Oct
18
2023

Income-Contingent Repayment Plan, Explained

By | Debt Payoff, Student Loans, student_loan | Comments Off on Income-Contingent Repayment Plan, Explained

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Income-contingent payment (ICR) plans are one kind of Income-driven repayment plan, which can help make federal student loan payments more affordable. The income-contingent repayment plan allows you to extend your loan repayment period while reducing monthly payments to help them better align with your income. Any remaining loan amounts due at the end of your ICR plan term may be forgiven.

An ICR may be a good fit if you’re just starting your career and aren’t earning a lot of money. You may also consider an income-contingent repayment plan if you’re hoping to qualify for federal Public Service Loan Forgiveness (PSLF).

But is an ICR plan right for you? And what are the pros and cons of income-contingent repayment? Weighing the benefits alongside the potential downsides can help you decide if it’s an option worth pursuing managing your student loan debt.

What Is Income-Contingent Repayment (ICR)?

Income-driven repayment plans, including ICR, determine your monthly payment amount based on your household size and income. Depending on how much you make and how many people there are in your household, it’s possible that you could have no monthly payment at all.

Like other income-driven repayment plans offered by the Department of Education (DOE), an ICR plan aims to make it easier to keep up with federal student loan payments.

With income-contingent repayment, your monthly payments are capped at the lesser of:

•   20% of your discretionary income

•   What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted for your income

Of the four income-driven repayment options, income-contingent repayment is the oldest plan, and it is the only one that sets the payment cap at 20% of a borrower’s discretionary income. With income-based repayment (IBR) and Pay as You Earn (PAYE), monthly student loan payments max out at 10% of your discretionary income. The Department of Education recently introduced a new IDR plan called Saving on a Valuable Education (SAVE), and starting in July 2024, borrowers on the SAVE plan could see their payments reduced from 10% to 5% of income above 225% of the poverty line.

The interest rate for an ICR plan stays the same for the entire repayment term. The rate would be whatever you’re currently paying for any loans you’ve consolidated or the weighted average of all loans you haven’t consolidated.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How an ICR Plan Works

Income-contingent repayment can reduce your federal student loan payments, allowing you to pay 20% of your discretionary income each month or commit to making fixed payments based on a 12-year loan term.

You have up to 25 years to repay all loans enrolled in the plan. If you still have remaining payments after 25 years of monthly payments, the DOE will forgive the balance. But while you may not owe any more payments on the loan, the IRS considers student loan debts forgiven through ICR or another income-driven repayment plan to be taxable income, so you may owe taxes on it.

Income-contingent repayment plans base your monthly payment on your income and family size. This means that if your income, or your family size, changes over time, your monthly payments could change as well. With all of the federal IDR plans, borrowers must recertify their loan every year to show any changes to your income or family size.

If you’re enrolled in the 10-year Standard Repayment Plan, your monthly payments would be the same for the entire repayment term, and you never have to recertify your loan.

Here’s an example of what your payments might look like on an ICR plan versus a Standard Repayment plan, assuming you’re single, make $50,000 a year, get 3.5% annual raises, and owe $35,000 in federal loans at a weighted interest rate of 5.7%.

Standard

 ICR Plan

 Savings
First month’s payment $383 $319 $64
Last month’s payment $383 $336 $47
Total payments $45,960 $49,092 -$3,132
Repayment term 10 years 12.4 years -2.4 years

As you can see, an income-contingent repayment plan would lower your monthly payments. But it will take you longer to pay your loans off and you pay more than $3,000 in additional interest charges over the life of the loan. If you start earning more while you’re on the ICR plan, your payments could also increase.

If you get married, and you and your spouse file your taxes jointly, your loan servicer will use your joint income to determine your loan payment. If you file separately or are separated from your spouse, you’ll only owe based on your individual income.

Recommended: How is Income Based Repayment Calculated?

Who Is Eligible for an Income-Contingent Repayment Plan?

