Federal Loans

Acceleration – Demand for immediate repayment of your entire federal student loan. The entire unpaid amount of your federal student loan becomes due and payable if you:

• receive loan money but don’t enroll at least half-time at the school that determined you were eligible to receive the federal student loan,
• use your loan money to pay for anything other than expenses related to your education at the school that determined you were eligible to receive the federal student loan,
• make a false statement that causes you to receive a federal loan that you’re not eligible to receive, or  default on your federal student loan.

Aggregate Loan Limit – A limit on the total amount of FFEL or Direct Subsidized Loans and/or Unsubsidized Loans that you may borrow for undergraduate and graduate study. If the total amount you receive over the course of your education reaches the aggregate loan limit, you will not be eligible to receive additional loans. However, if you repay some of your loans to bring your outstanding loan debt below the aggregate loan limit, you could then borrow again, up to the amount of your remaining eligibility under the aggregate loan limit.

Capitalized Interest (Capitalization) – Unpaid interest that has been added to the principal balance of a federal student loan. Future interest is charged on the increased principal balance, and this may increase the amount of your monthly payment and the total amount you repay over the life of the federal student loan.

Federal Student Loan – In this guide, loans made under the William D. Ford Federal Direct Loan (Direct Loan) Program, Federal Perkins Loan Program, and the Federal Family Education Loan (FFEL) Program.

Grace Period –For certain types of federal student loans, a period of time (generally six months) after you graduate or drop below half-time enrollment during which you are not required to make payments. The repayment period for your loan begins after the end of the grace period. Interest – The cost of borrowing money. Interest is calculated as a percentage of the outstanding (unpaid) principal balance.

Loan Discharge (Cancellation) – The elimination of a loan debt under certain limited circumstances. Loan Forgiveness – The elimination of a loan debt under one or more of the various Direct Loan forgiveness programs.

Loan Holder – The U.S. Department of Education is your loan holder. Your loan servicer will be different than your loan holder (see below).

Loan Servicer – An entity that collects payments on a federal student loan, responds to customer service inquiries and performs other administrative tasks associated with maintaining a loan on behalf of a loan holder (see below). A loan servicer performs all servicing tasks on behalf of the U.S. Department of Education. A current listing of federal loan servicers for federally held loans made through the Direct Loan Program can be found at StudentAid.gov/manage-loans/repayment/servicers.

Partial Financial Hardship – An eligibility requirement under the Income-Based Repayment and Pay As You Earn repayment plans. Generally, you’ll meet this requirement if your federal student loan debt is higher than your annual discretionary income or represents a significant portion of your annual income.

Principal – The loan amount you borrow plus any capitalized interest

Master Promissory Note (MPN) – A Master Promissory Note is a legal document that contains the Borrower’s Rights and Responsibilities and Terms and Conditions for repayment. Direct PLUS and Direct Subsidized and Unsubsidized loans have different MPNs. An MPN can also be good for up to 10 years if certain enrollment requirements are met. Therefore if you leave school and return, you may be able to receive additional loans without signing a new MPN.

Third-Party Debt Relief Company – A private company, not affiliated with the U.S. Department of Education, that provides (or claims to provide) student loan management services for a fee.

The interest rates on Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans are fixed rates that are calculated each year in accordance with formulas specified in the laws and regulations that set the terms and conditions of Direct Loans.

When the rates are calculated, they apply to all loans for which the first disbursement is made during the period beginning on July 1 of one year and ending on June 30 of the following year. Each loan you receive over the course of your education may have a different fixed interest rate, depending on when the loan is first disbursed, the loan type, and whether you are an undergraduate student a graduate or a professional student.

How Interest Accrues

Direct Loans are “simple daily interest” loans. This means that interest accrues daily. The amount of interest that accrues per day is calculated by dividing the interest rate on your loan (as a decimal) by the number of days in a year and then multiplying that by the outstanding principal balance of the loan.

