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Figuring out when you have to start paying back student loans can be a bit tricky, but this year it’s more complicated than usual. A pause on all federal student loan payments has been in effect since 2020. That pause ends in 2023 (the Biden administration hasn’t yet announced when exactly.) Additionally, depending on your income and when your loans were disbursed, you may be eligible for one-time forgiveness of up to $20K.

In addition, most federal student loans have a six-month grace period after graduation, during which borrowers are not required to make payments on their student loans. The payback terms on private student loans are set by individual lenders, which may or may not offer a grace period.

Read on to find out when you have to start paying back your federal and private student loans.

Student Loan Payment Pause Ends Some Time in 2023

In March 2020, at the beginning of the Covid-19 pandemic, the federal government ordered the suspension of payments, interest, and collections on most federally held student loans. Almost three years later, borrowers will restart making loan payments in 2023.

When the time comes, borrowers should receive a billing statement from their loan servicer at least 21 days before their payment is due. The statement will provide the latest information on payment due dates, monthly amount, and interest accrued. If you are eligible for one-time forgiveness, assuming it survives the many court challenges, you’ll want to make sure to apply in time so that the canceled debt is reflected in your balance.

What else you can do: Make sure your contact information is up-to-date on your loan servicer’s website and in your StudentAid.gov profile. And to refresh your memory on all things student loans, read our summary of the basics of student loans.

What Is a Student Loan Grace Period?

A grace period is the time you’re given after graduation before you have to start paying back your student loans. The federal government and many private lenders understand that you might not find a steady job straight out of college.

Both Direct Subsidized and Unsubsidized Loans have a grace period. Direct PLUS loans for graduate students and parents don’t have a grace period. Make sure you understand which loan you have so you’re financially ready to start making payments.

While the grace period gives you time to find a job before you have to start making payments, it’s important to understand that unsubsidized federal student loans will continue to accrue interest during their grace periods.

Usually, at the end of the grace period, the interest is capitalized onto the principal (or original amount borrowed). This becomes the new value of the loan, and interest continues to accrue based on this new value. However, new federal regulations will eliminate interest capitalization when borrowers first enter repayment.

Recommended: How Much Money To Budget for Student Loans

Federal vs Private Loans: Key Differences

There are two main types of student loans: private student loans and federal student loans. Private student loans are borrowed from a bank, credit union, or another lender. Federal loans are backed by the U.S. Department of Education. Important differences between the two include:

•   Only federal student loans were eligible for the payment pause.

•   Fixed interest rates on federal student loans are generally lower than for private loans.

•   Only federal student loans are eligible for income-driven repayment plans, deferment and forbearance, and federal loan forgiveness.

When to Start Paying Federal Student Loans

As noted above, both direct subsidized and unsubsidized loans offer a six-month grace period where loan payments are not required after a student graduates. For instance, if you graduate in June, your first payment will be due in December.

Here’s how the payment pause may affect your grace period:

•   Students whose grace period coincided with payment pause will need to make a loan payment starting in 2023 — your grace period wasn’t paused.

•   Similarly, students who graduate in December 2022 will make their first payment six months later, unless the payment pause is still in effect.

When to Start Paying Private Student Loans

Some private student loans operate with a six-month grace period, similar to federal student loans. But not all. If you have a private student loan, check your loan terms to see if you have a grace period.

If you’re looking to take out a private student loan with a grace period, consider reviewing different lenders to see who has the best terms. Unlike federal student loans, interest rates for private student loans vary based on individual factors including your credit history. Because of this, your interest rate might be higher than it would be with federal loans.

Recommended: Private Student Loans Guide

Can You Get More Time Before Paying Back Student Loans?

If you’ve already graduated and you’re having trouble finding a job in your field, you might be stretching your finances as thin as they go. Even your student loan repayments might not get priority. Before you let late payments get the best of you, consider what options are available.

It may be possible to talk to the loan servicer about delaying your payments a little longer. Your lender doesn’t want you to be late either, and might be willing to work with you.

Extended Deferment or Forbearance

Borrowers with federal student loans might qualify for student loan deferment or forbearance, which allow you to temporarily pause payments. Keep in mind that interest may still accrue while your loans are in deferment or forbearance, depending on the type of loan you hold. You’ll be responsible for that interest regardless of when you start making your payments.

The start date of those repayments isn’t the only thing you should be concerned with. If you have student loans, lowering your payment amount is probably on your mind as well. Not sure what your monthly payment is? Use our student loan calculator to estimate your student loan payments.

