How Interest Accrues on Federal Student Loans

To get a clear picture of how much you will pay in interest on your federal student loans, you must first understand how the interest accrues. Interest on federal student loans accrues daily. If you have Subsidized Stafford Loans, interest does not begin to accrue until six months after you have graduated, dropped below half time status, or otherwise withdrawn. If you have Unsubsidized Stafford Loans or PLUS Loans, interest begins to accrue from the time the loan is disbursed (paid out).

To calculate the amount of interest that your loan accrues daily, use this formula: Interest rate multiplied by the current principal balance (amount you originally borrowed, plus any interest that has already accrued) divided by 365.

It is also important to understand the concept of capitalization. When interest is capitalized, the outstanding (unpaid) interest on your student loan account is added to the principal balance. When this happens, you are essentially paying interest on top of interest.

When does interest capitalize?
With federal loans, interest is typically capitalized at the end of your six month grace period, then after any other period of deferment or forbearance. For example, if you have Unsubsidized loans of $15,000 and you have been in school for 4 years, you would accrue $4,080 in interest (if you did not make any payments during school). When interest capitalizes after your grace period is finished, that $4,080 is added to your principal balance. Your principal balance is now $19,080. If you apply for a six month Unemployment Deferment after you graduate, you would now be accruing interest based on the $19,080 principal balance instead of the original $15,000.

How to Find Out How Much You Have Borrowed

The Department of Education provides a tool you can use to track your federal student loan debt. The National Student Loan Data System (NSLDS) tracks all of your federal student loan debt (it does not include any Alternative (Private) Loans you may have borrowed). You will need to enter your social security number, the first two letters of your last name, your date of birth, and your Federal Student Aid PIN to access the system. The NSLDS also shows your lender and who currently services each of your federal student loans.

Repaying Your Student Loans

Once you have either graduated, withdrawn, or dropped below half-time status, your student loan will enter a new status (depending on which loan type you have borrowed):

• If you have a Federal Stafford Loan, you will have a six month grace period before the loan goes into repayment. Your first payment will be due within 60 days of the end of your grace period.
  

• If you have a Grad PLUS Loan, your loan will go into repayment within 60 days of your withdrawal date (there is no automatic grace period for PLUS loans, but you may request a deferment from your lender).
  

• If you have an Alternative (Private) Loan, you may have a six month grace period. Note that Alternative Loan products vary in their loan terms, so this just applies to most Alternative Loans. There are a few Alternative Loans that require interest only payments while you are in-school. Some Alternative Loans have a limit on how long you can remain in an in-school status, so read your loan paperwork carefully.

I've entered repayment. Now what?

Once you have entered repayment, you will start to receive monthly statements (bills) from your lender or servicer. With some lenders, you can sign up to receive these statements via email. Others will send you a paper statement or a payment book. It is important to note that statements from your lender or servicer are just a courtesy. If you don't receive one, it does not excuse you from making your payment. It's important to keep track of your loan status so you will know when your loans are due. Your lender wants you to pay on time, but it is your responsibility to do so. Remember that a negative credit score can impact your future housing choices, job prospects, and the ability to make other purchases with credit. It is crucial that you stay on top of your payment responsibility to protect your financial future.

Repayment Plans

With Federal Student Loans (and most Alternative Loans), you have some options regarding your payment plan. Here is an overview of the repayment plans that are usually available. Keep in mind that your student loans do not have a prepayment penalty, so no matter which plan you choose, you always have the right to pay extra! More information on each of these repayment plans is available on the Department of Education's website.

• Standard Repayment: If you don't request a different repayment plan, you will most likely be on this plan. For Federal Student Loans, the standard repayment plan is ten years of equal payments every month (your term may be shorter than ten years, depending on the amount you owe). This plan will cost you the least in terms of overall interest paid over the life of the loan.
  

• Graduated Repayment:On the Graduated Repayment Plan, your payments start off relatively low, then increase every two years.
  

• Extended Repayment: This plan has a fixed payment amount over the life of the loan, but the total repayment term is extended from 12 to 30 years (depending on your balance). Your payments will be smaller than on a standard repayment term, but you will end up paying more interest if your loan term is extended.
  

• Income Sensitive Repayment:Under the Income Sensitive Plan, your payments will be a certain percentage of your gross monthly income.
  

• Income Contingent Repayment: This plan is only available to Direct Loan borrowers. If your federal student loans are not Direct Loans (borrowed directly from the Department of Education, not from a private lender or bank), you have the option to consolidate into the Direct Loan Program to access this repayment plan. With this plan, your monthly payments are adjusted each year to be a certain percentage of your income. At the end of 25 years, if your loan has not been paid off by making monthly payments, any remaining balance will be written off (though it is considered taxable income).
  

