Federal Student Loan Payment Rules

The federal government offers a series of low-rate educational loans to help college students cover their tuition and other expenses. Well, it does make college education more accessible for those from moderate- and low-income families.

However, according to the result of a few researches, today there are plenty of students, especially professional students who desired low-paying public servicing careers, plagued by high monthly repayment of student loans.

Fortunately, Congress has recently focused on making it easier and convenient for new graduates who have high debt but relatively low income to manage their debt repayment through a number of repayment plans. But notice that before making a payment, you need to figure out a few questions first.

1. Who do you pay?

You know, since July 1, 2010, all federal student loans are regulated directly by the federal government, and the funds will come directly from the U.S. Department of Education (ED) under the William D. Ford Federal Direct Loan Program.

Thus, you have to make payments as required to certain agencies participating in federal student loan programs. Normally, the company you are now working for will sign a contract with one of the agencies and then get your monthly payment paid on time, if you’ve made a three year commitment to the employee.

In the case that you transfer to a different company, be sure to notify the agency whether or not you new employer will continue the financial support. Well if the employee is not willing to make payment or you are fired, you will have to take responsibility to the debt and make timely payment until the loan amount is paid off in full to the agency.

2. When should you begin to make repayment?

Generally speaking, you won’t be required to repay your educational debt when you are still attending school. With a Stafford student loan, you will get 6-month grant period after your graduation. And Perkins loans usually require borrowers to make payment 9 months after their graduation.

However, if you are a graduate who benefits from large amount PLUS loan, you will have to make payment immediately after the loans amount is fully disbursed. What makes things even worse is that it requires borrowers to make the first payment within 60 days after the final disbursement. Otherwise, you will be faced with penalty.

3. How much your monthly payment will be?

As for the maximum or minimum amount you need to repay every month, it varies greatly.

Basically, your monthly payment will be affected by several factors, such as:

  • the sum total amount you borrow
  • fixed interest rate
  • type of repayment plans you choose

1. What repayment options are available for you?

Since the federal government realizes that it’s a little bit difficult for new graduates to pay off their educational loans within a short period, it now provides a few more repayment options for young professionals to choose. Well, if you are still struggling to avoid default on your monthly payment, maybe it’s time to choose another repayment plan to get some reprieve.

1) Standard Repayment Plan

For those who don’t land a great job and make a decent living, standard repayment plan is the best choice. It only requires you to repay $50 each month, which will hardly bring you any financial burden even when you are working as a lower-paying intern. But do remember that if you keep paying 50 dollars, it will take 10 years for you to pay off the loan.

2) Extended Repayment Plan

Students who have borrowed large amount federal student loans are likely to seek for ways to lower their monthly payment. Well, the most efficient solution is to extend the loan term. Extended repayment plan sounds nice for you, since it allows you to repay the loan within 30 years. What you need to be aware of is that longer loan term also means increasing interest cost.

3) Graduated Repayment Plan

Expect to lower your monthly payment without extending your loan term? Graduated repayment plan will be a perfect idea. It only reduces your payments for the first two years, thereafter, the amount will increase gradually. Depending on the total amount you borrow, the loan term can be 10, 20 or 30 years.

4) Income-Based Plan

Already have a steady income? Making monthly payment based on your income will be the smartest choice. When you get a pay rise, the payment will be adjusted accordingly. Normally, you need to repay the educational debt within 25 years, and any remaining amount after 25 years will be discharged as taxable event.

5) Income Contingent Plan

This repayment plan is very much similar to income-based plan. Besides your personal income, it will also take your family size and the total loan amount into consideration. Your monthly payment will be adjusted on a yearly basis and the balance after 25 years will also be discharged.

6) Income Sensitive Plan

It’s also a great way for you to make monthly payment depending on your income. The best part is that you will have a lot of options. The payment amount can be 4% to 25% percentage of your monthly income. However, be sure to make the payment amount greater than the accrued interest and reapply every year.