INTRODUCTION ..........

REPAYING YOUR STUDE

REPAYMENT PLANS ......

Perkins Loans 

Direct Loans .

FFELs ...........

REPAYMENT OPTIONS ..

Consolidation 

Deferment ....

Forbearance ..

LOAN DISCHARGE (CA

DEFAULT ...................

FACTS YOU SHOULD K

FREQUENTLY ASKED QU

IMPORTANT TERMS ......

Contents
1

ou’ve attended college or received other education beyond high

school, and you received federal student loans* from the US

Department of Education (ED) along the way. You’re now about to

deal with paying them back. You’ll need to know how to manage

your student loan debt to avoid repayment problems. This publication

explains available repayment options so you can successfully repay your

debt. It will also tell you what steps to take so you won’t get behind in

payments or go into default.

Federal student loans are real loans, just like car loans or mortgage

loans. You can’t just get out of repaying a student loan if your financial

circumstances become difficult any more than you could get out of a car

loan or mortgage, unless you qualify for bankruptcy. But, it’s very difficult

to have federal student loans discharged in bankruptcy; this happens only

rarely. Also, you can’t cancel your student loans if you didn’t get the

education you expected, didn’t get the job you expected, or didn’t

complete your education, unless you leave school for a reason that

qualifies you for a discharge of your loan**. Remember, your student

loans belong to you; you have to pay them back.

Introduction

Y

*1) Federal Perkins Loans

2) Federal Family Education Loans (FFELs), consisting of subsidized and unsubsidized Federal

Stafford Loans, Federal PLUS Loans (for parents who borrow for their children), and Federal

Consolidation Loans

3) William D. Ford Federal Direct Loans (Direct Loans), consisting of subsidized and unsubsidized

Federal Direct Stafford/Ford Loans, Federal Direct PLUS Loans (for parents who borrow for their

children), and Federal Direct Consolidation Loans

** For example, you might have left school early because you

1) became totally and permanently disabled. However, your condition cannot have existed before

you applied for your federal loan, unless a doctor certifies that your condition substantially

deteriorated since the loan was made.

2) Your school falsely certified your eligibility or signed your application or promissory note without

your approval.

3) Your school closed, and you couldn’t complete your program of study. In this case, you cannot have

withdrawn from the school more than 90 days before it closed. (The day the school closed is defined

as the day it stopped providing educational instruction in all programs.) You don’t qualify for a loan

discharge if you withdrew before your school closed, but you completed the program of study for which

the loan was intended either by transferring academic credits or hours earned at the closed school to

another school, or by any other means. Note that the state agency or other nonprofit agency that

guaranteed the loan makes the final decision on whether your loan is eligible for discharge.
2

Notes
3

Repaying Your Student Loan Debt

When do I start repaying my loan?

fter you graduate, leave school, or drop below half-time enrollment

at a participating school, generally you have a “grace period” before

you have to begin repayment.

◆ For Federal Perkins Loans, the grace period is nine months.

◆ For FFEL Stafford Loans and Direct Stafford Loans, the grace period is

six months.

◆ If your parents borrow a FFEL PLUS Loan or a Direct PLUS Loan for

you, there is no grace period. The first payment on these loans is

generally due within 60 days after the final loan disbursement for the

period of enrollment for which your parents borrowed.

During the grace period on a subsidized loan, you don’t have to pay any

principal, and no interest will be charged (the federal government pays

the interest). During the grace period on an unsubsidized loan, you don’t

have to pay any principal, but interest will be charged. You can either pay

the interest or it will be capitalized (added to your principal balance).

If you should return to school at least half time before the grace period

ends, you again may postpone loan repayment while you’re in school,

and you’ll be entitled to a full grace period when you terminate enrollment or drop below half-time enrollment status. You must understand,

however, that once the grace period ends, you are in repayment status and

must request a deferment if you want to postpone repayment. For more

on deferment, see page 19.

Effective October 1, 1998, the six-month grace period excludes a period of

up to three years if you’re called, or ordered, to active duty in a reserve

component of the U.S. Armed Forces. The active duty must be for a period

of more than 30 days and would include any period of time necessary for

you to resume enrollment at the next available regular enrollment period.

When you graduated, left school, or dropped below half-time enrollment

status, the financial aid administrator at your school provided counseling

to inform you of your rights and responsibilities as a borrower. The aid

administrator also provided information about the types of loans you received, the address where you must send your payments and the way to

contact your lender, your repayment amount, repayment options and

other debt management strategies, the date repayment was to begin, and

the consequences of default.

A
4

At the same time the financial aid administrator provided this information, your loan holder (the financial institution you received the loan

from) should have sent you information about repayment, including payment due dates. If your grace period is almost over and you haven’t received this information, contact your lender as soon as possible.

Remember, though, you’re responsible for beginning repayment on time,

even if you don’t receive this information.

Why is the amount the school told me I must repay more

than the amount I actually received?

Mainly because interest accumulates on your loan. Interest is a percentage

of the original loan amount (the loan principal) that’s added to what you

have to pay. It’s a charge for using borrowed money. Everyone has to pay

interest, no matter what type of loan they have; education loans are no

different. The interest rate for a Federal Perkins Loan is fixed at 5 percent.

The interest rate for FFEL and Direct Loans is variable but does not exceed

8.25 percent. The rate is adjusted each year on July 1. You’ll be notified of

interest rate changes throughout the life of your FFEL or Direct Loan.

As mentioned earlier, if you borrowed an unsubsidized loan, interest

starts accruing (accumulating) from the time the funds were disbursed to

you, and you’re responsible for paying that interest. You chose to either

pay it while you were in school or let it accrue. If you let the interest accrue, it has been “capitalized” (that is, added to your principal balance).

This means the total amount you repay will be greater than if you paid

the interest all along.

Also, there’s a fee charged for Federal Stafford and Direct loans of up to 4

percent of the loan. This fee is deducted proportionately from each loan

disbursement you received. This means the loan amount you received was

less than the amount you actually borrowed. You’re responsible for repaying the entire amount you borrow, however, not just the amount you received in loan disbursements.

How is interest calculated?

Interest on all loans borrowed under ED’s programs is calculated on a

simple daily basis. The following formula demonstrates how the simple

interest is calculated between payments:

Average daily balance between payments

x Interest rate

x (Number of days between payments / 365.25)

4
5

How interest accrues between payments made on April 15 and May 15,

for example:

Average daily balance: $10,000

Interest rate: x .08

Days between payments (30/365.25): x .08214

Monthly interest: $65.71

The loan holder first applies your payment to late charges or collection

costs on your account (if any), then to the interest that has accumulated

(accrued interest). The remainder of the payment is then applied to the

principal balance. Just as the accrued interest varies monthly (depending

on how many days elapse between the receipt of payments), the amount

of a payment applied to accrued interest and the amount applied to principal also will vary monthly.

A breakdown of how your payments are applied should be on your billing

statement. If not, ask your loan holder or servicer for that information.

How do I know where to send payments?

Before you graduated, left school, or dropped below half time enrollment

status, your school should have given you information about who to

repay. Also, your loan holder should be listed on your promissory note.