Can You Lower Your Student Loan Payments?

Depending on the type of loans you have, there are a few different ways you can lower your student loan payments.

Consolidation

If you have many different federal student loans, you might want to consider student loan consolidation. Consolidating your existing loans with a Direct Consolidation Loan means combining all of your federal loans into a single loan and potentially lengthening the term so your payments go down. A longer term, however, means paying more interest over the (now longer) life of your loan.

Your new interest rate will be the weighted average of all your federal loans combined, rounded up to the nearest eighth of 1%, which means consolidation might not lower your interest rate.

Refinancing

Refinancing your student loans is similar to consolidation. However, a refinanced loan uses your credit history to determine your interest rate. Ideally, refinancing will lead to a lower rate. It’s important to note that refinancing student loans forfeits protections that come with federal student loans, like forbearance and income-driven repayment plans.

It’s also possible to lengthen or shorten your loan term. Refinancing can be done with private student loans, federal student loans, or both. Just remember that lengthening the loan term may result in paying more in interest over the life of the loan.

For more on this option, read our take on the advantages of refinancing student loans.

Income-Driven Repayment Plans

If you have federal student loans and have a lower income, you might want to look into Income-Driven Repayment plans. There are a few different IDR options that vary based on your income and family size. And recent changes by the Biden Administration make the plans an even better deal for borrowers.

All IDR plans forgive the remaining balance on your loans either 20 or 25 years after you begin paying the loan back. This could be an option to consider if you are a recent grad. Note that while the remaining balance is forgiven at the end of an IDR loan term, that amount may be considered taxable income by the IRS.

What Happens if You Don’t Start Paying Back Student Loans?

If you don’t start paying back your student loans, you can face some pretty serious financial consequences. Your loan will become delinquent after the first day of missed payments. Once you’re 90 days late, making a payment on your federal loans, your loan servicer will report the delinquency to the credit reporting bureaus and your credit score will take a hit.

If you have a private student loan, your lender may report you to the credit reporting bureaus after just 30 days. A lower credit score can make it more difficult to secure credit and loans in the future, and if you do get a loan, it might come with less favorable terms and a higher interest rate.

Student Loan Default

After 270 days, your federal loans will enter default. Private loans may default after 120 days and Federal Perkins loans can enter default immediately after you miss a payment.

Once you’re in default, your credit will take another hit. You might also be subject to having your wages garnished (though the rules on this are different when it comes to federal vs. private student loans).

In addition to wage garnishment and damage to your credit, you may also experience the following negative consequences:

•   Late fees. For example, federal loans that are 30 days late may encounter late fees of 6% of the amount due.

•   Loss of eligibility for loan deferment or forbearance once you default on federal loans.

•   No longer able to choose your repayment plan for federal loans.

•   The government may withhold your tax refund if you fail to pay federal loans.

•   Loss of eligibility for financial aid.

The Takeaway

The payment pause on federal student loans ends some time in 2023. If you graduated before December 2022, your first federal student loan payment will be due once the pause ends. If you graduate in December 2022 or later, your first payment will be due after six months – or later if the pause is still in effect. Your loan servicer will provide you with a billing statement at least 21 days before your first payment is due. If you can’t afford to resume your monthly payments, federal loan holders have options: deferment, an income-driven repayment plan, or refinancing. Some private student loans also offer grace periods; check with your loan servicer to find out.

SoFi student loan refinancing can save you thousands of dollars thanks to flexible terms and low fixed or variable rates. There are no application or origination fees, and no prepayment penalties. Complete our simple online application in just minutes.

Find out if you’re prequalified without having to complete a full application.

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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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The term “unbanked” applies to an individual or household that doesn’t use a traditional banking account or credit union for financial services. An unbanked adult has no checking or savings account, relying instead on alternative financial services to pay for life’s expenses.

While the urge to store cash under a mattress may be strong for some, being unbanked can be both expensive and impractical. The benefits of using a financial institution may well outweigh those of the alternatives. However, many people encounter obstacles when trying to access a bank or credit union.

Here, you’ll learn:

•   What does “unbanked mean?

•   Why do people become unbanked?

•   What types of people are typically unbanked?

•   What are the pros and cons of being unbanked?

•   What are initiatives to help the unbanked?

What Does Unbanked Mean?

First, it’s important to give a definition of “unbanked.” If a person is unbanked, that means they are not served by a bank or similar financial institution. If you are over the age of 18 and have no checking or savings account and no credit or debit card, you are considered to be an unbanked adult.