For example, on a $10,000 Direct Unsubsidized Loan with a 6.8% interest rate, the amount of interest that accrues per day while the loan has an outstanding balance of $10,000 is $1.86, calculated as follows:

(0.068 / 365) X $10,000 = $1.8

How You Can Find the Interest Rates on Your Loans

You can find the interest rates for your Direct Loans and FFEL Program loans by logging in to your account at StudentAid.gov with your FSA ID (account username and password. The site will open to your Dashboard where you will see a record of the loans and grants you’ve received. By selecting “view details” and then “view breakdown” under the loans tab, you will be able to see your loan(s) sorted by the servicer. By expanding the “view loans” option, you will see the details of your loan(s) including the interest rate for each loan.

What Is Interest Capitalization and When Does It Occur?

It’s important to know what happens when you don’t pay interest as it accrues on Direct Unsubsidized and Direct PLUS loans.

The unpaid interest is added to your outstanding principal balance, which makes the amount you owe greater than the loan amount you initially took out. Interest is then charged on that unpaid interest, which is called capitalization. Under most repayment plans, this will increase your monthly payment amount and the total amount you repay over the life of the loan

There are certain points specified by law where interest is capitalized:

• Following periods of deferment on an unsubsidized loan and/or forbearance on any type of loans
• Following the grace period on an unsubsidized loan
• If you voluntarily leave the Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), or Income-Based Repayment (IBR) plans
• If you fail to annually update your income for some of the income-driven plans
• If you are repaying your loans under the PAYE or IBR plans and no longer qualify to make payments based on income

What is Repayment?

Repayment is the process of satisfying your obligation to pay back the money you borrowed to help you pay for your education.

For Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans as a graduate or professional student, the repayment period begins when your grace period ends (see page 2). Direct PLUS Loans for parent borrowers enter repayment when they are fully disbursed (paid out), but parents may defer (postpone) making payments while their child is enrolled in school at least half-time and for an additional six months after their child graduates, leaves school or drops below half-time enrollment.

What Determines the Rules of My Repayment?

You repay your loan according to a repayment plan that you choose through your federal loan servicer. The repayment plan you choose determines the amount you pay each month and the number of payments you must make.

What are my options if my federal student loan payments are high compared to my income?

If your federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven repayment plan. Which income-driven repayment plan you are eligible for depends on your type of loan (Direct Loan or FFEL), when you were a new borrower, if you have a partial financial hardship, and if you were a student or parent borrower.

Most Direct Loans are eligible for at least one income-driven repayment plan. Based on your income and family size, your payment could be as low as $0 per month. If you have FFEL program loans, you can consolidate them into a Direct Consolidation Loan to gain access to additional income-driven repayment plans that are only available to Direct Loan borrowers.

Income-driven repayment plans:

• Revised Pay As You Earn Repayment Plan (REPAYE Plan)
• Pay As You Earn Repayment Plan (PAYE Plan)
• Income-Based Repayment Plan (IBR Plan)
• Income-Contingent Repayment Plan (ICR Plan)
• Income-Sensitive Repayment Plan (only available for FFEL program loans

Did you Know?

You can make payments during your grace period to prevent interest from accruing and reduce the amount of interest that may be capitalized when you enter repayment. You can find out how much you can save by contacting your loan servicer.

 If you took out a private student loan, you may have to begin making payments while you’re still in school. Contact the holder of that private student loan immediately to arrange payment.

What happens if I return to school?

 If you return to school on at least a half-time basis before the end of your six-month grace period, your loans will return to in-school status. You won’t have to make payments until six months after you graduate, leave school, or drop below half-time enrollment.

If you return to school on at least a half-time basis after your six-month grace period has ended, you’ll qualify for an in-school deferment and won’t have to make payments while you remain enrolled at least half-time. However, when you graduate, leave school, or drop below half-time enrollment, your in-school deferment will end, and you’ll be required to begin making payments right away

Repayment Incentives

Interest rate reduction for payments made with automatic withdrawal

The Automatic Debit payment option allows your loan servicer to automatically deduct your monthly payment from your checking or savings account.