Anyone with an eligible federal student loan can apply for the income-contingent repayment plan. Eligible loans include:

•   Direct student loans (subsidized or unsubsidized)

•   Direct consolidation loans

•   Direct PLUS loans made to graduate or professional students

Other types of federal student loans may also be enrolled in income-contingent repayment plans if you consolidate them into a Direct loan first. For example, you could use an ICR plan to repay consolidated:

•   Federal Stafford loans (subsidized or unsubsidized)

•   Federal Perkins loans

•   Federal Family Education Loan (FFEL) PLUS loans

•   FFEL consolidation loans

•   Direct PLUS loans for parents

The income-contingent repayment is the only income-driven repayment plan option that includes loans taken out by parents. So if you borrowed federal loans to help your child pay for college, you could enroll in an ICR plan (after consolidating your loans) to make the payments more manageable.

Two types of loans are not eligible for income-contingent repayment or any other income-driven repayment plan:

•   Private student loans

•   Federal student loans in default

If you’ve defaulted on your federal student loans you must first get them out of default before you can enroll in an income-driven repayment plan. The DOE allows you to do this through loan consolidation and/or loan rehabilitation. Either one can help you get caught up with loan payments and loan rehabilitation will also remove the default from your credit history.

Pros and Cons of ICR Plans

Income-contingent repayment is just one option for paying off student loans, and it may not be right for everyone. It’s important to look at both the advantages and potential disadvantages before enrolling in an ICR plan.

Pros of income-contingent repayment:

•   Can lower your monthly payments

•   Parent loans are eligible for income-contingent repayment, after consolidation

•   Extends the loan term to 25 years to repay student loans

•   Remaining loan balances are forgivable

•   Qualifying repayment plan for PSLF

Cons of income-contingent repayment:

•   Other income-driven repayment plans like PAYE or SAVE base monthly payments on 5 to 10% of your discretionary income

•   Taking longer to repay loans means paying more in interest

•   If your income changes, your payments could increase

•   Enrolling certain loans requires consolidation first

•   Forgiven loan amounts are taxable

If you’re interested in an income-driven repayment plan, it may be helpful to do the math first to see how much you might pay with different plans. An income-based repayment option, for example, might lower your payments even more than ICR so it’s worth running the numbers through a student loan repayment calculator.

The Takeaway

Income-contingent repayment plans are something you might consider if you have federal student loans. With an ICR plan, your monthly payments may be lower than they are with the Standard Loan Repayment Plan, allowing you more money for other bills.

You won’t receive a lower interest rate when you sign up for an income-driven repayment plan. The only way to change your interest rate is through student loan refinancing. But if you refinance your federal loans, you will lose access to benefits like ICR and other income-driven repayment plans.

When you refinance student loans, you take out a new loan to pay off your existing ones. If you’re able to secure a lower interest rate on the new loan and don’t extend the term length of the loan, you could pay less in total interest over the life of the loan while having lower monthly payments. This could give you more breathing room in your budget. If you have both federal and private loans, you may choose to place the federal loans in an income-driven repayment plan and then refinance the private loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.


SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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.

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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Oct
18
2023
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How to Get the Student Loan Interest Deduction

By | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments

If you’re tackling school debt and looking for ways to maximize your tax refund, one avenue to consider is the student loan interest deduction. This benefit allows you to take a tax deduction for the interest you paid on student loans that you took out for yourself, your spouse, or your dependents. The deduction can lower how much of your income is taxed, which could result in a lower overall tax bill.

However, there’s a limit to how much you can deduct each tax year, and you must meet certain criteria in order to get the deduction. Let’s look at how the student loan interest deduction works and how to qualify for it.

Are Student Loan Payments Deductible?

Typically, when you repay a student loan, your monthly payment goes toward the original amount you borrowed plus origination fees (the loan principal) and the amount a lender charges you to borrow it (interest). With the student loan interest deduction, you are only allowed to deduct the amount you paid in interest, not the full amount of the loan payment.

Is Student Loan Interest Deductible?

The student loan interest deductible allows you to subtract up to $2,500 or the total amount of interest paid on student loans — whichever is lower — from your taxable income. Private and federal loans may qualify for this benefit. The deduction is considered “above the line,” which means you don’t have to itemize your taxes to take advantage of it.