You may wonder, how do unbanked adults conduct financial transactions? How do they go about cashing checks without a bank account and pay bills?

Many unbanked individuals deal in cash, whether by their preference or due to their circumstances. In order to conduct everyday financial transactions, they may use check cashing services, payday advances or loans, pawn shops, and/or make payments with cash or money orders.

Why Do People Become Unbanked?

People become unbanked for various reasons. These can include:

•   Lack of money to meet minimum balance requirements at financial institutions

•   Lack of the credentials needed to open bank accounts (say, a Social Security number)

•   An underlying distrust of financial institutions

•   A desire to avoid any fees involved in opening a checking or savings account, or the penalties for incurring a negative bank account balance

•   Inability to open an account due to having a previous account closed by a bank or credit union, or because they have bad credit

•   Living too far away from a bricks-and-mortar banking location or being unable to drive or take transportation to a financial institution

•   Lacking a computer, a Wi-Fi connection, and/or the tech skills to open an account online.

How Many People are Unbanked in the U.S.?

The United States has a considerable number of unbanked adults. A recent survey by the Federal Deposit Insurance Corporation (FDIC) found that over 6% of American households are unbanked, which accounts for about 14 million U.S. adults. According to a 2020-2021 Federal Reserve poll, 5% of adults in the United States are unbanked, having no traditional checking or savings accounts.

While these are large numbers, it’s worth noting that other nations have much larger percentages of unbanked people. The countries with the highest percentage include Morocco, Mexico, Vietnam, Egypt, and the Philippines, all with unbanked populations of 60% or more.

What Are the Types of People Who Are Unbanked?

The Federal Reserve of the United States estimates that most of the unbanked population fall into the following demographics:

•   Low-income: Families making below $25,000/year

•   Less-educated: A higher percentage of the unbanked never graduated from high school

•   Non-white: Blacks and Hispanics make up the majority of the unbanked

•   Women: More females are unbanked than males, possibly because some women don’t view themselves as in charge of household finances, with someone else in the family managing the bank account

•   Young people: They tend to be unbanked more often than older adults, possibly because they are college students, without jobs, and lack the financial means or the know-how to open an account. (It’s worth noting that some institutions offer college student bank accounts, which are specially designed to help students begin banking. These can be a useful option.)

What Is the Difference Between Unbanked and Underbanked?

You may also have heard the term underbanked as well as unbanked. An underbanked person typically does have a checking and savings account with an FDIC-insured institution, but regularly relies on alternative financial services. Despite having traditional accounts, they may still utilize check-cashing services, money orders, and short-term payday loans.

The Federal Reserve estimates that 13% of adults in the United States are underbanked. As with the unbanked population, this could be due to a lack of access to banking services, bad credit, a lack of financial or technical resources to open and maintain an account, a distrust of financial institutions, or having had a previous account closed.

Initiatives to Help the Unbanked

Being unbanked can make it a challenge for a person to manage their money and build wealth. Fortunately, government programs and some financial entities are working to solve this issue. They are developing new ways to provide incentives and encourage unbanked individuals to choose traditional banking options. These include:

•   Eliminating banking fees. Getting rid of minimum balance requirements, monthly account fees, and other financial deterrents can encourage low-income individuals to open an account.

•   Developing banking apps. Banking on the phone or computer can help make it easier for people who don’t have a convenient banking branch or have physical challenges.

•   Second chance accounts. Some banks may offer a second chance checking account. When opening this type of account, the bank is willing to overlook bad credit, previously unpaid overdraft fees, or past forced account closures. The account will likely have some limitations, but it can be an on-ramp to a standard checking account.

•   Bringing back postal banking. Decades ago, an individual could perform basic banking transactions at their local post office—cashing checks, bill payment processing, sending money to other branches, and issuing modest loans. There is a movement to bring back these services, and some post offices are already offering to cash payroll checks and have the amount put on a debit card for a small fee.

•   Educational outreach. In 2021, the FDIC announced a “tech sprint” program, incentivizing participating banks to research and implement new ideas to reach the unbanked population in their communities. Among the offerings in development: workshops on how to balance your bank account and banking tutorial videos.

Why Is Being Unbanked a Problem?

Being unbanked can be a problem for a few reasons. For example:

•   It can be complicated and time-consuming to conduct banking transactions without having standard bank accounts.