 Under the automatic debit payment option, you receive a 0.25% interest rate reduction on your loans that are owned by the Department, during periods of repayment.

Repayment of your federal student loan is a serious financial obligation. When you make payments on time, you begin establishing a credit history that will affect your future eligibility to obtain loans for the purchase of a car or home. When you apply for a job, employers often use your credit history as a way to measure how you meet your responsibilities and your ability to establish and stick to a plan.

Falling behind on your federal student loan payments can have major consequences:

• Your federal student loan becomes delinquent the first day after you miss (fail to make) the payment that is due.
• If a federal student loan is delinquent for 270 days, it goes into default.
• Loans on which payments are delinquent and loans that are in default are reported to national credit agencies.

What are the consequences for my federal student aid?

• You will lose your eligibility for loan deferments and forbearances and your eligibility to choose from among the available repayment plans.
• You will not be eligible for additional federal student aid if you return to school

What are the consequences for my career and future income?

• You may be required to immediately repay the entire unpaid amount of your loan. This process is known as acceleration.
• You may not be eligible for certain types of employment.
• Your loans may be turned over to a collection agency, and you will have to pay additional charges, late fees, and collection costs.
• You may have part of your income withheld by the federal government. This is known as wage garnishment.
• Your federal and state income tax refunds may be withheld and applied to your debt. This is known as a tax offset. exclamation-triangle

Avoid Default! If your account remains delinquent, your loan servicer will send you warning notices reminding you of your repayment obligation. Contact your loan servicer if you think you will have trouble making your payments or won’t be able to pay on time. Allowing your federal student loans to go into default can increase the amount you will have to pay back because fees and penalties will be added to the balance due.

What are the consequences for my credit rating?

• Your credit score will be damaged.
• You may have difficulty qualifying for credit cards, car loans, or mortgages and will be charged much higher interest rates.
• You may have difficulty signing up for utilities, getting car or homeowner’s insurance, or getting a cell phone plan.
• You may have difficulty getting approval to rent an apartment (credit checks may be required)

You may qualify for a deferment if you are

• enrolled at least half-time at an eligible postsecondary school;
• in a full-time course of study in a graduate fellowship program;
• in an approved full-time rehabilitation program for individuals with disabilities;
• unemployed or unable to find full-time employment (for a maximum of three years);
• experiencing economic hardship (including Peace Corps service) as defined by federal regulations (for a maximum of three years);
• serving on active duty during a war or other military operation or national emergency and for an additional 180-day period following the demobilization date for your qualifying service;
• performing qualifying National Guard duty during a war or other military operation or national emergency and for an additional 180-day period following the demobilization date for your qualifying service; or  a member of the National Guard or other reserve component of the U.S. armed forces (current or retired) and you are called or ordered to active duty under certain circumstances: (1) while you are enrolled at least half time at an eligible school; (2) within six months of having been enrolled at least half time during the 13 months following the conclusion of your active duty service; or (3) until you return to enrolled student status on at least a half-time basis, whichever is earlier.

Remember You are responsible for staying in touch with your loan servicer.

Forbearance

If you are having temporary problems repaying your federal student loans and are not eligible for a deferment, contact your loan servicer to see if you are eligible for forbearance. Forbearance is another method of temporarily postponing or reducing loan payments. You are never charged a fee for applying for a forbearance on your federal student loans.