Note that there are income phaseouts based on your modified adjusted gross income (MAGI). A borrower can claim the full credit if their MAGI is $80,000 or less ($160,000 or less if you’re filing jointly). The deduction is gradually reduced if your MAGI falls between $80,000 and $90,000 ($160,000 and $180,000 if you’re filing jointly). The deduction is eliminated for borrowers with a MAGI of more than $90,000 ($180,000 or more if you’re filing jointly).


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Who Can Deduct Student Loan Interest?

Not everyone is able to claim the student loan interest deduction. In order to be eligible for it, you must meet certain criteria:

•   You paid interest on a qualified student loan for you, your spouse, or your dependents in the previous tax year. (A qualified student loan is a loan taken out to pay for qualified education expenses like tuition, housing, books, and supplies. The loan must be used within a “reasonable period” after it’s taken out.)

•   You’re legally required to pay interest on a qualified student loan.

•   Your MAGI in the 2023 tax year is less than $90,000 (or less than $180,000 if you’re filing jointly).

•   Your filing status is anything except married filing separately.

•   If you’re filing taxes jointly, neither you nor your spouse can be claimed as a dependent on someone else’s tax return.

Your eligibility may be impacted if your employer made payments on your student loans as part of a work benefit.

What to Know About the Student Loan Interest Deduction Form

If you pay $600 or more in interest on qualified student loans during a tax year, your loan servicer should send you IRS Form 1098-E. This student loan tax form is usually sent out around the end of January.

If you don’t receive a 1098-E form, you should be able to download it from your loan servicer’s website. To find out who your loan servicer is, log on to the Federal Student Aid website, and the information will be listed in your dashboard. You can also call the Federal Student Aid Information Center at 800-433-3243.

Keep in mind that if you didn’t make payments on your federal student loans because of the Covid-related payment pause — or if you didn’t pay $600 in interest during the tax year — you may not get a 1098-E form. However, you can contact your servicer to find out how much interest you paid during the year if you’re planning to report it on your taxes.

Recommended: How Student Loans Could Impact Your Taxes

Additional Education Tax Breaks

The student loan interest deduction isn’t the only benefit worth knowing about. You may also want to see if you qualify for certain education tax credits, which represent a dollar-for-dollar reduction in your overall tax burden. They can directly lower the tax amount you owe. Here are two to consider.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a credit for tuition and other qualified educational expenses paid during the first four years of a student’s college education. The credit is worth up to $2,500 per eligible student. Once your tax bill hits zero, you could earn 40% of whatever remains (up to $1,000) as a tax refund.

You must meet certain requirements in order to qualify for the AOTC. You must:

•   Pursue a degree or other recognized education credential

•   Be enrolled at least half time for at least one academic period beginning in the tax year

•   Have no felony drug convictions at the end of the tax year

•   Haven’t claimed the AOTC for more than four tax years

As with the student loan interest deduction, your income matters. To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less if you’re filing jointly) in the 2023 tax year. The credit amount begins to decrease if your MAGI falls between $80,000 and $90,000 (over $160,000 but less than $180,000 if you’re filing jointly). The credit is eliminated if your MAGI is over $90,000 ($180,000 if you’re filing jointly).

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) works a little differently. The credit is worth 20% of the first $10,000 of qualified educational expenses, or a maximum of $2,000 per year. Unlike the AOTC, which only applies to the first four years of a student’s college education, the LLC includes undergraduate, graduate, and professional schools, and courses needed to acquire job skills. There’s no limit to the number of years you can claim it.

However, the LLC has a lower income limit, which means it could be more difficult to qualify for. For instance, in 2022, the credit amount gradually decreased if your MAGI fell between $80,000 and $90,000 ($160,000 and $180,000 if you filed jointly) in the 2022 tax year. The credit was eliminated if your MAGI is $90,000 or more ($180,000 or more if you filed jointly).

Strategies to Lower Monthly Student Loan Payments

Borrowers looking to save beyond tax time may want to explore ways to lower their monthly student loan payments.

One option to consider is a Direct Consolidation Loan. This loan is offered through the Department of Education and lets you combine different federal student federal loans into a single loan, resulting in one monthly payment. It can also lower your monthly payment amount, allow you to switch from a variable to a fixed interest rate, and help set up loans that are eligible for forgiveness.