◆ You’ll repay a Federal Perkins Loan to the school that made the loan or

to an agency the school hires to service the loan.

◆ You’ll repay a Direct Stafford Loan, or your parents will repay a Direct

PLUS Loan, to ED’s Direct Loan Servicing Center.

◆ Generally, you’ll repay a FFEL Stafford Loan (and your parents will

repay a FFEL PLUS Loan) to the lender that made the loan. Sometimes

a loan holder contracts with a loan servicer to administer student

loans. If that’s the case, you’ll make loan payments to the servicer.

Also, FFEL Stafford Loans are often sold to another lender or

secondary market. The loan holder is required to notify you by mail if

your loan is sold and give you the name and address of the new loan

holder. Even if your loan is sold—which is a common practice—your

rights, responsibilities, and repayment obligation won’t change.

Generally, you’ll receive billing statements or a coupon book from your

loan holder. But, you’ll have to make all payments on time even if you

don’t receive these.
6

What if I’ve forgotten what type of loan I have

or who my loan holder is?

This information should be on the bill you receive from your loan holder.

But, if you have questions about what loans you have, you can review

your federal student loan history through the National Student Loan Data

System (NSLDS). Note that NSLDS has information only about loans ED

administers (the loans listed in the footnote on page 1 of this publication). If you obtained a private or nonfederal loan, you’ll need to contact

the loan holder or your school for more information. You can obtain information about your NSLDS record by contacting the Federal Student

Aid Information Center at 1-800-4-FED-AID (1-800-433-3243).

You can also check NSLDS through the U.S. Department of Education’s

Federal Student Aid (FSA) Web site at www.studentaid.ed.gov At the

site, click on “Repaying,” then click on “Get Your Loan Information.”

To check NSLDS, you’ll need a PIN (Personal Identification Number), which

is a four-digit number ED will send you. With your PIN, you can review the

type and amount of the ED loans you borrowed, the status of each loan, and

the name, address, and telephone number of the loan holder. If you want to

receive another copy of your PIN, change your PIN, or restrict access to your

personal information, go to the Web site listed above. At the site, click on

“Apply for PIN,” right under “My FSA” in the left column.

• Keep all your loan documents! This simple piece of advice is one of the most important. You’ll have

problems later if you can’t find your promissory note, can’t remember what type of loans you received,

or don’t know who you’re supposed to repay or how you go about postponing (deferring) repayment if

you should have financial difficulties. Keep a file of all documents connected with your loans from the

time you first get a loan, so you’ll always have what you need in one place. Then, you won’t be

confused about what you’re supposed to do or who you’re supposed to contact if you have questions.

• Whenever you talk to your lender or loan servicer, keep a record of the person you talked to, the date

you had the conversation, and what was said. If you send letters, always include your loan account

number, and keep copies of those letters (and the responses you receive) in your file. That way, you’ll

know who said what and when, which can help you avoid problems and misunderstandings.

• Notify your school and/or loan holder in writing if you move, change your name or Social Security

Number, or reenroll in school. You must ensure your loan holder won’t lose track of you. If that

happens, you could miss payments and become delinquent (late). Also, your loan could be sold, and

you won’t know who has it or where to send payments because you couldn’t be notified.

• Ask questions if there’s something you don’t understand or if you’re having trouble making payments.

Don’t wait until things become too tough—ask for help from your loan holder or loan servicer right away!

Be a Smart Borrower
7

hen repaying your student loan, you have some choices in

repayment plans (for FFEL and Direct Loans) that can make

repaying easier and help you avoid delinquency or default. If you’re

delinquent, it means you’re late making a scheduled loan payment

(most often, you’re 30 days or more late). Default, explained in more detail

on page 27, generally means you’re 270 days or more late in making a loan

payment. (Note that for Federal Perkins Loans, however, default is defined as

the failure to make an installment payment when due or the failure to comply

with other terms of your promissory note or written repayment agreement.)

Although default is more serious than delinquency, even delinquency can

be reported to credit bureaus. A delinquency notation remains part of

your financial history and could affect your credit rating. Repaying your

loan on time will help you establish and maintain a good credit rating,

which is crucial when you want to buy a car or a house, or even if you

want to rent an apartment. Sometimes, your credit rating can even affect

whether you’ll be selected for a particular job. So, it’s important to keep

paying on your student loans!

What repayment plans are available?

The Federal Perkins Loan Program doesn’t have a variety of repayment

plans. Your monthly payment amount will depend on the size of your

debt and the length of your repayment period. The minimum monthly

payment is generally $40, however.

Repayment Plans

W

Examples of Typical Payments for Federal Perkins Loan Repayment

Perkins Loans

Four repayment plans are available under the Direct Loan Program. Direct

PLUS Loan borrowers are eligible for all except the Income Contingent

Repayment Plan.

◆ Standard Repayment Plan

With the Standard Repayment Plan, you’ll pay a fixed amount each

month until your loan is paid in full. Your monthly payments will be at

least $50, and you’ll have up to 10 years to repay.

Direct Loans

Total Loan 

Amount

Number of 

Payments 

Monthly 

Payment

Total Interest 

Charges

Total 

Repaid

 $3,000 90 $40 $604.55 $3,604.55 

 1 $4.55

 $5,000 119 $53.06 $1,363.40 $6,363.40 

 1 $49.26

 $15,000 119 $159.16 $4,090.85 $19,090.85 

 1 $150.81
8

The Standard Repayment Plan is good for you if you can handle higher

monthly payments because you’ll repay your loan more quickly. Your

monthly payments will be higher than under the other plans because your

loan will be repaid in the shortest possible time. Because of the 10-year

limit on repayment, however, you might pay the least amount of interest.

◆ Extended Repayment Plan

Under the Extended Repayment Plan, you’ll still have minimum monthly

payments of $50, but you can take generally from 12 to 30 years to repay

your loan. The length of your repayment period will depend on the total

amount you owe when your loan goes into repayment.

This is a good plan if you think you’ll need to make smaller monthly

payments. Because the repayment period generally will be at least 12

years, your monthly payments will be less than with the Standard Plan.

However, you’ll end up paying more in interest because you’re taking

longer to pay back the loan.

◆ Graduated Repayment Plan

With this plan, your payments start out low, then increase in stages. You

can generally take from 12 to 30 years to repay your loan. The length of

your repayment period will depend on the total amount you owe when

your loan goes into repayment.

This plan might be right for you if you expect your income to increase

steadily over time. Your initial monthly payments will be equal to either

the interest that accumulates on your loan between payments or half the

payment you would make each month using the Standard Repayment

Plan, whichever is greater. However, your monthly payments will never

increase to more than 1.5 times what you would pay with the Standard

Repayment Plan. As is true for the Extended Plan, you’ll also pay more in

interest over the life of your loan.

◆ Income Contingent Repayment Plan

The Income Contingent Repayment (ICR) Plan is designed to give you the

flexibility to pay your loan without causing undue financial hardship.