You may be granted a forbearance if you meet one of the following requirements:

• You are unable to make your scheduled loan payments for reasons including, but not limited to, financial hardship and illness.
• You are serving in a medical or dental internship or residency program and you meet specific requirements.
• The total amount you owe each month for the Direct Loans and FFEL Loans you received is 20% or more of your total monthly gross income (for a maximum of three years).
• You are serving in an approved AmeriCorps position.
• You are performing a teaching service that would qualify for loan forgiveness under the requirements of the Teacher Loan Forgiveness Program.
• You qualify for partial repayment of your loans under the Student Loan Repayment Program, as administered by the Department of Defense.  You are called to active duty in the U.S. armed forces.

Note: Interest will continue to be charged during a forbearance on all types of loans. If you do not pay this interest, it will be capitalized at the end of the forbearance.

Did you know? Interest will continue to be charged during a forbearance on all types of loans. If you do not pay this interest, it will be capitalized at the end of the forbearance.

A Direct Consolidation Loan may help make payments more manageable by combining several federal student loans into one loan with one monthly payment. You need to apply for loan consolidation and choose a repayment plan. Depending on the amount of your federal student loans and the repayment plan you choose, you have between 10 and 30 years to repay your Direct Consolidation Loan. (Private education loans are not eligible for consolidation, but they may be taken into account when determining your maximum repayment period under certain repayment plans.) The interest rate for Direct Consolidation Loans is fixed. The fixed rate is the weighted average of the interest rates on all of the loans you consolidate, rounded up to the nearest 1/8 of 1%. There is no cap on the interest rate on a Direct Consolidation Loan. To learn more, visit StudentAid.gov/manage-loans/consolidation.

Once your loans are combined into a Direct Consolidation Loan, they cannot be reversed. The loans that were consolidated are paid off and no longer exist.

How can consolidation help me manage my debt?

Loan consolidation can offer you benefits to help manage your education debt. Through consolidation, you can do the following:

• If you currently have federal student loans that are with different loan servicers, consolidation can greatly simplify loan repayment by giving you a single loan with just one monthly bill. Consolidation can lower your monthly payment by giving you a longer period of time (up to 30 years) to repay your loans.
• If you consolidate loans other than Direct Loans, consolidation may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF).
• You’ll be able to switch any variable-rate loans you have to a fixed interest rate.
• As with other types of student loans, you may prepay a Direct Consolidation Loan without penalty and may change repayment plans if you find that your current plan no longer meets your needs

Is there a downside to consolidation?

Although consolidation can help many students manage their monthly payments, there are some cases when a Direct Consolidation Loan may not be right for you:

• Because consolidation usually increases the period of time you have to repay your loans, you will likely make more payments and pay more in interest than would be the case if you didn’t consolidate.
• When you consolidate your loans, any outstanding interest on the loans that you consolidate becomes part of the original principal balance on your consolidation loan (effectively the same as interest capitalization), which means that future interest accrues on a higher principal balance than might have been the case if you had not consolidated.
• Consolidation may also cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your current loans.
• If you’re paying your current loans under an income-driven repayment plan, or if you’ve made qualifying payments toward Public Service Loan Forgiveness, consolidating your current loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness or PSLF.
• If you consolidate Perkins Loans, you lose eligibility for cancellation benefits that are available only for Perkins Loans, and you also lose eligibility for Perkins Loan interest subsidy benefits. exclamation-triangle

There is no application fee to consolidate your federal student loans into a Direct Consolidation Loan. You may be contacted by private companies that offer to help you apply for a Direct Consolidation Loan, for a fee. These companies have no affiliation with the U.S. Department of Education or our services. There’s no need to pay anyone for assistance in getting a Direct Consolidation Loan. The application process is easy and free.

PSLF forgives all of your remaining Direct Loan debt after you have made the 120 qualifying payments. To be eligible for PSLF, you must be

• making payments under a qualifying repayment plan; and
• working full-time at a qualifying public service organization while making 120 qualifying monthly payments.

For more information, visit StudentAid.gov/manage-loans/forgivenesscancellation/public-service.

Remember!

Federal loans are not generally included in debts eliminated under personal bankruptcy. Contact your loan servicer to discuss federal student loan repayment.