- PLUS Loans. These loans are available to graduate students and the parents of dependent undergraduate students. PLUS loans have generally had higher interest rates than Stafford loans and, like unsubsidized Stafford loans, accrue interest while the student is in school. Unlike Stafford loans, PLUS loans are limited only by the student’s cost of attending a school. They accounted for 24 percent of the total volume (in dollars) of federal student loans disbursed in 2017.
Repayment, Default, and Forgiveness
When borrowers finish their schooling, they are automatically assigned to the standard repayment plan, which amortizes the loan principal and accrued interest over a 10-year period. Other repayment plans, as well as various tools for pausing or reducing payments, are available and have expanded over time. For example, borrowers may select a graduated repayment plan or an IDR plan. In a graduated repayment plan, the required monthly payments increase over time, with the expectation that the borrower’s income will also increase over time. In IDR plans, borrowers’ payments are based on their incomes and may be as low as zero if their income falls below a certain threshold. After selecting a plan and beginning repayment, borrowers may apply for payment deferment or forbearance, which temporarily reduces or pauses their payments. 4
Borrowers who miss a required monthly payment and have not obtained deferment or forbearance from their loan servicer are considered to be 30 days delinquent. Borrowers who continue to miss payments and become 270 days delinquent are declared by the government to have defaulted on their loans. When borrowers default, they lose eligibility for further federal aid until the default is resolved, and the default is reported to consumer credit reporting agencies.
Unlike balances on some other types of loans, the balance on a student loan is usually not discharged when the borrower declares bankruptcy. The government or its contractor is generally required to attempt to recover the loan balance through various means, such as by garnishing wages, withholding tax refunds or Social Security benefits, or pursuing civil litigation. Typically, through those means as well as through voluntary repayment of defaulted loans, the government ultimately recovers most of the remaining balance of loans that defaulted.
When borrowers do not pay enough to cover the interest on their loan-for example, when the required payment in an IDR plan is small, when they receive deferment or forbearance, or when they default-their loan balance increases. (For subsidized loans, deferment temporarily pauses interest accrual, so the balances of those loans do not grow during periods of deferment.) Of the borrowers who entered repayment in the five-year period between 2010 and 2014, 56 percent had their balance increase at some point between the time they entered repayment and 2017. Of the borrowers whose balance increased, 78 percent had received temporary deferment or forbearance, 44 percent had defaulted (including some who had also received deferment or forbearance), and 33 percent had selected an IDR plan.
Under certain circumstances, the government forgives some or all of borrowers’ outstanding loan balances. For example, borrowers who work in local, state, or federal government or nonprofit jobs for 10 years or who work as teachers in low-income areas for 5 years may have their loan balances forgiven. Borrowers in IDR plans may also qualify for forgiveness after making the required payments for a certain period of time, either 20 or 25 years.
The volume of outstanding federal student no credit check payday loans Bloomington IL loan debt increased more than sevenfold between 1995 and 2017, from $187 billion to $1.4 trillion in 2017 dollars (see Figure 1 ). That growth was the result of an increase in the number of borrowers, an increase in the average amount they borrowed, and a decrease in the rate at which they repaid outstanding loans.
How Do the Federal Student Loan Programs Work?
- Interest Rates. The interest rates on federal student loans varied considerably between 1995 and 2017. Until 2006, loans were issued with variable interest rates, which were indexed to a market interest rate and changed in step with that , loans were issued with fixed interest rates, which were set in the year of disbursement and then remained constant for the life of the loan.
- Unsubsidized Stafford Loans. Available to both undergraduate and graduate students irrespective of their financial need, unsubsidized Stafford loans accrue interest even while the borrower is in school. The borrowing limits are higher for unsubsidized loans than for subsidized ones. In 2017, unsubsidized Stafford loans accounted for 53 percent of the total volume (in dollars) of federal student loans disbursed.