Another strategy to think about is refinancing your student loans with a private lender, resulting in one new loan, hopefully with a lower interest rate. Just realize that if you refinance a federal student loan, you will lose access to federal protections and programs, such as the Covid-related payment pause, the Public Service Loan Forgiveness program, and income-driven repayment plans. And if you’re refinancing to get a lower monthly payment, know that you may pay more interest over the life of the loan if you refinance with an extended term.

Recommended: 7 Tips to Lower Your Student Loan Payments

The Takeaway

The student loan interest deduction can lower how much of your income is taxed, which could result in a lower overall tax bill. Depending on your income, you can deduct up to $2,500 of the interest paid on your loans. If you earn more than $90,000 a year (or $180,000 if you’re filing jointly), you are not eligible. Education tax credits, like the American Opportunity Tax Credit and the Lifetime Learning Credit, could also help lower your tax bill. Like the student loan interest deduction, you must meet certain criteria to be eligible.

There are different strategies that may help you lower your monthly payments so you can save outside of tax time. A Direct Consolidation Loan, for example, lets you combine multiple federal loans into a single loan and switch from a variable to a fixed interest rate.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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.

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.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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Oct
18
2023
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How Do I View My Federal Student Loans?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Whether you’re a new grad who wants to get a grip on how much you owe and set up a payment plan or a working professional who wants to find out how much you’ve paid off of your total balance, keeping tabs on your student loan numbers is an important part of financial wellbeing. But for something that is so important, it can be surprisingly confusing to locate all your student loan information.

Student loan holders can view their federal student loans via the Federal Student Aid website (FSA), which is run by the Office of the U.S. Department of Education. It offers a convenient option for getting a comprehensive picture of all federal loans.

The FSA website can show you information on your federal student loans like:

•  The number and types of loans you have

•  The initial amount of your loans

•  Your current loan balances

•  The interest rates on your loans

•  If any of your loans are in default

•  The name of your loan service provider and their contact information

Using the Federal Student Aid website

In order to see your loan information on FSA, borrowers will need to create a new account; current registrants can log in with their email, phone number, or FSA ID username and password. In addition to student loans, the site also has valuable resources including repayment plans and loan counseling.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Where Do I Pay My Student Loans?

Even though you can obtain all the information about your student loans through the FSA website, that is not actually where you pay your student loans. Once you’re logged in, borrowers should be able to see the name and contact information for their student loan service provider. The student loan service provider is the entity charged with collecting loan payments.

Once you know who your student loan servicer is, you should be able to set up an online account directly with the loan servicer. Some student loan servicers also offer the option to set up automatic bill pay.

If you’d rather go old school, don’t worry, your student loan servicer’s website should also have information about making payments in other ways, like check or bank transfer.

Looking to save money on your
monthly student loan payments?
See how refinancing could help.

How Do I Pay My Student Loans?

Once you know how to view your federal student loans, you may still be wondering how exactly to pay them off. Viewing your federal loans is just the first step; next, you need to strategize your student loan repayment. One of the first things you may want to do is consider your different repayment plan options. As a note, you can use our student loan calculator to get estimates of what your monthly payments could look like under the various plans.

The federal government offers a handful of options when it comes to federal student loan repayment. These repayment plans are designed for people with different types of financial situations and priorities, from those who want a straightforward way to pay off their loans in a 10-year period to those looking for income-driven repayment plans.
Here’s a quick rundown of the repayment options offered for federal student loans:

•   The Standard Repayment plan is the default loan repayment plan for federal student loans. Borrowers pay a fixed amount every month within 10 years in order to pay off their loan(s).

•   The Extended Repayment is similar to the Standard Repayment plan but instead of making payments over 10 years, the payments are extended up to 25 years.

•   The Graduated Repayment Plan also offers a 10-year repayment option. Under this plan, monthly loan payments start at a lower amount and are then increased every two years for up to 30 years.

There are also four income-driven repayment plans–— Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Under these plans, monthly payments are determined as a percentage of the borrower’s monthly income. Depending on the plan, borrowers have up to 25 years to repay their loans.

If you’re just starting to pay back your student loans after graduation, you’ll likely be automatically assigned to the Standard Repayment plan. You can change the repayment plan you are enrolled in at any time.