Each year, your monthly payment will be based on your adjusted gross

income (AGI)—as reported on your U.S. income tax return—your family

size, the interest rate, and the total amount of your Direct Loan debt.

To participate in the ICR plan, you must authorize the IRS to inform ED

of your income amount. This information will be used to calculate your

repayment amount, which will be adjusted annually to reflect changes in

your AGI and in the interest rate on your loan.
9

For more information on Direct Loan repayment options, contact the Direct Loan Servicing Center at

The Direct Loan Servicing Center

Borrower Services: 1-800-848-0979 or 1-315-738-6634

Fax: 1-800-848-0984

TTY: 1-800-848-0983

www.dl.ed.gov

There are also four repayment plans available. FFEL PLUS Loan borrowers are

generally eligible for all four and might have options for additional

repayment plans, depending on the lender. Also, individual lenders can tailor

the FFEL repayment plans. Check with your lender for more information.

◆ Standard Repayment Plan

As with the Standard Repayment Plan under the Direct Loan Program,

your monthly payments will be at least $50, and you’ll have up to 10

years to repay.

◆ Graduated Repayment Plan

Under the FFEL Graduated Repayment Plan, your payments will be

lower at first, then increase over time. Each payment must at least equal

the interest accrued on the loan between scheduled payments. No

scheduled payment amount can be more than three times greater than

any other scheduled payment amount. You’re generally expected to

repay the loan within 10 years.

◆ Income Sensitive Repayment Plan

Like the Income Contingent Repayment Plan under the Direct Loan

Program, the FFEL Income Sensitive Repayment Plan bases your

monthly payment on your yearly income and your loan amount. As

your income increases or decreases, so do your payments. Each payment

must at least equal the interest accrued on the loan between scheduled

payments, and no scheduled payment amount can be more than three

times greater than any other scheduled payment amount.

◆ Extended Repayment Plan

The Extended Repayment Plan is available to new FFEL borrowers who

received their first loan on or after October 7, 1998 and who have FFELs

totaling more than $30,000. Under the Extended Repayment Plan, your

payments will be fixed or graduated (lower at first and then increased

over time) over a period of up to 25 years.

FFELs

Remember, the longer

your loan is in repayment,

the more interest you’ll

pay, and the more your

loan will cost you.
10

Can I do anything to deal with the interest?

Some loan holders offer reduced interest rates if you repay your loan

using electronic debiting (allowing your bank to automatically deduct

your monthly loan payments from your checking or savings account).

Sometimes you can get a reduced interest rate if you make a certain

number of consecutive on time monthly payments. For the FFEL Program, you should contact your lender to find out about these options.

For the Direct Loan Program, call 1-800-848-0979 or visit the Web site

at www.dl.ed.gov

There are tax incentives for certain higher education expenses, including a

deduction for student loan interest for certain borrowers. This benefit applies to federal and nonfederal loans taken out to pay for postsecondary

education costs. The maximum deduction is $2,500 a year. IRS Publication 970, Tax Benefits for Higher Education, explains these credits and other

tax benefits. You can find out more by calling the IRS at 1-800-829-1040.

TTY callers can call 1-800-829-4059.

How do I know which repayment plan is best for me?

Although you’re asked to choose a plan when you first begin repayment,

you might want to switch plans later if a different plan would work better for your current financial situation. Under the FFEL Program, you

can change plans once a year. Under the Direct Loan Program, you can

change plans any time as long as the maximum repayment period under

your new plan is longer than the time your Direct Loans have already

been in repayment. You can choose the Income Contingent Repayment

Plan at any time.

The tables on the next two pages can help you compare monthly payments under the different plans. The examples assume an 8.25 percent interest rate, which is the maximum rate. Your rate could be lower.

To help you figure your own repayments using an online calculator, you

can go to www.studentaid.ed.gov At the site, click on the “Repaying”

tab, then click on “Calculate.”

Remember that you don’t necessarily want to choose a plan just because it

offers the lowest monthly payment. While doing so seems tempting, this

might not be the best course of action. You might need more information

about what you can afford before you select a plan.
11

Examples of Typical Payments for Direct Loan Repayment*

* Because interest rates are variable and change yearly, this table assumes the maximum interest rate of 8.25 percent. Interest rates are

often lower than the maximum, however, so your repayment amounts could be less than shown here. Interest rates change each July 1,

so check annually to find out the current rate.

** The calculation for Income Contingent Repayment assumes a 5 percent annual income growth. Your income might grow at a different

rate, which would affect the amount of your monthly payment and total payment.

Repayment Period 

Starting Monthly Payment

Interest Paid

Total Amount Paid

Repayment Period 

Starting Monthly Payment

Interest Paid

Total Amount Paid

Repayment Period 

Starting Monthly Payment

Interest Paid

Total Amount Paid

Repayment Period 

Starting Monthly Payment

Interest Paid

Total Amount Paid

120 payments

(10 years)

$61

$2,359

$7,359

144 payments

(12 years)

$55

$2,893

$7,893

144 payments

(12 years)

$35

$3,649

$8,649

300 payments

(25 years)

$35

$7,991

$12,051

120 payments

(10 years)

$123

$4,718

$14,718

180 payments

(15 years)

$97

$7,464

$17,464

180 payments

(15 years)

$69

$9,176

$19,176

211 payments

(17 years, 7 months)

$85

$9,576

$19,576

120 payments

(10 years)

$245

$9,437

$29,437

240 payments

(20 years)

$170

$20,898

$40,898

240 payments

(20 years)

$138

$24,427

$44,427

183 payments

(15 years, 3 months)

$182

$15,975

$35,975

Jack borrows $5,000 in 

subsidized Direct Stafford 

Loans to finance an associate’s degree in auto repair. 

After graduation, he obtains 

employment as a mechanic 

earning $17,000 a year.

Income Contingent**

Graduated

Extended

Standard

Darrell borrows $10,000 in 

unsubsidized Direct Stafford 

Loans to finance a bachelor’s degree in secondary 

education. After graduation, 

he obtains a teaching job in 

a high school earning 

$23,000 a year.

Latitia borrows $20,000 in Direct Stafford Loans ($8,000 in 

subsidized loans and $12,000 

in unsubsidized loans) to finance a graduate degree in 

social work. After graduation, 

she begins working for the 

state earning $27,000 a year.
12

Repayment Period

Monthly Payment

Interest Paid

Total Amount Paid

Repayment Period

Starting Monthly Payment

Ending Monthly Payment

Interest Paid

Total Amount Paid

Repayment Period

Starting Monthly Payment

Ending Monthly Payment

Interest Paid

Total Amount Paid

Repayment Period

Starting Monthly Payment

Ending Monthly Payment

Interest Paid

Total Amount Paid

120 payments (10 years)

$92

$3,539

$11,039

Not available**

120 payments (10 years)

$52

$107

$4,008

$11,508

132 payments (11 years)

$67

$90

$4,068

$11,568

120 payments (10 years)

$184

$7,077

$22,077

Not available**

120 payments (10 years)

$103

$214

$8,015

$23,015

132 payments (11 years)

$103

$184

$8,315

$23,315

120 payments (10 years)

$368

$14,155

$44,155

180 payments (15 years)

$206

$418

$27,840

$57,840

120 payments (10 years)

$206

$428

$16,031

$46,031

132 payments (11 years)

$206

$368

$16,630

$46,630

Shawna borrows $7,500 in 

subsidized Federal Stafford 

Loans to finance a bachelor’s

degree in geology. After 

graduation, she obtains employment with a museum 

earning $20,000 a year. 

