house. 

Student Loan Consolidation Repayment Options:

• Standard Repayment

With the standard plan, you'll pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50, and you'll have up to 10 years to repay your loans. The standard plan is good for you if you can handle higher monthly payments because you'll repay your loans more quickly. Your monthly payment under the standard plan may be higher than it would be under the other plans because your loans will be repaid in the shortest time.

Extended Repayment

To be eligible for the extended plan, you must have more than $30,000 in Direct Loan debt and you must not have an outstanding balance on a Direct Loan as of October 7, 1998. Under the extended plan you have 25 years for repayment and two payment options: fixed or graduated. Fixed payments are the same amount each month, as with the standard plan, while graduated payments start low and increase every two years, as with the graduated plan below.

This is a good plan if you will need to make smaller monthly payments. Because the repayment period will be 25 years, your monthly payments will be less than with the standard plan. However, you may pay more in interest because you're taking longer to repay the loans.

Remember that the longer your loans are in repayment, the more interest you will pay.

• Graduated Repayment

With this plan your payments start out low and increase every two years. The length of your repayment period will be up to ten years. If you expect your income to increase steadily over time, this plan may be right for you. Your monthly payment will never be less than the amount of interest that accrues between payments. Although your monthly payment will gradually increase, no single payment under this plan will be more than three times greater than any other payment.

• Income Contingent Repayment (ICR)

(not available for parent PLUS Loans)

This plan gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse's income if you're married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:

1. the amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or

2. 20% of your monthly discretionary income*.

If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.

The maximum repayment period is 25 years. If you haven't fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged.

• Income-Based Repayment Plan. (IBR)

Under this plan the required monthly payment will be based on your income during any period when you have a partial financial hardship. Your monthly payment may be adjusted annually. The maximum repayment period under this plan may exceed 10 years. If you meet certain requirements over a specified period of time, you may qualify for cancellation of any outstanding balance of your loans.

• Pay As You Earn. (PAYE/PER)

On January 2013 the DOE announced that borrowers with Federal Student Loans may now be able to take advantage of a new repayment plan that could lower their monthly federal student loan payments. The plan, known as Pay As You Earn, caps monthly payments for many recent graduates at an amount that is affordable based on their annual income. This new option follows through on President Obama’s promise to provide student graduates with relief on their student loan payments and help them responsibly manage their debt payments. “We know many recent graduates are worried about repaying their student loans as our economy continues to recover, and now it’s easier than ever for student borrowers to lower monthly payments and stay on track,” said U.S. Secretary of Education Arne Duncan.

Pay As You Earn plan, which President Obama first introduced on October 2011, caps payments for Federal Direct Student Loans at 10% of discretionary income for eligible borrowers, and the Department estimates as many as 1.6 million Direct Loan borrowers could reduce their monthly payments with this plan. The new option complements similar repayment plans available to help borrowers manage their debt, including Income-Based Repayment, which caps monthly loan payments at 15% of a borrower’s discretionary income. Borrowers who don’t qualify for a Pay As You Earn may still qualify for an Income-Based Repayment, which more than 1.3 million borrowers already use. Most borrowers are able to repay their student loans, but for many who are struggling – including nurses, teachers, first-responders and others in lower-paying public service jobs – these income driven plans could reduce monthly payments to help borrowers to manage their student loan debt and avoid the negative consequences of defaulting on their student loans. While borrowers may pay more in interest in the long run under an income driven plan, those options can provide some relief on loan payments, especially in a borrower’s early years of repayment. Given the many options that make paying back federal student loans more manageable, the DOE has developed tools to assist borrowers make responsible financing and repayment choices. To qualify you must have at least one Direct Loan or a loan in the Federal Family Education Loan (FFEL) program that is eligible to be repaid under one of the income-driven plans.

New Rules on Federal Student Loans

Whether you're taking out a federal student loan or entering repayment, get up to speed on these five changes to the federal loan program.