The federal government may also have options for you to consolidate your student loans into a Direct Consolidation Loan, which would allow you to group all your loans together into a single loan from the government, with an interest rate that’s the weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percent.

In addition to the repayment plans offered by the federal government, you might also consider refinancing your student loans with a private company. Loan refinancing pays off your current federal and private student loans with a new loan from a private lender.

The private lender will review factors like your credit history and income potential to determine your new terms. For some borrowers, student loan refinancing may result in a lower interest rate, lower monthly payments, or even a shorter repayment term—which could mean you spend less money in interest over the life of the loan. Conversely, if you refinance with an extended term, you may pay more interest over the life of the loan.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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.

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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Oct
18
2023
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What Is a Student Loan Grace Period and How Long Is It?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

As you prepare for life after graduation, one important step is figuring out whether you’re required to make monthly student loan payments right away or you have what’s called a “grace period.” The same question applies to students taking a break from going to school full time.

Below, we’ll explain what a grace period is, when it starts, and how you might extend yours. You’ll also find a simple financial to-do list to tackle before you start making student loan payments.

What Is a Grace Period for Student Loans?

A student loan grace period is a window of time after a student graduates and before they must begin making loan payments. The intent of a grace period is to give new graduates a chance to get a job, get settled, select a repayment plan, and start saving a bit before their loan repayment kicks in. Most federal student loans have a grace period, as well as some private student loans.

Grace periods also apply when a student leaves school or drops below half-time enrollment. Active members of the military who are deployed for more than 30 days during their grace period may receive the full grace period upon their return.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Long Is the Grace Period for Student Loans?

The grace period for federal student loans is typically six months. Some Perkins loans can have a nine-month grace period. When private lenders offer a grace period on student loans, it’s usually six months, too.

Keep in mind that, as noted above, not all student loans have grace periods.

Does My Student Loan Have a Grace Period?

Whether you have a grace period depends on what kind of loans you have. Student loans fall into two main buckets: federal and private student loans.

Federal Student Loans

Most federal student loans have grace periods.

•   Direct Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period.

•   Grad PLUS loans technically don’t have a grace period. But graduate or professional students get an automatic six-month deferment after they graduate, leave school, or drop below half-time enrollment.

•   Parent Plus loans also don’t have a grace period. However, parents can request a six-month deferment after their child graduates, leaves school, or drops below half-time.

Keep in mind: Borrowers who consolidate their federal loans lose their grace period. Once your Direct Consolidation Loan is disbursed, repayment begins approximately two months later. And if you refinance, any grace period is determined by your new private lender.

Private Student Loans

The terms of private student loans vary by lender. Some private loans require that you make payments while you’re still in school. When private lenders do offer a grace period, it’s usually six months for undergraduates and nine months for graduate and professional students.

Here at SoFi, qualified private student loan borrowers can take advantage of a six-month grace period before payments are due. SoFi also honors existing grace periods on refinanced student loans.

If you’re not sure whether your private student loan has a grace period, check your loan documents or call your student loan servicer.

Recommended: Student Loan Forgiveness for Current Students

Does Interest Accrue During the Grace Period?

During the student loan payment pause, which lasted from March 2020 to September 1, 2023, interest did not accrue on federal student loans. However, that’s not the way it usually works.

For most federal and private student loans, interest is charged during the grace period — even though you aren’t making payments on the loan. In some cases, this interest is then added to your total loan balance (a process called “capitalization”), effectively leaving you to pay interest on your interest.

In July 2023, federal regulations changed so that the interest that accrues during a borrower’s grace period is not capitalized. According to the federal student aid website, “the interest that accrues during your grace period will be added to the outstanding balance of your loan, but it will not be capitalized.”

How to Make the Most of Your Student Loan Grace Period

If you are in a financially tight spot after you graduate or during your break from school, a student loan grace period can offer much-needed breathing room. Here’s how you can put your grace period to good use:

Get Your Finances in Order

Take this time to create a new post-grad budget. Which approach you use is up to you: the 70-20-10 Rule, the Kakeibo method, zero-based budgeting. The important thing is to determine your monthly income and expenses, setting aside enough to pay down debts and save a little.