Income Contingent**

Graduated

Extended

Standard

José borrows $15,000 in unsubsidized Federal Stafford 

Loans to finance a bachelor’s

degree in music. After graduation, he obtains a job as a 

voice instructor earning 

$25,000 a year.

Cristina borrows $30,000 in 

Federal Stafford Loans 

($20,000 in subsidized loans 

and $10,000 in unsubsidized 

loans) to finance a law degree. After graduation, she 

begins working for the district 

attorney’s office earning 

$31,000 a year.

Examples of Typical Payments for FFEL Repayment*

* Because interest rates are variable and change yearly, this table assumes the maximum interest rate of 8.25 percent. Interest rates are

often lower than the maximum, however, so your repayment amounts could be less than shown here. Interest rates change each July 1,

so check annually to find out the current rate. Note that amounts might differ under the Extended, Graduated, and Income Sensitive

plans because each FFEL lender might have a different approach in setting up these plans.

**The Extended Repayment Plan is available only to new FFEL borrowers who received their first loan on or after October 7, 1998, and

who have FFELs totaling more than $30,000.
13

How can I figure out what I can afford?

To get a handle on your expenses, preparing a monthly budget once you

leave school can help you identify how you spend money so you can track

your spending to make sure it stays within certain guidelines. A budget

can also help you see how much of your loan you can repay each month.

You might be able to afford larger monthly loan payments than you

thought, or your budget could show that you need to cut back on nonessential spending.

The budget planning worksheet on page 15 can help you determine your

expenses and estimate your total available income. Your budget should be

as detailed and as accurate as possible, so add to that worksheet, create

your own, or go to www.studentaid.ed.gov to use an online calculator.

Select “Repaying,” then click on “Calculate.”

To begin preparing your budget, collect your pay stubs and bank statements. Your net monthly salary is what’s left after state and federal taxes,

Social Security, Medicare (FICA), and any other deductions are taken

from your gross pay. You can probably estimate that 25 to 30 percent of

your salary will go to taxes and Medicare. So, to figure your net monthly

salary, multiply your gross monthly amount by .75 or .70.

Next, add any other sources of income you might have, such as interest

income or contributions from family members. Don’t forget nontaxable

income such as Veterans Benefits.

Next calculate your expenses. If you don’t already know your housing arrangements and you’re single, consider whether you’ll live alone or with

roommates to cut down on expenses. Estimate the cost of housing in the

area where you expect to live by calling rental properties to get an idea of

the amount of rent you’ll pay or the average cost to buy a house.

If you rent, and your utilities (electricity, telephone, water) are not already included, get an estimate from the rental properties you check. If you’re already

paying these costs, collect some bills for a few months to get an idea of the average monthly amount you’re paying. When you budget for telephone bills,

don’t forget your cell phone, if you have one, and any long distance calls.

For food expenses, keep a weekly record for a few weeks to a month to see

what you’re spending for groceries, and what items you’re buying. Do the

same for personal expenses such as laundry, toiletries such as shampoo or

cosmetics, eating out, and entertainment. You can see if there’s a way to

cut down on buying some items or a way to buy less expensive ones.

When budgeting for transportation costs, consider whether you need to

drive to work or whether it would be possible (and perhaps less expensive)

Income

Expenses
14

to take the subway or bus. You’ll probably still need to budget for a car,

which would include gas, maintenance, insurance, and repairs. You might

need to add parking fees if you drive to work.

Budgeting for health care expenses is a good idea so you can cover expenses your health insurance might not. You might not need to spend on

health care each month, but the money will be there if you need it.

If you’re caring for a child or for an older person, figure in the cost of expenses such as day care or home health care, if necessary.

Obviously, you’ll have to budget for other debts you might have, including

credit card debt. Here is an area where you might be able to save some

money. Interest on credit cards often builds up quickly, so people spend

much more for a purchase than the original price. Paying more than the

minimum due on credit cards can help pay them off sooner, providing

more funds for other unavoidable expenses—like your student loan debt!

By trying to cut nonessential expenses, you might also be able to set some

money aside for emergencies, or just to put into a savings account. Having some extra funds—if possible—is helpful for unexpected expenses.

If, after preparing your budget, you find your finances are tight, your loan

holder can help you identify the repayment plan requiring the lowest

monthly payment amount; you can use this plan until your economic

situation improves.

If your total resources are greater than your total expenses, you might select a loan repayment option with a higher monthly payment. That way,

your loan will be paid off sooner, which will reduce the total amount of

interest you pay. You can also reduce your total interest by sending payments larger than required. This is called making a prepayment, and you

can do this at any time and won’t be charged a fee for doing so.
15

Budget Planning Worksheet

Estimated Income

Income Sources

• Net Salary

• Interest Income

• Investment Income

• Family

• Other

Non-Taxable Income

• TANF*

• Veterans Benefits

• Social Security

• Other

Total Income

Estimated Expenses

Housing

• Rent/Mortgage

• Gas/Electricity

• Water

• Telephone/cell phone

Food

• Buying lunch at work

Transportation

• Car payment

• Car repair

• Car insurance

• Bus

• Subway

• Other

Health

• Doctors

• Insurance

• Prescriptions

• Other

Dependent Care

• Child care

• Elder care

Personal/Miscellaneous

• Clothing

• Laundry

• Dry Cleaning

• Personal items (shampoo, cosmetics, etc.)

• Other

Entertainment

• Movies

• Concerts

• Eating out

• Other

Debt Obligations

• Student Loans

• Credit Cards

• Other

Emergencies

Total Expenses

Monthly

Amount MonthlyAmount

*Temporary Assistance for Needy Families
16

Notes
17

’m having problems making repayments. What can I do?

First, contact your lender or loan servicer right away if you think you’re

going to have trouble making payments. Don’t wait until you get behind! Your loan holder can look at your situation and offer several options

to help you, including consolidation, deferment, and forbearance, as well

as a choice of repayment plans, as discussed in the previous section.

What is consolidation?

Consolidation allows you to simplify the repayment process by combining several types of federal education loans into one loan, so you make

just one payment a month. Also, that monthly payment might be lower

than what you’re currently paying.

You can get a Direct Consolidation Loan, available from ED, or a Federal (FFEL) Consolidation Loan, available from participating FFEL

lenders. Under either program, the loan holder pays off the existing

loans and makes one Consolidation Loan to replace them. If you have

subsidized and unsubsidized loans, they’ll be grouped accordingly

when you consolidate so you won’t lose your interest subsidy on the

subsidized loans.