1. Loans get pricier.

The rate on subsidized Stafford loans — the federally sponsored loans available to students with need — jumps from 3.4% to 6.8% on July 1, barring a last-minute (and unlikely) save from Congress. Despite the headlines, there's no reason to panic. The rate applies only to new loans, not those that are outstanding, and it doesn't necessarily mean your payments will soar, says Mark Kantrowitz, of Edvisors.com.

At 6.8%, a $5,500 Stafford loan repaid over ten years (the standard schedule) would cost about $9 more per month, or about $1,000 more over the life of the loan. Not surprisingly, the hit becomes bigger the more you borrow. On the maximum amount available in subsidized Staffords for undergraduates — $23,000 — you'd pay about $40 more per month, or $4,600 over the ten-year repayment schedule.

2. Interest starts sooner.

The feds have always picked up interest on subsidized Staffords while students are in school, but until recently, interest was also deferred during the six-month grace period before new grads have to start repaying student loans. Now, the interest on subsidized Stafford loans starts the moment grads hit the real world — but the change applies only to loans issued between July 1, 2012, and July 1, 2014, after which the grace period is scheduled to go back into effect.

This year's crop of grads will likely have a combination of loans that gain interest during the grace period and those that don't. A $3,500 loan at a 6.8% interest rate (assuming rates double) will accumulate $120 in interest during the six-month period.

3. Grad students lose a break.

As of July 1, 2012, graduate students no longer have access to subsidized Staffords, which means they lose the in-school deferral on interest for those loans. They can still get unsubsidized Staffords, which carry a 6.8% fixed rate and are available to all students who apply. Unsubsidized Staffords start accruing interest from the time they are disbursed, but repayment can be deferred until six months after graduation.

4. PLUS borrowers face a higher hurdle.

Graduate students — as well as parents — can also get PLUS loans, which carry a 7.9% fixed rate. You can borrow the full cost of attendance, minus financial aid. Unlike Stafford loans, PLUS loans require underwriting — and those standards have tightened up. To qualify, recipients cannot have an "adverse" credit history, which includes bankruptcy and has lately expanded to include unpaid collection accounts and charge-offs.

You can appeal a denial by providing extra documentation, such as proof of a repaid loan or divorce records showing you're not responsible for the debt, or by finding an endorser. The endorser takes a risk and must be willing to pay the loan in full if you do not. Undergraduates whose parents are denied a PLUS loan are eligible for up to an additional $4,000 to $5,000 in unsubsidized Stafford loans per year. Those who are denied PLUS loans are unlikely to qualify for private loans.

5. Repayment plans get more generous.

One of several repayment options, Pay As You Earn, became available to borrowers at the end of December 2012 and improves on the income-based repayment program. As with the earlier plan, Pay As You Earn pegs the amount you pay to your discretionary income (the amount by which your income exceeds the poverty line), but it lowers the percentage of income you pay from 15% to 10% and the number of years over which you pay from 25 to 20 years. At the end of that period, any remaining amount is forgiven. To qualify, you must have taken out your first federal student loan after September 30, 2007, and received a disbursement from at least one loan after September 30, 2011. Only Direct Loans are covered.

Available Programs for Students to pay off their Student Debts

Standard Repayment

With the standard plan, you’ll pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50, and you’ll have up to 10-30 years to repay your loans. Your monthly payment under the standard plan may be higher than it would be under the other plans because your loans will be repaid in the shortest time.

Graduated Repayment

With this plan, your payments start out low and increase every two years. The length of your repayment period will be up to ten years. If you expect your income to increase steadily over time, this plan may be right for you. Your monthly payment will never be less than the amount of interest that accrues between payments. Although your monthly payment will gradually increase, no single payment under this plan will be more than three times greater than any other payment.

Income Based Repayment (IBR)

Income Based Repayment is a new repayment plan for the major types of federal loans made to students. Under IBR, the required monthly payment is capped at an amount that is intended to be affordable based on income and family size. You are eligible for IBR if the monthly repayment amount under IBR will be less than the monthly amount calculated under a 10-year standard repayment plan.

