Federal Loans

Basic Federal Student Loan Repayment Options

The available pre-default repayment plans are different depending on what type of student loan you have. (What Type of Loan Do I Have ?). These plans are not available if you are already in default.  The good news is that there are a number of flexible and affordable repayment plans for federal loan borrowers.  You should pay particular attention to the income-driven repayment plans .  These generally require you to pay more in the long run, but may be needed to help keep you current on your payments and out of default.

Most of these plans are available for both FFEL and Direct Loan borrowers.  The IBR plan is available in both the FFEL and Direct loan program while ICR is available only in the Direct Loan program.  The Pay as You Earn plan is only for Direct Loan borrowers.  Perkins has its own rules, as do private loans .  Another difference between FFEL and Direct Loans is that public service forgiveness is only available in the Direct Loan program.  Borrowers may consolidate with Direct Loans in order to participate in the public service forgiveness program.

PLUS loan borrowers have nearly all the repayment options that Direct and FFEL Stafford loan borrowers have, with one big exception.   The income-based plans described below (Pay as You Earn, ICR and IBR) are not generally available to parent PLUS borrowers. These plans are available to graduate PLUS borrowers.

Parent PLUS borrowers who also have other federal student loans and choose to consolidate with Direct will find that the PLUS loan taints the entire consolidation loan and will mean that they will not be eligible to repay the consolidation loan using IBR or Pay As You Earn.  If they wish to consolidate, parent PLUS borrowers may exclude the PLUS loans from the consolidation and pay them separately.  These borrowers should also be able to consolidate and choose ICR.

What Your Payment Covers

Lenders are allowed to credit any payment received first to accrued late charges or collection costs, then to any outstanding interest, and finally to outstanding principal. This is also true for schools collecting Perkins loans.

This means, for example, that, if the collection rate for a particular year is 24%, then 24% of each payment you make is applied to collection costs, the balance to interest, and then, if the payment is sufficient, to the reduction in the principal.

You may repay the entire loan or any part of a federal loan at any time without penalty. If you send in a payment amount that equals or exceeds the monthly payment amount, the lender must apply the prepayment to future installments by advancing the next payment due date, unless you request otherwise.

If you would like to prepay some of the principal on your loan, you must request in writing that the extra amount you send be applied to principal. Send the payment and request together, via certified mail, get a receipt, and keep copies for yourself.

Private lenders may charge you a penalty if you repay early. You should read your loan agreement carefully to look for rules related to prepayment.

How is Interest Calculated?

Interest on all federal loans is calculated on a simple daily basis. The following formula demonstrates how the sample interest is calculated between payments:Average daily balance between payments x interest rate x (Number of days between payments/365.25) = monthly interest.For example:Average daily balance $10,000 Interest rate x .08 Days between payments (30/365.25) x .08214 _____________________________________________Monthly Interest: $65.71