Editor's Note: Since the writing of this article, the federal Student Loan Debt Relief program has been blocked due to two court decisions; the Supreme Court has agreed to hear arguments for both appeals in February. In the meantime, the Biden administration extended the federal student loan payment pause into 2023. The US Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
Even though common sense might suggest that repaying any loan should be straightforward—that all you have to do is send money until you don’t owe any more—there is actually a fair amount of strategy involved. When it comes to repaying federal student loans, there are many ways to think about taking them on.
Having a game plan for eradicating student loan debt is a good idea: In the United States alone, 45 million borrowers hold more than $1.6 trillion in student loan debt, and payments to tackle that mountain of debt have been slowing, on the whole. Those numbers and that trend underline the necessity that a borrower knows how to shoulder debt while reducing it.
So here’s a guide that offers tips for repaying federal student loans. Are you the calculating sort? Our student loan payoff calculator is a good tool for getting an idea of your loan payoff date. (The Education Department also has a calculator if you want to play around with your numbers.)
As outlined in the CARES Act, and extended by executive order, both the suspension of loan payments and the 0% interest rate on loans held by the Department of Education are set to expire after Aug. 31, 2022.
Repaying Federal Student Loans
1. Taking Advantage of the Grace Period
An important factor to determine your strategy to pay off a federal student loan is when you are expected to make your first loan payment. This deadline can dictate the rest of your actions. According to the Federal Student Aid office , for most student loans, there is a set period of time after a student graduates, leaves school, or drops below half-time enrollment before payments begin.
This grace period could be six to nine months, depending on the program a student received a loan through. As the date of the first payment draws closer, the loan servicer should let the borrower know when the first payment will be due—but it helps to think of how to take advantage of the grace period in advance.
While it might be tempting to view the grace period as a time when you can sink your extra money into other things you want or need, it’s probably smarter to save up for when those payments will start coming due.
If you have a subsidized federal student loan, your loan will not accrue interest while you’re in school or during the grace period, so it helps make paying it off in the longer run less burdensome.
If you have an unsubsidized federal student loan, interest has been accruing since the loan was disbursed, so you could consider taking the time when you do not have to make principal payments to pay down some of the interest that accrued.
For more information on ways to pay off student loans, this link includes tips for budgeting during a grace period and others you can mull over in that time. Interest has a way of sneaking up on borrowers because they might have in mind only the principal amount when thinking about monthly payments.
Also be aware that some federal student loan programs can have an up-front interest rate reduction, which requires making a number of monthly payments on time to prevent the rate from increasing.
So, just as studying is important to one’s academic life, studying up on student debt strategies is important to your overall life.
Borrowers can also learn to harness momentum to pay off student loans faster.
2. Selecting the Right Repayment Plan
Federal student loans come with many options for repayment. The options that might be open to you will depend on the type of loan you took out.
This Federal Student Aid office brochure drills down on the most common plans and loans they apply to, and offers bullet points of comparison.
It also links to information on consolidating federal student loans. Refinancing loans is something else to consider.
Generally speaking, the most popular repayment plan for federal student loans is the Standard Repayment Plan. Part of the reason it’s the most popular is—wait for it—is that it’s the default plan borrowers will be designated for unless they request otherwise.
The Standard Repayment Plan affords borrowers up to 10 years to repay, with an expectation of fixed monthly payments of at least $50 during that time.
There’s also the Graduated Repayment Plan, which starts with lower payments that increase every two years. Under the plan, a borrower makes payments for up to 10 years.
With the Extended Repayment Plan, a borrower can take up to 25 years to pay the loan. There are specific eligibility requirements. The plan requires lower monthly payments than the 10-year Standard plan, though you will wind up paying more in interest for your loan than you would have over 10 years.
Then there are income-driven repayment plans, which are geared toward monthly payments that are intended to be affordable based on discretionary income and family size. These are meant to further lighten the financial burden for individuals who have additional ongoing expenses or obstacles.
As such, they offer a greater degree of flexibility on their terms—like the Income-Contingent Repayment Plan. With that plan, any outstanding balance will be forgiven if the borrower hasn’t repaid the loan in full after 25 years. (Income tax may still be owed on the amount that was forgiven.) Again, more details on each of these payment plans—and others—can be found in this Federal Student Aid office publication .
Some of these plans are good options if you are seeking Public Service Loan Forgiveness—circumstances that apply if you are employed by a U.S. federal, state, local, or tribal government or nonprofit organization.
Many of the income-driven repayment plans may be good options if Public Service Loan Forgiveness is a light at the end of your federal student loan debt tunnel.
The Income-Based Repayment Plan is worth a mention, as monthly payments would be 10% to 15% of discretionary income, and payments are recalculated each year to factor in family size and discretionary income.
It’s normal to feel a little confused with so many numbers being thrown around. Our guide on fast ways to pay off debt makes a good addition to everything discussed so far.
3. Student Loan Consolidation
A Direct Consolidation Loan allows a borrower to consolidate multiple federal education loans into one loan at no cost. It’s just a way to minimize the headaches—and ulcers—that can stem from the obligation to make monthly payments on different loans.
It’s not usually a way to save money, as the new interest rate you get with a Direct Consolidation Loan is a weighted average of all your loans’ interest rates rounded up to the nearest eighth of a percentage point.
There is another asterisk in considering this option: Private student loans cannot be consolidated with federal student loans into a Direct Consolidation Loan. You can, however, pursue refinancing both types of loans with a private lender.
If you have solid credit and a stable income, among other personal financial attributes, it’s possible to qualify for a new loan at a lower interest rate.
But there’s an asterisk to this asterisk, which is that refinancing with a private lender can make you ineligible for the federal benefits and protections offered to qualified federal student loan borrowers, like Public Service Loan Forgiveness, income-driven repayment, deferment and forbearance.
4. Paying More Than the Minimum
A strategizer knows that there’s more to it than paying the lowest amount required every month on student loans.
A big reason to pay more than the monthly minimum is that student loan repayment is structured around amortization—a word you heard if you took an accounting or economics class that basically means a portion of fixed monthly payments goes to the costs associated with interest (what the lender gets paid for the loan) and reducing your loan balance (paying off the total amount owed).
Paying more than the minimum means you can accelerate reduction of the amount you owe rather than covering the interest—which is effectively the lender charging you for the privilege of having the loan in the first place.
That privilege isn’t exactly bragworthy, so it’s smart to make more than the minimum payment—however little more it might be.
One plan of attack for borrowers to consider is signing up for automatic payments through their federal loan servicer so the payments are taken directly from their bank account as they’re due.
The payment amount to be withdrawn can be customized, and there’s a discount for doing so: Those who have a Direct Loan will get an interest-rate reduction while participating in automatic debit.
Getting Student Loans Under Control
Nobody really enjoys thinking about student loans, but the upshot of that is the pain points associated with them are well known—and there are proven strategies to ease the pain and manage the process of repaying government student loans, whether going for a special payment program, consolidating, or refinancing.
All it takes is a little planning and a willingness to adapt those plans to the ways your life unfolds after you have that degree.
SoFi student loan refinancing offers flexible terms and low fixed or variable rates. There are no application or origination fees. And getting prequalified online is easy.
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.
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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.