If you repay under the IBR plan for 25 years and meet other requirements you may have any remaining balance  of your loan(s) cancelled. Additionally, if you work in public service and have reduced loan payments through IBR, the remaining balance after ten years in a public service job could be cancelled.

Income Contingent Repayment (ICR)

This plan gives you the flexibility to meet your Direct Loans obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse’s income if you’re married), family size, and the total amount of your

Direct Loans.

Under the ICR plan you will pay each month the lesser of:

1. The amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or

2. Twenty percent of your monthly discretionary income. If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized (added to the loan principal). The maximum repayment period is 20 years. If you haven’t fully repaid your loans after 20 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged. As of July 1, 2009, graduate and professional student Direct PLUS Loan borrowers are eligible to use the ICR plan. Parent Direct PLUS Loan borrowers are not eligible for the ICR repayment plan.

PAYE

PAYE is Pay As You Earn?

Pay As You Earn is a repayment plan for eligible Direct Loans that is designed to limit your required monthly payment to an amount that is affordable based on your income and family size.

What federal student loans are eligible to be repaid under the Pay As You Earn plan?

Only loans made under the Direct Loan Program are eligible for repayment under Pay As You Earn.

Who is eligible for Pay As You Earn?

You must be a new borrower. You are a new borrower if you had no outstanding balance on a Direct Loan or

FFEL Program loan as of Oct. 1, 2007, or if you had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new Direct Loan or FFEL Program loan on or after Oct. 1, 2007. In addition, you must have received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or Direct PLUS

Loan for graduate or professional students on or after Oct. 1, 2011, or you must have received a Direct Consolidation Loan based on an application that was received on or after Oct. 1, 2011.

What are the benefits of Pay As You Earn?

1. LOWER SCHEDULED MONTHLY PAYMENT: Under Pay As You Earn, your monthly payment amount will be less than the amount you would be required to pay under a 10-year Standard Repayment

Plan, and may be less than under other repayment plans.

1. INTEREST PAYMENT BENEFIT: If your monthly Pay As You Earn payment amount does not cover the full amount of interest that accrues on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans (and on the subsidized portion of your Direct Consolidation Loans) for up to three consecutive years from the date you begin repaying your loans under Pay As You Earn.

20-YEAR CANCELLATION:

EXTENDED

Who is eligible?

If you’re a Direct Loan borrower, you must have had no outstanding balance on a Direct Loan as of October 7, 1998, or on the date you obtained a Direct Loan after October 7, 1998, and you must have more than $30,000 in outstanding Direct Loans.

What are the benefits?

Under this plan, your monthly payments are:

• A fixed or graduated amount,

• Made for up to 25 years, and

• Generally lower than payments made under the Standard and Graduated Repayment Plans.

Eligible Loans

Subsidized Federal Stafford Loans

Direct Subsidized Loans

Subsidized Federal Consolidation Loans

Direct Subsidized Consolidation Loans

Federal Insured Student Loans (FISL)

Guaranteed Student Loans (GSL)

UnSubsidized and Unsubsidized Federal Stafford Loans

Direct Unsubsidized Loans, including Direct Unsubsidized Loans (TEACH) (converted from TEACH Grants)

Unsubsidized Federal Consolidation Loans

Direct Unsubsidized Consolidation Loans

Federal PLUS Loans (for parents or for graduate and professional students)

Direct PLUS Loans (for parents or for graduate and professional students)

Direct PLUS Consolidation Loans

Federal Perkins Loans

National Direct Student Loans (NDSL)

National Defense Student Loans (NDSL)

Federal Supplemental Loans for Students (SLS)

Parent Loans for Undergraduate Students (PLUS)

Auxiliary Loans to Assist Students (ALAS)

Health Professions Student Loans (HPSL)

Health Education Assistance Loans (HEAL)

Nursing Student Loans (NSL)

Loans for Disadvantaged Students (LDS)

Ineligible Loans

Loans made by a state or private lender and not guaranteed by the federal government

Primary Care Loans

Law Access Loans

Medical Assist Loans

PLATO Loan