Set Up Autopay

Missed loan payments can incur penalties and hurt your credit score. Setting up autopay means one less thing you have to remember. Some student loan lenders will even discount your interest rate for setting up automatic payments (like SoFi!).

Consider Making Payments Ahead of Time

Just because you don’t have to make payments toward student loans during a grace period doesn’t mean you can’t. If you are in a financial position to make payments — even interest-only payments — during a grace period, you should. It can help keep your loan’s principal balance from growing if you have private loans and the accruing interest is capitalizing during your grace period. (Learn more in our take on making minimum student loans payments.)

Look into Alternative Repayment Plans

Once your grace period is over for your federal loan, you’ll be automatically enrolled in the Standard Repayment plan. However, if you’re concerned about making your payments, several income-driven repayment plans are available. These plans reduce your payment to a small percentage of your discretionary income. The Department of Education introduced a new IDR plan recently called the Saving on a Valuable Education (SAVE). With SAVE, borrowers get the lowest monthly payments of all the IDR plans — sometimes as low as $0. (Note that the lowest payments will arrive in July 2024, when the minimum payment for SAVE participants drops from 10% to 5% of discretionary income.)

Consider Consolidating or Refinancing Your Student Loans

These two terms are often used interchangeably, but there are important differences between them. Both consolidation and refinancing combine and replace existing student loans with a single new loan.

A Direct Consolidation Loan allows you to combine several federal student loans into one new federal loan. The resulting interest rate is the weighted average of prior loan rates, rounded up to the nearest ⅛ of a percent. However, as noted above, borrowers who consolidate their federal loans lose their grace period.

Student loan refinancing is when you consolidate your student loans with a private lender and receive new rates and terms. Your interest rate — which is hopefully lower — is determined by your credit history.

Can You Extend Your Student Loan Grace Period?

If your loan doesn’t qualify for a grace period or you want to extend your grace period, you have options. You may still delay your federal student-loan repayment through deferment and forbearance.

What’s the difference? Both are similar to a grace period in that you won’t be responsible for student loan payments for a length of time. The difference is in the interest.

When a loan is in forbearance, loan payments are temporarily paused, but interest will accrue during the forbearance period. This can lead to substantial increases in what you’ll pay for your federal loans over time. You’ll want to consider forbearance very carefully, and look into other options that might be available to you, like income-driven repayment plans. (The good news is that the interest that accrues during forbearance no longer capitalizes.)

During deferment, by contrast, interest will not accrue – at least, not for Direct Subsidized Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, and subsidized portions of Direct Consolidation Loans or Federal Family Education Loan Program (FFEL) Consolidation Loans. Other types of federal loans may still accrue interest during deferment, and that interest will capitalize upon exiting deferment unless you were enrolled in an income-driven repayment plan.

While grace periods are automatic, you’ll need to request a student loan deferment or forbearance and meet certain eligibility requirements. In some cases — during a medical residency or National Guard activation, for example — a lender is required to grant forbearance.

The Takeaway

Federal student loan grace periods are typically six months from your date of graduation, during which you don’t have to make payments. Most federal student loans have grace periods (though sometimes they’re dubbed “deferments” instead). Private student loan terms vary by lender. However, some lenders, like SoFi, match federal grace periods for undergrad loans.

During your grace period, you may want to make payments anyway, even interest-only payments, to prevent your balance from growing. The grace period is a good time to create a new budget, choose a repayment plan, and set up autopay. Student loan payments and interest were on pause between March 2020 and September 2023, but they have resumed.
If you have trouble making your payments, you have options, from income-driven repayment to consolidation to refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


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.

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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Oct
16
2023
Who Qualifies for FAFSA? Find Out if You Do

Who Qualifies for FAFSA? Find Out if You Do

By | Going to College, Student Loans, student_loan | Comments Off on Who Qualifies for FAFSA? Find Out if You Do

Editor’s Note: The new, simplified FAFSA form for the 2024-2025 academic year is available, although applicants are reporting a number of glitches. Try not to worry, take your time, and aim to submit your application as soon as possible.

Students who are enrolled at least half-time at an eligible school, are a U.S. citizen or eligible non-citizen, and meet other requirements can receive financial aid through the Free Application for Federal Student Aid (FAFSA®).