There are three categories of Direct Consolidation Loans: Direct Subsidized Consolidation Loans, Direct Unsubsidized Consolidation Loans,

and Direct PLUS Consolidation Loans. If you have loans from more than

one category, you still have only one Direct Consolidation Loan and

make only one monthly payment.

Under the FFEL Program, you can receive a Subsidized and/or an

Unsubsidized FFEL Consolidation Loan, depending on the types of loans

you’re consolidating. (FFEL PLUS Consolidation Loans are included under the Unsubsidized FFEL Consolidation Loan category.)

You can also consolidate Federal Perkins Loans and other federal education loans. To get a complete list of the kinds of federal student loans that

can be consolidated

◆ contact the Direct Loan Origination Center’s Consolidation

Department if you’re applying for a Direct Consolidation Loan. You

can reach them by calling 1-800-557-7392. TTY users can call

1-800-557-7395. Or visit www.loanconsolidation.ed.gov

◆ contact a participating FFEL lender if you’re applying for a FFEL

Consolidation Loan.

Consolidation

Repayment Options

I
18

Note that for parent

borrowers who want to

apply for a FFEL PLUS

Consolidation Loan, no

credit checks are

required. To apply for a

Direct PLUS Consolidation Loan, parent

borrowers are subject

to a check for adverse

credit history.

Under FFEL consolidation, if the same holder holds all the loans you want to

consolidate, you must obtain your consolidation loan from that holder, unless

you haven’t been able to get a loan with income-sensitive repayment terms.

To get a Direct Consolidation Loan, you must consolidate at least one Direct

Loan or FFEL. If you don’t have a Direct Loan, but you have a FFEL, you must

first contact a FFEL lender that makes FFEL Consolidation Loans to ask about

obtaining a FFEL Consolidation Loan. If you can’t get such a loan, or you

can’t get one with income-sensitive repayment terms acceptable to you, and

you’re eligible for the Direct Loan Income Contingent Repayment Plan (see

page 8), you can apply for a Direct Consolidation Loan.

Even if you’re in default, you might be eligible for a Consolidation Loan if

certain conditions are met. Talk to your loan holder(s).

What’s the interest rate on a Consolidation Loan?

As of February 1, 1999, both FFEL and Direct Consolidation Loans have

the same interest rate, which is a fixed rate set according to a formula established by law. The rate is the weighted average rate of the current rates

charged on the loans being consolidated, rounded up to the nearest oneeighth of a percent. This means the rate you’ll pay won’t be more than

one-eighth of a percent more than the effective rate on your individual

loans. The rate is fixed for the life of the Consolidation Loan.

Before February 1, 1999, Consolidation Loans had variable interest rates.

For information on interest rates for these loans, contact the Direct Loan

Origination Center’s Consolidation Department by calling 1-800-557-

7392, if you have a Direct Consolidation Loan, or check with your lender

if you have a FFEL Consolidation Loan.

If you have a Stafford Loan made on or after July 1, 1995, you can reduce

your consolidation rate by up to half a percentage point or more if you

can consolidate before the end of your grace period.

What’s the repayment period for Consolidation Loans?

You’ll have from 10 to 30 years, depending on the amount of your debt

and the repayment option you choose.

What are my repayment options?

All the FFEL Stafford Loan repayment plans (see page 9) are available to

FFEL Consolidation Loan borrowers. For Direct Consolidation Loan borrowers, the Direct Loan repayment plans listed on page 8 generally are

available, except that Direct PLUS Consolidation Loans are not eligible to

be repaid under the Income Contingent Repayment Plan or might not be

eligible for some discharge/cancellation benefits.
19

So, consolidation seems like the way to go.

It might be, but although consolidation can simplify loan repayment and

might lower your monthly payment, you should carefully consider

whether you want to consolidate all your loans. For example, you might

lose some discharge (cancellation) benefits if you include a Federal

Perkins Loan in a FFEL Consolidation Loan or Direct Consolidation Loan.

If that’s the case, you might want to consolidate only your FFELs or only

your Direct Loans and not your Federal Perkins Loan(s). Also, you

wouldn’t want to lose any borrower benefits offered under your existing

nonconsolidated loans, such as interest rate discounts or principal rebates, which can significantly reduce the cost of repaying your loans.

You can have a longer period of time to repay your consolidation loan

than you do for the individual student loans you’re repaying, but this

means you’ll also pay more interest over time. In fact, consolidation can

double total interest expense. If you don’t need monthly payment relief,

you should compare the cost of repaying your unconsolidated loans

against the cost of repaying a consolidation loan. To help you figure the

costs, contact your lender or loan servicer, or use the online calculator you

can find at www.studentaid.ed.gov At the site, click on the “Repaying”

tab, then click on “Calculate.”

Once made, consolidation loans can’t be unmade because the loans that

were consolidated have been paid off and no longer exist. So, take the

time to study your consolidation options before you apply.

For more details on loan consolidation, contact your loan holder or servicer.

What is deferment?

Deferment is a postponement of repayment under various, specific circumstances (see the chart on the next page).

◆ For Federal Perkins Loans, subsidized FFEL Stafford Loans, and

subsidized Direct Stafford Loans, you don’t have to pay principal or

interest during deferment.

◆ For unsubsidized FFEL Stafford Loans, unsubsidized Direct Stafford Loans,

FFEL PLUS Loans, and Direct PLUS Loans, you can postpone paying

principal, but you (or your parents, for PLUS Loans) are responsible for

the interest. You can pay the interest during the deferment period, or the

loan holder can capitalize the interest when the deferment ends.

Remember that capitalization will increase the loan balance.

The deferments listed on the next page apply to all Federal Perkins Loan

borrowers and to Direct Loan borrowers and FFEL borrowers who received their first loan on or after July 1, 1993. Other deferments might

Deferment
20

Deferment Condition Direct

Loans1,2 FFELs1,3 Perkins 

Loans

At least half time study at a postsecondary school

Study in an approved graduate 

fellowship program or in an 

approved rehabilitation training 

program for the disabled

Unable to find full-time employment

Economic hardship

Engages in service listed under 

discharge/cancellation conditions 

(see pages 23 and 24)

 YES YES YES

 YES YES YES

Up to 3 years Up to 3 years Up to 3 years

Up to 3 years4 Up to 3 years4 Up to 3 years4

 NO NO YES5

Loan Deferment Summary

also be available if you have an outstanding balance on a federal student

loan made before July 1, 1993. For more information, FFEL Stafford Loan

borrowers should contact their lenders or agencies. Direct Stafford Loan

borrowers can contact the Direct Loan Servicing Center at

The Direct Loan Servicing Center

Borrower Services: 1-800-848-0979 or 1-315-738-6634

Fax: 1-800-848-0984

TTY: 1-800-848-0983

www.dl.ed.gov

Schools must automatically defer your Federal Perkins Loans during the

time you perform any service that qualifies you for loan cancellation (see

page 24 for service cancellations.)

In most cases, you aren’t just granted a deferment automatically; you

must formally request one through the procedures your loan holder has

established. Often, you need to complete a deferment form. You’ll need

to provide documentation showing you’re qualified for the deferment

you’re applying for. Make sure all your paperwork is in order and make

sure the loan holder receives it.