•   Being unbanked can be expensive as well. A person may have to pay high fees for check cashing and other services from predatory businesses. Plus, an unbanked individual won’t earn any interest on your money.

•   It can be risky to carry cash versus safely keeping it with a bank or credit union.

•   Unbanked people may struggle to build wealth and have a solid credit and banking history.

Pros of Being Unbanked

Being unbanked could be seen as a positive for some people. The upsides include:

•   Not having to deal with the bureaucracy or paperwork of opening and maintaining accounts at banks

•   No checking or savings account fees

•   No overdraft or minimum balance fees

•   No record of one’s finances, if a person wants that kind of privacy.

•   Can be seen as more convenient to use cash vs. using debit cards, ATMs, and bank branches.

Cons of Being Unbanked

As mentioned above, being unbanked can be problematic. Those who don’t have checking and savings account may find that:

•   Using money orders and similar products to pay bills can be costly (fees) and time-consuming.

•   Carrying and/or keeping cash at home can be risky; what happens if you are robbed?

•   No convenient direct deposit for paychecks. The unbanked may have to utilize a check-cashing or payday loan service, which can charge very high fees or interest rates.

•   No opportunity to build up a banking history or possibly a credit history for future borrowing.

•   No access to safe and convenient money transfers.

•   No opportunity to securely save money for the future.

•   No interest earned on your money.

•   No access to other products and services that banks may offer when you are a customer, such as cashback programs or better mortgage rates.

Opening a Bank Account

There are many reasons people may shy away from opening a bank account. That said, being unbanked has a number of disadvantages. Your money may not be as secure, and it may be more costly and time-consuming to conduct transactions. What’s more, your funds won’t earn interest and grow.

Opening a bank account can be a very simple process. For most people, what you need is:

•   A valid government-issued photo ID

•   A Social Security number or taxpayer ID number

•   Proof of address.

Then, once you’ve selected a financial entity you trust, it can be quite quick to complete the sign-up process, whether you do so in person or if you’re someone who can open an account online. What’s more, there are banks that will allow you to open an account without an initial deposit and that don’t have minimum balance requirements either.

For those who have past banking problems, like having had accounts closed before, a second chance account can be a good move. While it may not be a full-fledged standard account (there are typically limitations, such as no overdraft protection), it can be a positive step towards becoming banked.

By the way, if you previously had an account that’s now shuttered, it’s unlikely that you can reopen your closed bank account. It’s usually best to start over with a new account, at your prior financial institution or elsewhere.

The Takeaway

By choice or circumstance, millions of Americans are unbanked. Typically, this means they don’t have a checking or savings account and don’t participate in personal banking. There can definitely be a downside to being unbanked, including factors like spending more time and money to conduct banking transactions and not earning any interest on one’s funds. For many people, becoming a client of a bank or credit union can be a positive step towards improving their money management and gaining wealth.

SoFi can be a great option if you are just starting out as a banking client. Our Checking and Savings, when opened with direct deposit, can be a secure place to deposit your paychecks, pay bills, transfer funds, and enjoy peace of mind. Plus, you’ll earn a competitive APY while paying no account fees. Opening a SoFi bank account can be a great way to help your money grow faster.

Better banking is here with up to 4.20% APY on SoFi Checking and Savings.

FAQ

What does it mean when a person is unbanked?

Being unbanked means an individual who doesn’t have access to or doesn’t use traditional financial services, such as checking and/or savings accounts or debit and credit cards.

What are the needs of the unbanked?

The unbanked need to hold onto cash securely, pay bills, and transfer funds. Without using the traditional banking system, they are likely to spend more time and pay higher fees and interest rates to conduct basic banking transactions.

How do unbanked people get paid?

Unbanked people can receive funds by cash, a money order, a money transfer service for cash pickup, or by receiving a prepaid debit card.

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Photo credit: iStock/Deagreez

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.

If you’re facing a financial squeeze, you could catch a temporary break on repaying a student loan but end up owing more. That’s forbearance.

Interest accrues on nearly all federal student loans in forbearance and on all private student loans, if the lender has such a program. After the payment pause, the interest is typically added to the principal balance, a process called interest capitalization. (The pandemic-related government forbearance, which paused interest accrual on federal student loans, was an exception.) New regulations that take effect in July 2023 will eliminate interest capitalization, saving borrowers money.

Even though a payment reprieve can bring short-term relief, it might be worth exploring alternatives.

What Does Student Loan Forbearance Mean?

During an approved period of forbearance, a borrower is allowed to temporarily suspend loan payments.

