July 11, 2023

Key Elements of Loan Repayment

Direct loans are managed by third-party companies, known as federal student loan servicers. These firms perform functions such as collecting payments and helping borrowers select a repayment plan and access tools for pausing payments. FFEL program loans can be serviced by the holder of the loan or by third parties.

Repayment plans

Most borrowers who graduate, drop below half-time enrollment, or leave school automatically get a six-month grace period before their first payments are due. Unless they select another plan, borrowers start repayment in the Standard Repayment Plan, which has fixed payments over a 10-year period such that borrowers will completely pay off the principal and interest on their loans over that span provided payments are made in full and on time. If eligible, borrowers also have the option to enroll in other plans that lower monthly payments or extend the repayment period, but these plans may increase the interest accrued and therefore the amount repaid over the life of the loan.

Graduated Plan: This program allows borrowers to initially make lower monthly payments than those in the Standard Repayment Plan, but the payment amount increases every two years for 10 years such that borrowers will pay off the full principal and interest over that span, provided payments are made in full and on time.

Extended Plan:Borrowers with balances over $30,000 can enroll in Extended or Extended Graduated plans, modified versions of the Standard and Graduated plans that generally support repayment over 25 years.

Income-driven plans:These plans have monthly payments that are calculated based on a borrower’s income and family size, which must be recertified annually. Congress has authorized the Department of Education to forgive any remaining balance after 20 or 25 years of qualifying payments. However, if borrowers are unable to complete the recertification process—for example, because paperwork is not submitted or processed accurately or on time—their payments may increase. More income-driven plans are available for direct loan than FFEL program borrowers.

Pausing payments

A set of tools, known as deferment and forbearance, is available to support borrowers who need to postpone or suspend their payments. Eligible borrowers include those who are enrolled at least half-time in school, unemployed, disabled, serving in the military, or experiencing economic hardship, among other reasons.

Deferment:Borrowers with certain types of loans may be able to pause their payments and avoid accruing interest during the deferment period. Most borrowers who use deferments do so while enrolled in school or for financial hardship, such as unemployment.

Forbearance:In general, loans paused using forbearance accrues interest. Borrowers can opt into discretionary forbearances—typically offered during periods of economic hardship—or be placed in mandatory forbearances by their servicers. Servicers can apply forbearances while they process income driven repayment and other loan-related applications or while borrowers work to submit required documentation. In addition to pausing future payments, forbearance can be applied retroactively to make delinquent accounts current so that borrowers can, for example, enroll in income-driven plans.

Borrowers who qualify for a deferment or forbearance can typically postpone their payments for up to a year at a time (although some borrowers use these tools for shorter periods) and for a maximum of three years using each type of tool. With some types of deferment and many types of forbearance, when the period of suspended payments ends, unpaid interest on the loan capitalizes.

Delinquency and default

When borrowers do not make payments, they become delinquent on their loans, and when they reach 270 days without a payment, they default. For the purposes of this analysis, and because the dataset is drawn from the FFEL program, borrowers are considered to be in default when the servicer has filed a claim against them, which can occur at any point between 270 and 360 days of nonpayment.

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