1

 For PLUS Loans and unsubsidized student loans, only principal is deferred. Interest continues to accrue.

2 Direct Loan borrowers who have outstanding balances on FFEL Loans disbursed prior to July 1993, might be eligible for additional

deferments, provided the outstanding balance on the FFEL existed when the borrower received his or her first Direct Loan.

3 Applies to loans first disbursed on or after July 1, 1993, to borrowers who have no outstanding FFELs or Federal Supplemental Loans

for Students (Federal SLS Program) on the date they signed their promissory note. (Note that the Federal SLS Program was repealed

beginning with the 1994-1995 award year.)

4 Many Peace Corps volunteers will qualify for a deferment based on economic hardship.

5 More information on teaching service deferments can be found on the Internet at www.studentaid.ed.gov. At the site, Click on

“Repaying,” then click on “Cancellation and Deferment Options for Teachers.”
21

Here’s one of the most important things to remember: You must continue to make payments on the loan until you’ve been notified the deferment has been approved. Sometimes borrowers apply for deferment

and don’t hear anything back and assume things are fine. Or, as soon as

they send a deferment form and their paperwork, they think they can immediately stop payment. Even if the paperwork is received without any

problem, it takes a while to process. So, don’t skip the next payment

when it’s due. First, check with the loan holder. If your deferment has not

been processed, make your payment! You might go into default otherwise. You can’t get any deferment on a defaulted loan.

What is forbearance?

If you find you can’t meet your repayment schedule but you’re not eligible for a deferment, you might be granted forbearance for a limited and

specified period. During forbearance, your payments are temporarily postponed or reduced. Forbearance can also be an extension of the time you

have to repay your loan. Unlike deferment, whether your loans are subsidized or unsubsidized, you’ll be charged interest during forbearance. If

you don’t pay the interest as it accrues, it will be capitalized.

As is true with deferment, you aren’t just granted forbearance automatically; you must formally request one from your loan holder. You might

have to provide documentation to support your request.

You might be granted forbearance if you are

◆ unable to pay due to poor health or other unforeseen personal

problems.

◆ serving in a medical or dental internship or residency.

◆ serving in a position under the National Community Service Trust Act

of 1993 (forbearance can be granted for this reason for a Direct or

FFEL Stafford Loan, but not for a PLUS Loan).

◆ obligated to make payments on certain federal student loans that are

equal to or greater than 20 percent of your monthly gross income.

This is not a complete list of conditions that might qualify you for forbearance. For more information, contact your loan holder.

Unlike deferment, which you’re entitled to receive, the loan holder does

not have to grant forbearance except in certain mandatory circumstances

(check with your loan holder for details). In most cases, however, lenders

are willing to work with you if you show you’re willing but temporarily

unable to repay your debt.

Forbearance
22

Notes
23

Cancellation Conditions Amount Forgiven

Borrower’s total and permanent 

disability1 or death

Full-time teacher for five consecutive years in a designated elementary or secondary school 

serving students from low-income families

Bankruptcy (in rare cases)

Closed school (before student 

could complete program of 

study) or false loan certification

School does not make required 

return of loan funds to the lender

100%

Up to $5,000 of the aggregate loan 

amount that is outstanding after completion of the fifth year of teaching.

A borrower might qualify for loan forgiveness under the Direct Consolidation and the FFEL Consolidation Loan 

programs. If so, only the portion of the 

consolidation loan used to repay Direct Stafford Loans or FFEL Stafford 

Loans qualifies.

100%

100%

Up to the amount that the school was 

required to return.

For a PLUS Loan, includes death but not 

disability of the student for whom the parents borrowed.

For Direct and FFEL Stafford Loans received on or after October 1, 1998, by a 

borrower with no outstanding loan balance 

as of that date. At least one of the five consecutive years of teaching must occur after 

the 1997-98 academic year. (To find out 

whether your school is considered a low-income school, visit www.studentaid.ed.gov.

Click on "Repaying," then click on "Cancellation and Deferment Options for Teachers." 

Or, call 1-800-4-FED-AID.)

Cancellation is possible only if the bankruptcy court rules that repayment would 

cause undue hardship.

For loans received on or after January 1, 

1986.

For loans received on or after January 1, 

1986.

Notes

In some cases, your federal student loan can be discharged (canceled).

A discharge releases you from all obligation to repay the loan. Lists of

cancellation provisions for FFEL/Direct Loans and Federal Perkins

Loans are given on this page and the next.

Your loan can’t be discharged because you didn’t complete the program

of study at the school (unless you couldn’t complete the program for a

valid reason—see page 1), you didn’t like the school or the program of

study, or you didn’t get a job after completing the program of study.

For more information about discharge, contact the Direct Loan Servicing

Center by calling 1-800-848-0979 if you have a Direct Loan. If you have a

FFEL, contact the lender or agency that holds your loan. If you have a Federal

Perkins Loan, contact the school that made you the loan.

Loan Discharge (Cancellation)

1 Beginning July 1, 2002, a borrower who is determined to be totally and permanently disabled will have his or her loan placed in a

conditional discharge period for three years from the date the borrower became totally and permanently disabled. During this conditional

period, the borrower doesn’t have to pay principal or interest. If the borrower continues to meet the total-and-permanent disability

requirements during, and at the end of, the three-year conditional period, the borrower’s obligation to repay the loan is canceled. If the

borrower doesn’t continue to meet the cancellation requirements, the borrower must resume payment. Total and permanent disability is

defined as the inability to work and earn money because of an injury or illness that is expected to continue indefinitely or to result in

death. More information on this discharge can be found in the promissory note and by contacting the loan holder.

Direct Loan and FFEL Discharge/Cancellation Summary

I
24

Perkins Discharge/Cancellation Summary1

Cancellation Conditions Notes Amount

Forgiven

Borrower’s total and permanent disability2 or death 

Full-time teacher in a designated

elementary or secondary school serving students from 

low-income families

Full-time special education teacher (includes teaching 

children with disabilities in a public or other nonprofit 

elementary or secondary school) 

Full-time qualified professional provider of early 

intervention services for the disabled

Full-time teacher of math, science, foreign languages, 

bilingual education, or other fields designated as 

teacher shortage areas

Full-time employee of a public or nonprofit child- or 

family-services agency providing services to high-risk 

children and their families from low-income 

communities

Full-time nurse or medical technician

Full-time law enforcement or corrections officer

Full-time staff member in the education component of a 

Head Start Program

Vista or Peace Corps volunteer 

Service in the U.S. Armed Forces

Bankruptcy (in rare cases)

Closed school (before student could complete 

program of study) 

Service qualifies for deferment also.

Service qualifies for deferment also.

Service qualifies for deferment also. 

Service qualifies for deferment also.

Service qualifies for deferment also.

Service qualifies for deferment also. 

Service qualifies for deferment also.

Service qualifies for deferment also.

Service qualifies for deferment also.

Service qualifies for deferment also.

Service qualifies for deferment also.

Cancellation is possible only if the 

bankruptcy court rules that repayment would cause undue hardship.