There are two main types of forbearance for federal student loans: general and mandatory.

General Forbearance

With general forbearance, sometimes called discretionary forbearance, your loan servicer will decide whether or not to grant your request for forbearance if you are unable to make your loan payments.

General forbearance is available for Direct Loans, Federal Family Education Loan (FFEL) Program loans, and Perkins Loans for up to 12 months at a time. Borrowers still experiencing hardship when the forbearance period expires can reapply and request another general forbearance.

For now, unpaid interest is capitalized on Direct and FFEL loans but not on Perkins Loans, according to the Federal Student Aid office. As of July 2023, new regulations will eliminate all interest capitalization when a borrower exits forbearance.

Mandatory Forbearance

Your loan servicer is required to grant you forbearance if you meet certain criteria including:

•   You are serving in a medical or dental internship or residency program.

•   The total amount you owe each month for all federal student loans is 20% or more of your total monthly gross income.

•   You are serving in an AmeriCorps position for which you received a national service award.

•   You are performing a teaching service that would qualify you for teacher loan forgiveness.

•   You qualify for partial repayment of your loans under the Department of Defense Student Loan Repayment Program.

•   You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.

Direct and FFEL loans qualify for mandatory forbearance for any of the above reasons. Perkins Loans also qualify if a borrower has a heavy student loan debt burden.

Mandatory forbearance is to be granted for no more than 12 months but can be extended if you continue to meet eligibility requirements.

Private Student Loan Forbearance

Some private lenders offer student loan forbearance as well.

If you’re having trouble making private student loans payments, you’ll be smart to contact your loan holder immediately. Interest-only payments, interest-free payments for a limited time, or a change in interest rate could be options.

Who Should Use Student Loan Forbearance?

Forbearance on federal student loans may be a good choice if you don’t qualify for deferment and your hardship is temporary.

While both student loan deferment and forbearance offer the opportunity to press pause on your student loan payments, there’s a key difference: During deferment, you may not be responsible for paying interest that accrues on Direct Subsidized Loans, Federal Perkins Loans, and the subsidized portion of Direct Consolidation Loans or FFEL Consolidation Loans.

With private student loans, borrowers anticipating trouble making payments would be wise to contact their loan servicer to seek a solution. Whether the lender calls it deferment or forbearance, interest accrues and is the borrower’s responsibility.

Recommended: Student Loan Deferment vs Forbearance

Is Student Loan Forbearance Bad?

As a stopgap measure, no.

It certainly beats having late payments or a loan default on your credit reports. Most federal student loans enter default when payments are 270 days past due, but federal Perkins Loans and private student loans can go into default after just one missed payment.

If you default on a student loan, you don’t just shrug off the responsibility. The entire balance of a federal student loan (principal and interest) becomes immediately due. If the loan is placed with a collection agency, add 17.92% of the loan amount to your principal, interest, and fees if your loan is held by the Department of Education.

If your federal student loan is in collections and you do not enter into a repayment agreement or you renege on the agreement, the collection agency can garnish your wages — up to 15% of your disposable pay.

As if that weren’t enough of a deterrent, borrowers in default can expect to have part or all of their tax refund taken and applied automatically to federal student loan debt.

After a default on a private student loan (usually after a single missed payment), private lenders may hire a collection agency or file a lawsuit. Any collection fees should be stated in the loan agreement.

Pros and Cons of Student Loan Forbearance

Postponing payments has its advantages and disadvantages.

Upsides of Student Loan Forbearance

Forbearance:

•   Can help you avoid the major credit effects and fees of late payments and student loan default.

•   Does not affect your credit scores because the late payments are not reported on your credit reports. (Ensure that you continue making payments until your forbearance application has been approved.)

•   Can give you a chance to catch your breath when money is tight.

Recommended: How Does Deferring a Loan Affect My Credit Score?

Downsides of Student Loan Forbearance

•   Interest will accrue. If you do not pay that interest, it will be added to your principal balance, which will cause more interest to accrue over time and likely also increase your monthly payment. However, starting in July 2023, interest on federal student loans will no longer be capitalized.

•   If you’re pursuing federal student loan forgiveness, any period of forbearance probably will not count toward your forgiveness requirements.

•   It’s a short-term answer.

Recommended: Student Loan Forgiveness Programs

Alternatives to Forbearance

Income-Driven Repayment Plans

If you’re having trouble making student loan payments because of circumstances that may continue for an extended period, or if you’re unsure when you’ll be able to afford to resume payments, one option is an income-based repayment plan.