• Income Based Repayment:This plan is only available for federal student loans that were first disbursed on or after 7/1/09. It is similar to the Income Contingent Repayment Plan, but it caps your monthly payments at a lower percentage of your income.
  

• Interest Only Repayment:This is not a true repayment plan, but some lenders offer it as a temporary solution for borrowers who are having trouble making their monthly payments. For up to six months, you may be able to request this plan. You would make payments that cover the interest that accrues each month. It is not a long term solution, but it can help you prevent your loans from increasing during times of financial difficulty.

More information on Student Loan Repayment can be found on our website.

Ways to Save Money on Repayment

There are some ways you can save money on repaying your student loans. Here are some tips:

• Consider having your payments withdrawn from your bank account automatically each month.
  This service, usually called auto-debit, can save you money in two ways. First, it keeps you from paying late, so you can avoid late fees and increased interest costs. Second, many student loans, both federal and alternative, offer a financial incentive to use auto-debit. Most lenders offer you a 0.25% interest rate reduction if you use auto-debit. This means you would be paying an interest rate of 6.55% on a 6.80% loan.
  

• Review your loan documents (or contact your loan servicer if you are unsure) to see if there were any additional borrower benefits in place when you borrowed your loan.
  Most loans borrowed for 2008/2009 don't carry additional benefits, but a lot of lenders used to offer considerable discounts. Some offered additional interest rate reductions for on-time payments and other benefits. Check with your servicer to see if any of these benefits are attached to loans you previously borrowed.
  

• Don't be late!
  Being late with your payments can take money right out of your pocket. You could be charged a late fee and could lose borrower benefits associated with your loan. There are other hidden costs with being late too. If you are over 30 days late, you could be reported as delinquent to the credit bureaus (some lenders report you late at 30 days, others at 60). This could negatively impact your credit score, which could make your next car loan or mortgage more expensive!
  

• Pay more than the monthly amount due (even just a little)
  As we mentioned, federal student loans (and most private student loans) don't have a prepayment penalty. This means you have the option of paying more than the amount due. Here is an example of how just a small extra payment can save you in the long run:
  

If you have a $10,000 Federal Stafford Loan, your monthly payments may be $115.00 per month. It would take you 10 years to repay $10,000 at this monthly payment. The total interest you would pay on this loan would be $3,924. Here is how paying a little extra would save you money:

• If you pay an extra $20 each month...your loan would be paid off in 8 years and 1 month (almost 2 years early!) and your total interest cost would be $3,001 (close to $1,000 saved).
• If you pay an extra $40 each month...your loan would be paid off in 6 years and 9 months (over 3 years early!) and your total interest cost would be $2,481 (almost $1,500 saved).
• Even just $10 extra each month would cut 1 year off of your repayment term.
  

• Don't Default
  This is the most important advice we can give you on repaying your loans. If you default (fail to make payments or make agreed upon arrangements on your loan for 270 days), you will be paying A LOT more than you originally borrowed. The same $10,000 loan we mentioned in the previous examples would have cost you $13,924 over the life of the loan. If you defaulted on that same loan, you would pay at least $22,000 for that $10,000 student loan. This amount includes collection costs, late fees, and interest. Default is preventable. Scroll down for more information on this important topic.

What To Do If You Are Having Trouble Making Your Payments

We all have trouble paying our bills sometimes. This is especially true in our current economy. If you remember just one thing from reading this: Stay in touch with your lender or servicer. Federal student loans have a lot of options available to help you when you're having trouble. Most alternative loans have some options as well, though they are more limited. You need to stay in touch with your lender to find out what option is best for your particular situation. Your lender wants to help you stay on track. Here are some of the options that may be available to you:

• Deferment (temporary postponement of payments, if you meet the qualifying criteria)
• Forbearance (temporary postponement of payments granted at the discretion of the lender or servicer. There are also forbearances that allow you to temporarily reduce your payments.)
• Interest-Only Repayment (this plan allows you to temporarily pay just the interest that accrues on your loan)
• Change repayment plans - Ask if you can increase the term of your loan to lower your payments. You can always pay more each month once you are back on your feet (or switch back to the Standard Repayment Plan at that time)

The bottom line is that you do have options. Don't become delinquent on your payments because you don't know what to do. Default should never be an option. Stay in touch with your lender and ask for help if you need it.

Deferments and Forbearances

Here are some of the deferment and forbearance options that may be available to you. If you are unsure which is best for you or how to apply, contact your lender or servicer.

• Keep in mind that if you have a Subsidized Stafford Loan, interest will not accrue during periods of Deferment. It will accrue during a Forbearance, though.
• If your loan has defaulted, you will not qualify for a deferment or forbearance.