For loans received on or after 

January 1, 1986.

100%

Up to 100%

Up to 100%

Up to 100%

Up to 100%

Up to 100%

Up to 100%

Up to 100%

Up to 100%

Up to 70%

Up to 50% in areas 

of hostilities or 

imminent danger

Up to 100%

100%

1 As of October 7, 1998, all Perkins Loan borrowers are eligible for all cancellation benefits regardless of when the loan was made or

the terms of the borrower’s promissory note. However, this benefit is not retroactive to services performed before October 7, 1998.

2 Beginning July 1, 2002, a borrower who is determined to be totally and permanently disabled will have his or her loan placed in a

conditional discharge period for three years from the date the borrower became totally and permanently disabled. During this conditional period, the borrower doesn’t have to pay principal or interest. If the borrower continues to meet the total-and-permanent

disability requirements during, and at the end of, the three-year conditional period, the borrower’s obligation to repay the loan is

canceled. If the borrower doesn’t continue to meet the cancellation requirements, the borrower must resume payment. Total and

permanent disability is defined as the inability to work and earn money because of an injury or illness that is expected to continue

indefinitely or to result in death. For more information on qualifying for this discharge, review your promissory note and contact your

loan holder.

More information on teaching service cancellation/deferment options can be found at www.studentaided.gov. At the site, click on

“Repaying,” then on “Cancellation and Deferment Options for Teachers.”
25

Are there any other options?

Your state might offer programs that cancel or reduce part of your loan

for certain types of service you perform (such as teaching or nursing).

Contact your state agency for postsecondary education to see what programs are available in your state. For the address and telephone number

of your state agency, call the Federal Student Aid Information Center at

1-800-4-FED-AID (1-800-433-3243). You can also find this information

at www.studentaid.ed.gov At the site, click on the “Funding” tab, then

go to “State Aid.”

You should also contact professional, religious, or civic organizations to

see if any benefits would be available to you.

Although not a loan cancellation, some branches of the military offer

loan repayment programs as an incentive for service. Check with your

local recruiting office for more information.

Another type of repayment assistance (again, not a discharge) is available through the Nursing Education Loan Repayment Program (NELRP)

to registered nurses in exchange for service in eligible facilities located

in areas experiencing a shortage of nurses. All NELRP participants must

enter into a contract agreeing to provide full-time employment in an

approved eligible health facility (EHF) for 2 or 3 years. In return, the

NELRP will pay 60 percent of the participant’s total qualifying loan

balance for 2 years or 85 percent of the participant’s total qualifying

loan balance for 3 years. For more information, call NELRP, toll-free, at

1-866-813-3753 or visit www.bhpr.hrsa.gov/nursing/loanrepay.htm

The AmeriCorps Program allows participants to earn education awards—

including money to repay student loans—in return for national service.

For more information, contact the Corporation for National Service,

which administers the AmeriCorps Program:

Corporation for National Service

1201 New York Avenue NW

Washington, DC 20525

1-800-94-ACORPS (1-800-942-2677)

202-606-5000

TTY: 202-565-2799

Web site: www.americorps.org

E-mail: Questions@americorps.org
26

Some federal agencies will repay all or part of a borrower’s federal student

loans, including the U.S. Department of Defense, the U.S. Department of

Health and Human Services, and the Corporation for National Service.

ED has no jurisdiction over these non-ED programs. If you work for a federal agency, check with that agency to see if it participates.

Notes
27

e’ve discussed ways to help you meet your loan repayment

obligation. Explore all the options you can—the last thing

you want to do is default.

What is default?

For a Federal Perkins Loan, default occurs if you don’t make an installment

payment when due or don’t comply with the promissory note’s other

terms. Default for a FFEL or Direct Loan occurs if you become 270 days delinquent (if you’re making monthly payments) or 330 days delinquent if

you pay less often than monthly.

What happens if I default?

The consequences of default are severe:

◆ The entire loan balance (principal and interest) can be immediately

due and payable.

◆ You’ll lose your deferment options.

◆ You won’t be eligible for additional federal student aid.

◆ Your account might be turned over to a collection agency. If so, you’ll have

to pay additional interest charges, late fees, collection costs, and possibly

court costs and attorney fees. These costs will really add up, and it will

take you even longer to pay off your student loan.

◆ As mentioned earlier, your account will be reported to national credit

bureaus, and your credit rating can be damaged. You might find it very

difficult to receive other types of credit, such as credit cards, car loans,

or mortgages. Because many landlords do credit checks, it might be

hard to rent an apartment. Some employers check to see if you’re responsible by looking at your credit rating, so bad credit could even

affect getting a job. On top of this, your default will remain on your

credit report for up to seven years.

◆ Your federal income tax refunds (and in some states, your state income

tax refunds) might be withheld and applied toward your loan repayment. This happens a lot to defaulters, and it can really hurt if you

were counting on that refund.

◆ Your employer, at the request of the loan holder, may withhold (garnish) part of your wages.

◆ You might be unable to obtain a professional license in some states.

Do these sound serious? They are, so don’t let any of them happen to

you! Make sure to contact your lender as soon as you think you might have

trouble making payments. Don’t ignore any calls or letters from your lender

or servicer, either. Putting things off is never the answer because these loans

won’t go away; talk to your lender and discuss all the options for making

payment easier that you’ve seen in this booklet. Get the details from your

lender/servicer on how you can benefit from these options. Don’t default!

W

Default
28

Notes
29

◆ A loan, unlike a grant, is borrowed money that must be repaid.

◆ You must repay your loan even if you didn’t like the education you

received or you can’t obtain employment after you graduate.

◆ You must keep the loan holder informed of a change in your name,

address, telephone number, Social Security Number, or enrollment

status.

◆ You must make payments on your loan even if you don’t receive a bill

or repayment notice. Billing statements are sent to you as a

convenience, but you’re obligated to make payments even if you don’t

receive any reminders.

◆ You can prepay the whole loan or any part of it at any time without

penalty. This means you are paying some of the loan before it’s due.

◆ If you apply for deferment, forbearance, or consolidation, you must

continue to make payments on your loan until you have been notified

that your request has been processed and approved.

◆ Your student loan account balance and status will be reported to

national credit bureaus on a regular basis. Just as failing to repay your

loan can damage your credit rating, repaying your loan responsibly can

help you establish a good credit rating.

◆ The consequences of defaulting on a federal student loan are severe

and long lasting.

◆ There are repayment options available to assist you if you’re having

trouble making payments.

Facts You Should Know & Remember
30

Notes
31

What if I decide to return to school?

If you leave school but return for additional schooling at least half time

before your grace period ends, you again can postpone loan repayment

while you’re in school, and you’ll be entitled to a full grace period when

you leave school or drop below half-time status. You should understand,

however, that if you return to school after your grace period ends, you’re

in repayment status and must request a deferment if you want to postpone repayment.

Why didn’t I receive a Federal Perkins Loan, which has a

lower interest rate and more cancellation provisions,

instead of a Stafford Loan?