Monthly payments hinge on your income and family size. Income-driven repayment plans are intended to also forgive any remaining loan balance after 20 or 25 years.

Student Loan Refinancing

Refinancing your student loans with a private lender is another option to consider. You’d take out one new loan, hopefully with a lower interest rate, to pay off one or more old loans.

You may also be able to change the length of the loan.

Borrowers eligible for student loan refinancing typically have a solid financial history, including a good credit score. Just realize that if you refinance federal student loans with a private lender, you give up federal benefits like income-driven repayment, loan forgiveness, and federal forbearance.

Recommended: Student Loan Refinancing Calculator

The Takeaway

What does forbearance mean? Student loan forbearance is an option when you’re struggling to make payments, but in almost all cases interest will accrue and be added to the loan. Deferment, income-driven repayment, or refinancing could make more sense.

SoFi offers student loan refinancing with a fixed or variable interest rate and a simple online application.

It’s easy to see your rate on a student loan refi.

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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.

After graduation and your six-month federal student loan grace period, it’ll be time to start paying your dues. If you are on the Standard Repayment Plan, you’ll pay at least $50 a month for 10 years. But there are other ways to pay back your student loans: through income-driven repayment plans.

Not all of these plans have the same repayment strategy, and not all federal loans qualify for income-driven repayment. We’ll help you find the one that aligns with your financial situation before you commit.

How Does Income-Based Repayment Work?

The government offers four income-driven repayment plans for holders of federal student loans:

•   Income-Based Repayment Plan (IBR)

•   Income-Contingent Repayment Plan (ICR)

•   Pay As You Earn Repayment Plan (PAYE)

•   Revised Pay As You Earn Repayment Plan (REPAYE)

For most income-driven plans, your monthly payment is calculated as a portion of your discretionary income.
Discretionary income is the money that isn’t devoted to necessary bills, like rent or a car loan. Instead, it’s money you have left over after all mandatory payments are made. Money that might be otherwise used for things like dining out or shopping.

On an Income-Based Repayment plan (IBR), your monthly payment is set at 10% to 15% of your discretionary income. The Department of Education guarantees that your new payment will never be more than what you paid through the Standard Repayment Plan. IBR periods are 20 to 25 years, depending on when you borrowed money. If you still owe money after that, any remaining balance is typically forgiven.

In August 2022, President Biden proposed changes to some income-driven repayment programs as part of his Forgiveness plan. Payments for undergraduate borrowers would be reduced to 5% of discretionary income, which would be recalculated as 225% of the poverty level. The loan term would be 20 years, or 10 years for original loan balances less than $12,000. For more details, check out our Guide to Student Loan Forgiveness.

In all cases, the term of the repayment plan is from when you started the IBR plan, not when you started repaying your student loans. For example, if you began IBR five years after you graduated, your IBR period starts then. It doesn’t consider any payments before IBR as part of the term. You can estimate how much your monthly payments will be through the federal Loan Simulator calculator.

Recommended: Should You Refinance Your Student Loans?

The Difference Between Income-Driven Repayment Plans

Deciding which income-driven repayment plan is right for you (and that you may qualify for) depends on your financial situation and your loan type(s). Here’s what they all mean:

•   IBR (Income-Based Repayment Plan). Based on your income and family size. The potential IBR payment must be less than what you would pay under the Standard Repayment Plan to qualify. Read more about the Income-Based Repayment Plan.

•   ICR (Income-Contingent Repayment Plan). Your monthly payment is adjusted based on your income. It might not lower your payments as much as other plans, but it’s the only IDR plan that allows Parent PLUS Loans.

•   PAYE (Pay As You Earn Repayment Plan). You’ll never pay more than the fixed Standard Repayment Plan amount. Payment is 10% of your discretionary income. Any remaining balance after 20 years of payments is forgiven.

•   REPAYE (Revised Pay As You Earn Repayment Plan). There are no income eligibility requirements for this IDR. Anyone with qualifying student loans can apply for REPAYE. However, you could end up paying more per month under this plan than the Standard Repayment Plan. If you’re okay with a higher monthly payment, then REPAYE might work for you. Read more about PAYE vs. REPAYE.

Alternatives to Income-Driven Repayment Plans

Aside from the Standard Repayment Plan, there are a few options to consider instead of IDR.