• In-School Deferment - Can be granted if you are enrolled at least half-time at an eligible school
• Economic Hardship Deferment - Can be granted during periods of economic hardship.
• Unemployment Deferment - Can be granted to borrowers who are actively seeking but unable to find employment
• Active Military Deferment - Can be granted during active military service
• Forbearance - Can be requested if you do not qualify for a deferment and are having temporary financial difficulty. Low-Pay Forbearances are also available for borrowers who wish to temporarily lower their payments without becoming delinquent.

Visit the Repaying Your Student Loan guide from the Department of Education for more information about deferments and forbearances.

Loan Forgiveness and Cancellation Options

Under certain (rare) circumstances, you may be eligible to have a portion of your federal student loan cancelled. Some general categories of loan cancellation/forgiveness programs include:

• Federal loans are also cancelled in the event that the borrower dies or becomes totally and permanently disabled
• Teaching in a low-income school
• Certain public service jobs (this program is only available to Direct Loan borrowers)

More details about Cancellation and Forgiveness programs are available on the Department of Education website.

Consolidation

Consolidation is similar to refinancing your student loans. The lender (or the Department of Education in the Direct Loan Program) pays off all of the federal student loans you include in the consolidation and issues you a new consolidation loan. This loan has a fixed interest rate that is a weighted average of all of the interest rates from the underlying loans (rounded up to the nearest 1/8 percent).

You are not required to consolidate. The final determination about whether or not to consolidate is yours. Here are some cases in which you may want to consider consolidation.

• If you have federal loans in both the FFEL (Stafford or PLUS loans borrowed from a bank or private lender) and the Direct Loan Program, or if you have loans that were purchased by the Department of Education from your lender, you will have to repay two different servicers. Consolidation will combine all of these loans into one monthly payment.
• If you want to use the Income Contingent Repayment Plan or think you may qualify for Public Service Loan Forgiveness, your loans must be in the Direct Loan Program. Consolidating all of your loans into the Direct Loan Program will satisfy that requirement.
• If you borrowed before 7/1/06, you may have some variable rate Stafford loans. Consolidating those loans would give them a fixed interest rate.

Here are some cases in which you might NOT want to consolidate:

• If you have any borrower benefits tied to your loans, you may lose those benefits if you consolidate. Consult your lender or servicer for more information on this.
• If you include a Perkins loan in your consolidation, that loan will become an unsubsidized loan and will lose any special cancellation benefits tied to the Perkins loan.

If you wish to consolidate, you can choose any lender who participates or the Department of Education (Direct Loan Program). More information about consolidation is available here.

Avoiding Default

As we've mentioned previously, a student loan goes into default when you have not made payments or other arrangements (such as a Deferment or Forbearance) and your loan has been delinquent for 270 days. Defaulting has very serious consequences that will follow you for years, including:

• Significantly increased costs owed for collection and late fees
• Your loans may be assigned to a collection agency
• Your wages can be garnished
• Your federal and state income tax refunds can be seized.
• Any federal benefits you receive (such as Social Security) can be intercepted
• You can be sued
• You won't be able to receive any more federal financial aid
• You can lose your professional license
• Your credit will be seriously damaged
• You won't be eligible for a deferment

As you can see, these consequences are best avoided. How can you avoid default?

• Stay in contact with your lender. Open your mail and answer your phone if your lender calls. They can't help you if they can't reach you!
• If you are having trouble, speak with your lender or servicer to see if you qualify for a deferment or forbearance.
• If you are back in school at least half time, your lender will usually find out about your enrollment by hearing from your school. This is not always the case! If you think your loan should be deferred and you are receiving correspondence from your lender, open it! You may need to inform them that you are back in school to get your loan deferred.

Remember that your student loans are your responsibility. How you handle them now can set you up for an easier life after you graduate.

Alternative (Private) Loans: These are loans not guaranteed or regulated by the federal government. They are offered by banks or private lenders.Capitalization: When interest is capitalized, the outstanding (unpaid) interest on your student loan account is added to the principal balance. When this happens, you are essentially paying interest on top of interest.Deferment: A temporary postponement on federal student loans. Deferments are granted if you meet the specific critera for each type (i.e. Unemployment or Economic Hardship).Federal Student Loans: Loans that are guaranteed by the federal government. Includes Stafford, Parent PLUS, and Grad PLUS loans. These loans have a fixed interest rate, as well as deferment and forbearance options.Forbearance: A forbearance may be granted at the lender's discretion to temporarily postpone or reduce student loan payments.Interest: This is the additional amount you will pay to a lending institution to borrow money. In terms of savings, interest is the additional amount you will earn for having your money in a bank account or other savings vehicle.Principal: The amount you borrow on a loan before interest is calculated. When interest is capitalized, it is added to the principal balance.Subsidized: The federal government pays the interest that accrues on the subsidized portion of federal loans during the in-school period, grace period, and periods of deferment.Unsubsidized: The borrower is responsible for interest that accrues on any unsubsidized loan.