According to Education Data Initiative, the average cost for undergraduate students attending a four-year private nonprofit institution is $38,768 in tuition and fees per year. For students attending in-state public four year institutions, the average is $9,678 in tuition alone. Living on campus bumps these numbers up to $55,840 and $26,027 per year, respectively.

If you can’t afford to pay for this cost out-of pocket, understanding the FAFSA requirements can help you possibly fund this worthwhile expense.

What Is FAFSA?

The FAFSA is the official application form to request financial aid for higher education from the U.S. government. It determines whether undergraduate and graduate students are eligible to receive federal grants, work-study, and federal student loans. Federal aid can only be used toward qualifying college expenses.

It’s also often used by states and schools to see if you’re eligible for its student aid programs. Some private entities might also use it to determine your eligibility for their own financial aid programs.

Recommended: What Costs Does a Student Loan Cover?

How FAFSA Works

Students must complete the FAFSA before each college year. Applications must be received by the June 30 deadline. However, you can begin submitting your FAFSA for the following school year starting on October 1 (for the 2024-25 FAFSA, the FAFSA will be available in December 2023), and states and colleges often have earlier deadlines for state- and school-sponsored aid.

Some federal aid is granted on a first-come, first-served basis. Many of the aid programs are based on need, though some — like Direct Unsubsidized Student Loans and Direct PLUS Loans — are not.

To start, you’ll have to create a Federal Student Aid (FSA) ID online. If you’re a dependent student, one of your parents also needs to create their own FSA ID. While filling out the FAFSA, you may need to reference or submit supporting documentation, such as your Social Security number, bank account statements and tax return details, and possibly a parent’s financial paperwork, too.

After submitting the FAFSA, you’ll receive a Student Aid Report (SAR), which is an overview of the information you included on your FAFSA. Once your FAFSA is processed, you’ll receive a financial aid offer from your school. It will outline the types of federal student aid you’re eligible for, the amounts, and instructions on how to accept the award offer.

After you’ve selected the financial aid options you want to accept, the funds will be sent directly to your school. Then, your school will apply the funds to your unpaid account balance.

The FAFSA may also be used to apply for financial aid for summer classes.

Recommended: 2024-2025 FAFSA Changes, Explained

FAFSA Requirements

FAFSA qualifications include academic and financial criteria. Although some federal aid programs, like the federal Pell Grant, require you to demonstrate financial need, you might still qualify for other federal aid options if you meet the remaining FAFSA eligibility requirements.

Education Requirements

The level of education you’ve completed must meet the minimum requirements to qualify for a college or career school program. This includes a high school diploma or General Education Development certificate from a state-approved school or setting.

Citizenship or Residency and Social Security Number

Another of the FAFSA eligibility requirements is that students must be a U.S. citizen or U.S. National with an active Social Security number.

Eligible non-citizen students might still be eligible for federal aid if they have:

•   A permanent resident Green Card (Form 1-551, I-151, or I-551C)

•   An arrival-departure record (I-94)

•   A T-VISA

•   Battered Immigrant Status

Be Enrolled or Accepted

Students must also be enrolled as a regular student at a degree- or certificate-granting school. To meet FAFSA qualifications for a Direct student loan, you must be enrolled at least half-time.

Maintain Satisfactory Academic Performance

Returning students who are applying for federal financial aid must maintain Satisfactory Academic Progress (SAP).

Each school determines its own SAP criteria, which includes minimum GPA, minimum passing grades for courses, number of required course credits or hours, and the timeline it deems necessary to advance toward a degree or certificate.

Age and Dependency Status

Your dependency status determines whose information you’ll need to include on your FAFSA. Dependent students are required to provide their parents’ financial information on their FAFSA while independent students might not need to.

Generally, you’re considered an independent student if at least one of the following applies to you:

•   For the school year you’re applying for aid, you’ll be 24 years old by January 1.

•   You’re married or separated (but not divorced).

•   You’re a graduate-level student.

•   You have children and provide more than half of their support.

•   You have other dependents in your household whom you provide more than half of their support.

•   You’re in the U.S. armed forces and on active duty (non-training).

•   You’re a U.S. armed forces veteran.

•   Since turning age 13, your parents were deceased, you were in foster care or a ward or dependent of the court.

