- Understanding Terms
- Repayment Plans
- Loan Deferment and Forbearance
- Loan Forgiveness, Cancellation and Discharge
- More Resources
Stafford Loan: Stafford Loans are loans granted from the Federal Government to undergraduate and graduate students to pay for higher education. Stafford Loans can be subsidized or unsubsidized, are granted based on financial need (though nearly all middle and lower class families will qualify), and have a wide variety of repayment options. Stafford Loans are different from Perkins Loans and PLUS Loans.
Perkins Loans: Perkins Loans are another form of Federal Student Loans granted to students based on financial need. Perkins Loans are subsidized and offer better terms for repayment.
PLUS Loans: PLUS Loans are a form of Federal Student Loans granted to graduate students and parents of undergraduate student. PLUS loans can be for the entire remaining cost of tuition after other loans. When parents take loans to pay for their undergraduate children, then it is the parents’ responsibly to repay the loans.
Subsidized and Unsubsidized: Subsidized loans are loans where the interest is paid by the Federal Government while you are enrolled in school, during the loan’s grace period, and during periods of deferral. Unsubsidized loans do not get this benefit, and interest will be added to the loan’s principle during these periods. The amount of your loan that that will be considered subsidized is determined by your financial need.
Consolidation: Consolidation is when you combine your federal loans so that you only need to make a single monthly payment. When you consolidate your loans, your new interest rate will be an average of the rates of the consolidated loans. Consolidation will simplify and likely reduce your monthly payments but may have negative affects when combining different loan types. For example, Perkins Loans are granted a 9 mouth grace period, but a consolidated loan is granted only the 6 month grace period of Stafford Loans.
Grace Period: The grace period is a time after you finish your education before you have to start making loan repayments. For most loans the grace period is 6 months; for Perkins Loans it’s 9 months.
Loan Forgiveness, Cancellation and Discharge: Loan forgiveness, loan cancellation, and loan discharge all mean that your loan payments will end and your remaining balanced will be erased. The difference between the terms is mostly in technicalities. Cancellation is a general use term, forgiveness is a positive term (public service loan forgiveness, teacher loan forgiveness), and discharge generally relates to hardship situations (bankruptcy discharge, death discharge).
Deferment and Forbearance: Both deferment and forbearance mean that you don’t have to make loan payments temporarily or are granted reduced loan payments. Deferment is granted in certain situations, such as re-enrolling in school or entering active military duty. It can also be granted in certain types of financial hardship situations. Forbearance may be granted if you suffer an economic hardship, but not a type that qualifies for deferment -- such as a period of illness.
Standard Repayment Plan: Under the Standard Plan you’ll pay a fixed amount monthly until the loan is paid off. The repayment period will be between 10 and 30 years, depending on the size of the loan. This is the default plan for most former students. For those who can afford the monthly payments, it is the best option over the long term. It has the shortest repayment period, so that you’ll pay less interest.
Graduated Repayment Plan: Under the Graduated Plan your monthly payments will start low, possibly as low as $50, and rise every two years. By the end the period your monthly payments will be higher than under the Standard Plan. This plan is good if you are not making much money after finishing school but know that you’ll be making more in the future.
Extended Repayment Plan: Under the Extended Plan you’ll make payments over a longer period of time, but each payment will be lower than under the Standard Plan. The longer payment period means you’ll pay more in interest over the long run, but this plan can be helpful if you don’t have the resources to meet the Standard Plan’s payments.
Income-Based Repayment Plan (IBR): Under the IBR Plan you pay a portion of your monthly discretionary income (about 15%) for 20 or 25 years. Then your remaining loan is usually forgiven. This option is only for those who show they are experiencing financial hardship and only for as long as they’re experiencing it.
Income-Contingent Repayment Plan (ICR): Under the ICR Plan you pay a portion of your monthly discretionary income (about 20%) for 25 years. Then your remaining loan is usually forgiven. This option is similar to the IBR Plan except you don’t have to prove financial hardship to qualify.
Pay as You Earn Repayment Plan: Under the Pay as You Earn Plan you pay a portion of your monthly income (about 10%) for 20 years. Then your remaining loan is usually forgiven. Similar to the IBR Plan, this option is only for those who show they are experiencing financial hardship and only for as long as they’re experiencing it. This option is available only to people who borrowed after Oct. 1, 2007.
There are a number of situations where you may not be able to make loan payments for a period of time. When this happens there is the option to defer your loan payments to help you from defaulting on your loan. You can look here for of list of what qualifies for deferment. Deferment will generally last for as long as you meet the qualifications, though there is a three year limit in some categories. To get a deferment you will have to fill out the right forms with your loan servicer, which is often a private firm managing your loans for the government. The forms should be available on the firm’s website or can be sent you if you request them by phone.
Forbearance is when you can’t make your loan payments but don’t qualify for deferment. Forbearance has a limited period, no more than 1 year. Most cases of forbearance are for unforeseen events, such as illness or other sudden financial hardship, and the decision to grant it will be with the loan servicer. There are some situations where the servicer has to grant forbearance. To get a forbearance you will have to fill out the right forms with your loan servicer. The forms should be available on the servicer’s website or can be mailed to you if you request them by phone.
There are situations where you may qualify to have some or all of your loan forgiven. The two most common types of loan forgiveness are public service loan forgiveness and teacher loan forgiveness. For the public service loan forgiveness you must have made at least 120 payments on your loan, and your loan must not be in default. Most non-elected government and municipal public service jobs will qualify. For the teacher loan forgiveness you must teach in a public school for at least 5 years and your loan must not be in default.
A loan can be discharged if the borrower dies or become permanently disabled and therefore cannot earn a living. In this case the borrower or his estate will have to provide the proper paperwork to the loan servicer. In a very narrow range of situations, the loan can also be discharged if the borrower declares bankruptcy. But the general rule is that student loans cannot be discharged in bankruptcy, so it would be a good idea to discuss this with a lawyer before attempting the bankruptcy route.
A loan can also be discharged or partially discharged if a school committed fraud with your loan such as:
- signing your loan paperwork without your permission,
- certifying you for a course even though the school was aware you were unqualified, or
- knowing that you will be incapable of getting a job in the trade once you graduated.
You should also be able to get a discharge if you were a victim of identity theft, where someone else took out a loan in your name without your knowledge.
The U.S. Depatment of Education provides helpful information about loan repayment. They also sponsor an Ombudsman program. The Ombudsman helps people who have exhausted attempts to resolve issues on their own. This program is limited to Federal student loans.
The Finance Authority of Maine also fields questions about student loan repayment. Go here for contact information.