Question 1

What repayment plans are available for federal student loans?

Accepted Answer

Per 20 USC 1087e and 34 CFR Part 685, federal Direct Loan borrowers can choose: (1) Standard Repayment — fixed payments over 10 years; lowest total interest. (2) Graduated Repayment — payments start lower, increase every 2 years, over 10 years. (3) Extended Repayment — up to 25 years; requires $30,000+ balance; fixed or graduated. (4) Income-Based Repayment (IBR) — 10% (new borrowers) or 15% (older borrowers) of discretionary income; forgiveness after 20-25 years. (5) Pay As You Earn (PAYE) — 10% of discretionary income; forgiveness after 20 years; must be new borrower as of 10/1/2007. (6) SAVE (formerly REPAYE) — 5-10% of discretionary income; most generous IDR plan as of 2023 rules. (7) Income-Contingent Repayment (ICR) — 20% of discretionary income or 12-year fixed payment, whichever is less.

Question 2

What is discretionary income and how is it calculated for IDR plans?

Accepted Answer

For most IDR plans, discretionary income = Adjusted Gross Income (AGI) minus 225% of the federal poverty guideline for your family size and state. Under the SAVE plan (2023 regulation, 34 CFR § 685.209): 225% of poverty line for all family sizes. Under older IBR/PAYE: 150% of poverty line. Example: single borrower, $50,000 AGI, 2024 poverty guideline $15,060 (48 contiguous states). IBR discretionary income = $50,000 - (150% × $15,060) = $50,000 - $22,590 = $27,410. IBR payment = 10% × $27,410 / 12 = $228/month.

Question 3

How does Public Service Loan Forgiveness (PSLF) work?

Accepted Answer

Under 20 USC 1087e(m), borrowers working full-time for government or qualifying nonprofit employers who make 120 qualifying payments (10 years) under a qualifying repayment plan receive tax-free forgiveness of the remaining balance. Key requirements: (1) Direct Loans only (not FFEL or Perkins — consolidate first). (2) Full-time employment at qualifying employer. (3) Payments must be made under an IDR plan (or Standard — but Standard would pay off the loan in 10 years anyway). (4) 120 payments do not need to be consecutive. The IDR forgiveness at 20-25 years is taxable as income; PSLF forgiveness is tax-free. For borrowers on track for PSLF, maximizing IDR (lower payments = more to forgive) is often the optimal strategy.

Question 4

When is the SAVE plan better than PAYE or IBR?

Accepted Answer

The SAVE plan (Saving on a Valuable Education), finalized in 2023 (34 CFR § 685.209), is generally the most generous IDR plan for new borrowers: (1) Uses 225% poverty line vs 150% for IBR — higher income exclusion means lower payments. (2) Undergraduate loan payments capped at 5% of discretionary income (vs 10% for IBR/PAYE). (3) Interest subsidy: if your payment doesn't cover accruing interest, the government covers the difference — balance doesn't grow. (4) Shorter forgiveness timeline for small balances (10 years for $12,000 or less). Exception: PAYE may be better if you anticipate high future income (PAYE caps payment at what Standard would have been; SAVE does not). Note: SAVE regulations were subject to legal challenge in 2024 — verify current status at studentaid.gov.

Question 5

How does loan consolidation affect repayment?

Accepted Answer

Direct Consolidation Loan combines multiple federal loans into one with a weighted average interest rate (rounded up to nearest one-eighth of 1%). Benefits: access to IDR plans for FFEL loans; restarts the PSLF payment count clock (major consideration — consolidating mid-PSLF can reset progress). Drawbacks: loses benefits specific to original loans (graduated repayment schedules, Perkins loan cancellation benefits). For PSLF purposes, consolidation should generally happen before significant payment progress. For non-PSLF borrowers, consolidation rarely affects total interest paid materially.

Question 6

What happens to forgiven student loan balances at 20-25 years?

Accepted Answer

Under current law (20 USC 1087e), IDR forgiveness (at 20-25 years depending on plan) is treated as taxable income in the year of forgiveness. For a borrower with $80,000 forgiven in a 28% marginal bracket, the tax liability is ~$22,400. The 'tax bomb' is a real planning consideration for borrowers who expect large remaining balances at forgiveness. Workarounds: (1) Tax-advantaged savings during IDR years to fund future tax liability. (2) PSLF (tax-free, 10 years). (3) Some advocates project a statutory change — but not guaranteed. This calculator shows your projected forgiven amount and estimated tax liability.

Question 7

Should I refinance federal loans to private loans for a lower rate?

Accepted Answer

Refinancing federal loans to private permanently and irrevocably removes access to: (1) IDR plans. (2) PSLF eligibility. (3) Federal forbearance and deferment. (4) Potential future federal forgiveness programs. For borrowers pursuing PSLF or IDR forgiveness, refinancing is almost always a financial mistake even at a lower interest rate — you're trading guaranteed benefits for a rate reduction. For borrowers with high income, no forgiveness trajectory, and large private-sector salaries where they can pay off aggressively, refinancing can save meaningful interest. The calculator models the break-even: private refinance rate at which the total interest savings exceed the forgone federal benefits.

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