Consolidation

If you have federal student loans, you can get a Direct Consolidation Loan. This will move all your eligible federal student loans into one monthly payment. Your new interest rate is the weighted average of all your loans, rounded up to the nearest eighth of a percent.

This can be helpful if you have many smaller loans that each have a minimum monthly payment. It typically won’t lower your monthly payment, however, but it can make it manageable and easier to keep track of. Only federal loans are eligible for a Direct Consolidation Loan.

Refinancing

Refinancing is similar to consolidation. You get one loan to replace all your other loans, but it’s a new loan with a new interest rate from a private lender or bank. Your credit report and other personal financial factors are considered to see if you’re a responsible borrower. If you previously had a co-borrower, such as a parent, you can look into refinancing without a cosigner.

Many lenders allow you to refinance all your student loans, not just federal student loans. So if you have a mix of private student loans and federal student loans, refinancing will create one new loan with one payment to replace them.

If you qualify for a lower interest rate, you might end up paying less through refinancing than you would through an IDR plan. The interest rate you qualify for can vary depending on factors like how much you owe, your current loan terms, your credit score, and other personal financial information. You can explore different scenarios with our Student Loan Refinance Calculator.

Keep in mind that refinancing doesn’t guarantee a lower payment or interest rate. Along with that, different lenders offer different terms. Because of this, refinancing isn’t always the best option for everyone.

If you’re ready for a deep dive into the topic, this student loan refinancing guide covers all the bases.

How Do You Calculate Income for an Income-Driven Plan?

The Department of Education considers three different components when calculating a borrower’s income. While this may seem needlessly complicated, it actually benefits borrowers.

Annual Income

Any income that’s taxable counts toward the DOE’s calculation. That means regular wages, plus interest and dividends from savings and investments, unemployment benefits, etc. On the flip side, any income that isn’t taxed doesn’t count: gifts and inheritances, cash rebates from retailers, child support payments, and so on.

Spouse’s Income

If you and your spouse file a joint tax return, then their income must also be factored in. If you file separately, only your income counts. The exception: The REPAYE plan requires your spouse’s income information regardless of how you file.

Family Size

Your family size is the number of people who live with you and receive more than half their support from you. This includes children but also dependent adults, such as an older parent.

The Takeaway

There are four income-driven repayment plans for federal student loan holders. The best way to determine which is right for you is by using the Loan Simulator calculator on the StudentAid.gov site. Then carefully weigh your options: Sometimes, a lower monthly payment means paying more in interest over the life of your loan.

If none of the income-driven plans meet your needs, you may consider a Direct Consolidation Loan, which replaces multiple federal and private student loans with a single loan. Another option is student loan refinancing with a private lender. Just be aware that refinancing federal student loans makes you lose access to federal benefits, such as deferment, Public Service Loan Forgiveness (PSLF), and all IDR plans.

If you think that student loan refinancing may be a good option for you, check out student loan refinancing with SoFi. SoFi offers a competitive rate, flexible terms, no hidden fees, and no prepayment penalty — and you can view your rate in 2 minutes.

Checking your interest rate will not affect your credit score.

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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Once you are in an Income-Based Repayment (IBR) plan, you will need to recertify your income based repayment annually, by providing updated information about your income and family size. The government uses this information to calculate your payment amount and adjust it if necessary.

You can easily recertify online or by mail. Read on to find out when to recertify your income-based repayment, how to do it, and more.

What Is Income Based Repayment?

Income Based Repayment plans are offered for federal student loan borrowers to help make their payments more manageable. It’s an option to keep in mind when choosing a loan or if your current federal loan payments are high relative to your income. The program is intended to set your student loan payment at an amount that is affordable to you each month.

There are four income-driven repayment programs, including the income-based repayment plan. For all of these plans, your payment amount is generally based on a percentage of your discretionary income, as defined by the U.S. Department of Education. In the case of IBRs, discretionary income is “the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.”

IBR payments are determined as 10% of your discretionary income if you are a “new borrower,” who received their loan on or after July 1, 2014. You must also have no outstanding balance on a Direct Loan or Federal Family Education Loan (FFEL).

If you’re not a new borrower, payments are generally 15% of your discretionary income.

Your payment will never be more than the 10-year Standard Repayment Plan amount, which is the standard repayment plan for the Federal Direct Loan program and FFELs.

Each income-driven repayment plan has a different loan period. For IBRs, it’s 20 years for new borrowers and 25 years for those who aren’t considered new borrowers. Any loan balance that remains unpaid at the end of the repayment period will be forgiven.