A student who completes a Free Application for Federal Student Aid (FAFSA)

and demonstrates financial need is automatically considered for a Federal

Perkins Loan if the school the student attends participates in that program

and if the student meets program eligibility requirements. You’re not

guaranteed aid, however, even if you’re eligible. Aid is awarded based on

your demonstrated need, on the other aid you receive, and on school

funds available for Federal Perkins Loans. If a Perkins Loan didn’t meet

your financial need, you were eligible to apply for a FFEL Stafford Loan or

Direct Stafford Loan.

Why do I have an outstanding balance even though I used

all the coupons in my final payment coupon book?

Repayment schedules and corresponding payment coupon books are designed on the assumption that all payments will be made on time. If you

do this and pay the correct amount each month, you’ll pay your loan in

full by the end of the repayment schedule. If you’re delinquent, excess interest will accrue. You might also have collection charges or late fees. Interest also accrues during a forbearance or deferment. So, if you pay the

correct monthly payment amounts but have a delinquency during repayment, you’ll have an outstanding balance at the end of the repayment

schedule. Similarly, if extra interest has accrued, your balance will go up.

You’re responsible for paying that outstanding balance.

Frequently Asked Questions
32

Notes
33

borrower Person legally responsible for repaying a loan and who has signed the

promissory note.

cancellation The release of borrowers from their obligations to repay all or a portion of

their ED loans. Borrowers must meet certain requirements to be eligible

for cancellation.

capitalized interest Unpaid, accumulated interest that is added to the loan principal. Because

the principal increases, so does the total cost of the loan.

consolidation The combination of several types of federal education loans into one new

loan. Consolidation simplifies loan repayment.

default Failure to repay a loan in accordance with the terms of the promissory

note.

deferment The temporary postponement of loan payments; during this time, the

borrower does not have to pay either principal or interest.

delinquency Failure to make payments when due, as specified in the promissory note

and in the selected repayment plan. Delinquency can lead to default.

Direct Loans Loans made by the U.S. Department of Education (instead of a private

lending institution) under the William D. Ford Federal Direct Student

Loan Program. Direct Loans consist of Direct Subsidized Loans, Direct

Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.

As is true for FFELs, a student can receive a Direct Unsubsidized Loan

regardless of financial need. The interest rate on Direct Subsidized, Direct

Unsubsidized, and Direct Consolidation Loans is variable but does not

exceed 8.25 percent. The interest rate on Direct PLUS Loans is also variable but does not exceed 9 percent. Students and parents can receive

Direct Loans only if the student’s school participates in the Direct Loan

Program.

Direct Loan ED’s agent that collects Direct Loans and processes payments, deferments,

Servicing Center forbearances, and repayment options.

Important Terms

FFEL The “umbrella” term for the Federal Family Education Loan Program,

consisting of Federal (FFEL) Stafford Loans (subsidized and unsubsidized),

Federal (FFEL) PLUS Loans, and Federal (FFEL) Consolidation Loans. The

interest rate on FFEL Stafford Loans and FFEL Consolidation Loans is

variable but does not exceed 8.25 percent. The interest rate on FFEL PLUS

Loans is also variable but does not exceed 9 percent.
34

forbearance Temporary postponement or reduction of payments because of the

borrower’s financial difficulties. A forbearance also may be an extension of

the repayment period. All borrowers are charged interest during forbearance.

grace period A period of time between when the borrower graduates or drops below

half-time status and when repayment begins. For a FFEL Stafford Loan or

Direct Stafford Loan, the grace period is six months. During the grace

period on an unsubsidized FFEL Stafford Loan or Direct Stafford Loan,

interest that accrues must be paid or it will be capitalized. For a Federal

Perkins Loan, the grace period is nine months. There is no grace period

for a FFEL PLUS Loan, Direct PLUS Loan, or FFEL Consolidation Loan. A

Direct Consolidation Loan usually has no grace period, but a borrower

might be entitled to one if at least one of the loans being consolidated is

a FFEL Stafford Loan or Direct Stafford Loan that is in an in-school status.

guarantor The state or nonprofit private agency that administers the Federal Family

Education Loan (FFEL) Program in each state.

interest A loan expense charged a borrower for the use of borrowed money. Interest

is calculated as a percentage of the principal of the loan, which includes the

original amount borrowed and any capitalized interest. Accrued interest is

interest that accumulates on the unpaid principal balance of a loan.

lender The organization that made the loan initially; the lender could be the

borrower’s school (for Federal Perkins Loans); a bank, credit union, or

other lending institution (for FFELs), or the U.S. Department of Education (for Direct Loans).

loan holder The organization that currently “owns” the loan and to which the borrower owes repayment. Many banks sell loans, so the initial lender and

the current holder could be different.

loan principal The total sum of money borrowed. Loan principal includes the original

amount borrowed plus any interest that has been capitalized.

Perkins Loans Low-interest (5 percent) loans made under the Federal Perkins Loan Program to undergraduate and graduate students. Because the school is the

lender, students repay the school that made the Federal Perkins Loan or to

the agent the school hires to service the loan. A student must demonstrate

financial need to qualify for one of these loans.

PLUS Loans Loans made to the parent of a student. Parents with good credit histories

can borrow to help pay for the education expenses of a child who is a
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dependent undergraduate student enrolled at least half time at a participating school. There are FFEL PLUS Loans and Direct PLUS Loans. The

interest rate is variable but does not exceed 9 percent.

prepayment Any amount the borrower pays before it is required to be paid under the

terms of the loan’s promissory note. There is never a penalty for prepaying

principal or interest on U.S. Department of Education loans.

promissory note A binding legal contract between a loan holder and a borrower. The

promissory note contains the loan terms and conditions, including how

and when the loan must be repaid. By signing this note, the borrower

agrees to repay the loan.

repayment schedule A statement the loan holder provides the borrower that lists the amount

borrowed, the amount of monthly payments, and the date payments are due.

secondary market An agency that purchases student loans from originating lenders so these

lenders can make additional student loans. The Student Loan Marketing

Association (Sallie Mae) is an example of a secondary market. If such an

organization buys the loan, that organization becomes the “loan

holder”—see the previous page.

servicer An agency a school or lender employs to service (collect) a student loan

account. Often, the borrower will deal with the loan servicer when there

are questions about repayment. Servicers also approve deferments and

forbearances on the lender’s behalf.

Stafford Loans Loans made to undergraduate and graduate students under the FFEL and

Direct Loan programs. Borrowers can receive FFEL or Direct Stafford

Loans regardless of financial need. The interest rate is variable but does

not exceed 8.25 percent.

subsidized loan A federal student loan made on the basis of the borrower’s financial need

and other specific eligibility requirements. The federal government pays

the interest on these loans while borrowers are enrolled at least half time,

during the grace period, or during authorized periods of deferment.

unsubsidized loan A federal student loan made to a borrower meeting specific eligibility

requirements, but not based on financial need. The borrower is responsible for paying all interest that accrues throughout the life of an

unsubsidized loan. During in-school status, deferment, and forbearance

periods, the borrower may choose to pay the interest charged on the loan

or allow the interest to be capitalized (added to the loan principal).
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Notes