•   You’re an emancipated minor or are in a legal guardianship.

•   You’re an unaccompanied homeless or self-supporting youth at risk of homelessness.

Income Limits

A common misconception is that students or their parents must earn below a certain income to meet FAFSA eligibility requirements. However, there is not a FAFSA income limit for student applicants and their families.

Required Documents to Submit FAFSA

Although you won’t need to submit copies of additional documents with your FAFSA, you’ll need to refer to certain documents to complete your application. It may also be helpful to keep these documents on file in case your school requests to see them.

Social Security Number

You’ll need your Social Security number to include on your FAFSA form. If you’re a dependent, the form also asks for your parents’ Social Security number. If they don’t have one, enter all zeros without dashes.

W-2s and Untaxed Income Records

A main FAFSA requirement to successfully complete the application is reporting your income, and your parents’ income, if applicable. Make sure to reference all W-2s and untaxed income documentation, like interest income, child support, or other noneducation benefits.

If you are a dependent student, you’ll need to provide information from both yours and your parent’s W-2.

Tax Returns

You’ll need to reference your most current tax return information as well as your parents’ tax returns if you’re a dependent student. If you’ve already filed your tax return for the year, you might be eligible to use the IRS Data Retrieval Tool to transfer your tax information into the FAFSA.

Asset Records

You’ll also need to include your and your parents’ deposit account balances, like checking and savings, on your FAFSA. Similarly, investments, like stocks, bonds, and real estate that isn’t your primary home, must be included on your FAFSA form.

Alternatives to Federal Aid

Outside of the FAFSA application, there are other avenues to secure funds to pay for your higher education.

Savings

Consider tapping into existing savings, if your financial aid award comes up short. Doing so might help you avoid taking on more student loan debt.

There are certain accounts such as 529 savings plans that are designed to help parents and families save for their child’s education.

Grants

Research non-federal grants from your state, school, nonprofit, or other private organization. These funds don’t need to be repaid.

Scholarships

Scholarships are another aid source that doesn’t need to be repaid after leaving school. Find state-, school-, or private-sponsored scholarships to find more cash. There are online databases such as Scholarships.com that aggregate information on available scholarships. Take a look to review eligibility criteria and application requirements.

Part-Time Work

If you can manage balancing schoolwork with a part-time job, earning an income while enrolled in school can help you pay your way through your education.

Private Student Loans

Private student loans are available through private lenders, like banks, credit unions, and online institutions. These loans come with varying terms and interest rates, and can help cover the gap between your cost of attendance and existing financial aid.

When comparing private student loans and federal student loans, know that private lenders aren’t required to offer the same benefits or protections as federal student loans. As a result, private student loans are generally considered an option only after other sources of financing have been exhausted.

The Takeaway

Regardless of your or your family’s income, it’s generally worth submitting an application if you meet the FAFSA requirements. Since it’s a free application, there’s nothing to lose and much to gain if you’re eligible for aid, including scholarships and grants that don’t need to be repaid.

If you still need financial aid after submitting your FAFSA and searching for scholarships, consider a SoFi private student loan. It’s a zero fee loan option that offers competitive rates for qualifying borrowers.

Get pre-qualified in just a few minutes.

FAQ

How much or little income do you need to qualify for aid through FAFSA?

There are no income requirements for FAFSA applicants. Instead, a variety of factors determine whether a student is eligible for federal aid, including the school’s cost of attendance, the student’s year in school, their dependency status, family size, and more.

What is the maximum amount of money FAFSA gives?

The maximum amount of aid you can receive through the FAFSA depends on which federal aid programs you qualify for. Different programs have varying limits.

For example, the maximum Pell Grant award changes annually; for the 2022-23 award year the limit is $6,895. Direct Loans also have their own annual and aggregate borrowing limits.

How does parent income affect FAFSA aid?

Parent income that’s reported on a student’s FAFSA is used to calculate the applicant’s Expected Family Contribution (EFC). The EFC is a number on an index that helps schools determine your financial need if you attend its school. It also identifies your eligibility for certain financial aid programs like the Pell Grant or Direct Subsidized Loans.

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.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

Photo credit: iStock/Lipik1
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