In an effort to make monthly bills even more manageable, President Biden’s student loan forgiveness plan proposed changes to some income-driven repayment programs. Payments for undergraduate borrowers would be reduced to 5% of discretionary income, which would be recalculated as 225% of the poverty level. The loan term would be 20 years, or 10 years for original loan balances less than $12,000.

Recommended: Guide to Student Loan Forgiveness

Which Federal Loans Are Eligible for an Income Based Repayment Plan?

IBR plans are available for the following types of federal loans:

•   Direct Subsidized Loans

•   Direct Unsubsidized Loans

•   Direct PLUS Loans made to graduate or professional students

•   Direct Consolidation Loans that did not repay any PLUS loans made to parents

•   Subsidized Federal Stafford Loans

•   Unsubsidized Federal Stafford Loans

•   FFEL PLUS Loans made to graduate or professional students

•   FFEL Consolidation Loans that did not repay any PLUS loans made to parents

•   Federal Perkins Loans, if consolidated.

Income Based Repayment plans are not available to FFEL PLUS loans or Direct PLUS loans that are made to parents. They are also not available for Direct Consolidation Loans or FFEL Consolidation Loans that repaid PLUS loans to made parents.

Recommended: Refinancing Student Loans Without a Cosigner

What Is Student Loan Recertification?

You will need to apply for an income-driven repayment plan only once. When you do, you will be required to provide information about your income. You may be asked to provide your adjusted gross income if you’ve filed a tax return in the last two years or your income doesn’t differ that much from the income you reported on your tax return.

If your income is significantly different from the income on your tax return, or you haven’t filed one in the last two years, you may be asked for alternative documentation. The government will require you to recertify your income information and family size at least once each year.

How To Recertify Income Based Repayments

You can take care of your IBR recertification online at StudentAid.gov. Filing your application online ensures that it is sent to each of your loan servicers. Alternatively, you may provide paper applications to each of your loan servicers if you haven’t filed a tax return in the last two years or your income has changed significantly since you filed your last return.

To file online, go to the student aid website above, click on “Manage My Loans,” and then click on “Recertify an Income-Driven Repayment Plan.” You’ll need to log in with your federal student aid ID.

Then enter information about your family, including family size, your marital status, and your spouse’s income, if applicable. You can connect directly to your tax return to verify your income information. And if your income has changed since your last tax return, you can send in more recent pay stubs.

To recertify by mail, you can download the Income-Driven Repayment Plan Request form (PDF), fill it out, and attach the required documents. You’ll send the request to the address provided by your loan servicer.

When To Recertify Income Driven Repayment Plans

The government paused income-driven repayments as part of its COVID-19 relief program. The program included suspended loan payments, 0% interest, and stopped collections on defaulted loans. Payments will remain paused through Dec. 31, 2022. Paused payments will count toward IDR forgiveness.

Borrowers are not required to recertify before their payments restart. The earliest they might be required to do so is November 2022.

In normal times, you are required to recertify your income and family size each year, two months before your current 12-month payment period ends. If your income decreases or your family grows, you may recertify earlier than that to help ensure that your payment stays manageable.

If you fail to recertify your IBR plan by the annual deadline, your monthly payment will switch to the amount you would pay under the Standard Repayment Plan. You’ll be able to make payments based on your income again when you update your income information.

The Takeaway

Income Based Repayment plans are available to most federal student loan borrowers and can be a great way to make sure your student loan repayments work with your budget. Recertification is a critical step each year to alert the government to changes in your situation that might affect your payment size.

Refinancing is another way to manage your student loan debt, especially if you have private student loans that don’t qualify for government assistance programs.

If you’re considering refinancing federal loans, just be sure the amount you save outweighs the benefits of income-driven programs, potential student loan forgiveness, or other federal loan protections, all of which you lose access to when you refinance. Our Student Loan Refinance Calculator can help you run the numbers.

Visit SoFi to explore options for student loan refinancing. SoFi offers a competitive rate, flexible terms, no hidden fees, and no prepayment penalty — and you can view your rate in 2 minutes.

FAQ

Can you recertify student loans early?

Yes, you can recertify early, and it may even be a good idea if your family has grown or your income has decreased.

How do I recertify my student loans?

You can recertify your student loans online at the Federal Student Aid website (studentaid.gov), or by downloading and mailing in the Income-Driven Repayment Plan Request form with any supporting documentation.

When should I recertify my student loans?

You should recertify your student loans two months before your current 12-month payment period ends.

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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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