"Re-Work” your Federal Student Loans Without a “Refi”

Magda Doemeny, CFP®
8 Jul

As interest rates continue to drop and/or stay at all time lows the question about refinancing student loans becomes more and more prevalent. Can I save money? How much? Is it worth it to switch to another loan type? 

The first important thing to understand about adjusting your loan payments is that refinancing isn’t your only option. In fact, refinancing might not even be a good option. 

Remind me what goes into a student loan refinance? 

When you are refinancing your student loans you are doing one or both of the following: 

  1. Converting a federal loan to a private loan
  2. Attempting to lower the interest rate on your existing loan (whether federal or private)

As of February 2020, 92% of student loans are federal versus private.* This is important because this means that deciding to refinance likely means you are converting from a federal loan to a private loan. Before you move forward, however, it’s critical to know what other options you might have before making the switch. 

Before you refinance your federal loans understand your options

A unique and highly valuable feature of a federal loan is the option for forbearance, which is the ability to temporarily suspend your loan payments. Once your loans are privatized you lose this option should you run into a hardship. Additionally, moving to a private loan will likely convert your loan to a variable interest rate which may or may not be beneficial for you. Variable interest rates increase your risk in the long run because your payments may increase if your interest rate rises.

In terms of federal loan optionality, the federal government has recently increased the options available to those with student debt. It allows you to select from a few repayment options if you are eligible. 

Let’s walk through some of those options:

Standard Repayment Plans

Both the Standard Repayment Plan and the Graduate Repayment Plan will set you up to pay the loan over a 10 year period. As a general rule, the shorter the life of the loan the less you will pay collectively, compared to a longer loan period. This should make sense because if you are borrowing money for 30 years versus just 10, you will pay interest 3x as many times (even though the interest rate may be lower for the longer term loan). 

With these loans you will either find that your payments are fixed for the life of the loan (Standard Repayment Plan) or they start low and increase every two years for the life of the loan (Graduate Repayment Plan). 

After the 10 years, however, the outstanding balance of the loan will be forgiven. There are circumstances where you can have this type of loan structure for a 30 year loan period. This occurs if you have Direct Consolidation Loans and FFEL Consolidation Loans.

Extended Repayment Plans

The Extended Repayment Plans are very similar to the Standard Repayment plan except that you must have at least $30,000 in Direct Loans to qualify. If you have this amount, this loan will be structured such that you pay it off in 25 years instead of 10 years. The reason you will likely want a longer term for the loan is that as the size of the loan increases so would the monthly payment. Let’s take an example where you have $40,000 in loans and a 4.5% interest rate over two different loan periods

The monthly payments are more manageable for the 25 year loan but ultimately you are going to pay more over the life of the loan.

Loan Forgiveness Plans

Although only fairly recently created, and unfortunately subject to change with tax law, there are several programs that allow you to forgive the remaining balance of your student loans if certain criteria are met. Before we discuss what types of loans exist here, let’s quickly talk about the “gotchas” around these loans:

  1. If loans are forgiven, in many cases the balance of the loan is taxed as income in that year. This means you may have a larger tax bill to pay so be sure to talk with a tax professional as you near the end of your loan.
  2. The loans can go away or be canceled if tax law changes. As recently as 2020, President Trump has called to remove the Public Service Loan Forgiveness program. 
  3. In some cases you may be paying much more over the life of the loan with these programs even though they absolve your debt at the end. There is a balance to find between what you can afford monthly versus how much you want to pay for the life of the loan. 

Now that you understand some of the things to look for let’s talk about what the individual programs are and why they may be beneficial.

  1. Profession based repayment plans: There are several different types of loan forgiveness for lawyers, nurses, public services workers, teachers, and military. Within these, you must qualify based on your type of work. After a designated period of time, that can range from 10-25 years, the loan will be forgiven. These forgiveness programs were created to help those who need professional education to begin/advance their careers but also know that the career isn’t high-paying. It might be more common for a doctor to go to medical school and acquire debt with the hope to earn a high salary to assist with the payments. This won’t necessarily be the case for other professions like teaching and public service. 
  2. Income-based repayment plans: These plans were created with the idea of lowering monthly payments to a manageable amount. The way they can ensure this is the case is by making the payments a percentage of your income. In most cases they will range from 10%-15% of your income. Depending on the size of your outstanding student loan you can qualify for either a 10 year repayment or 20-25 year repayment. The larger your outstanding loan, the more likely you are to qualify for a longer loan repayment period. The types of loans that fall under this category are: 
  • Income-Based Repayment (IBR)
  • Pay As You Earn Repayment (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Contingent Repayment (ICR)

For these loan types, you will have to submit your income each year for review and adjustment to your annual payments. At times, you may want to evaluate how you file your taxes if you have a spouse because your joint income can play a factor in your monthly payment. Seek advice from a tax professional if you are married and are utilizing one of the income-based repayment plans. 

What’s right for you? 

This depends on what you are looking to do over the long run. You’ll want to evaluate three different restructuring options:

  1. Pay less each month
  2. Pay off sooner
  3. Pay less over the life of the loan

Pay less each month

This option may be right for you if you are trying to take on additional debt payments, think buy a home or car. Additionally, if you are struggling to make ends meet with your expenses, one of the first things you should evaluate are your spending habits. If you ever go into default for these loans you might no longer qualify for the forgiveness so make sure you can afford those payments! 

Pay off sooner

This might be right for you if you are trying to be debt free by a certain time. If you have the flexibility to take on higher monthly payments and therefore you can close out this part of your debt history, you should consider doing so. This might be useful if you need to go back to school to get another degree. 

Pay less over the life of the loan

Sometimes you just want to minimize how much interest (and therefore additive) expense you have for a loan. This is why some people like to put more than the minimum towards payments (ensuring those extra payments go towards the principal). From a planning perspective, we don’t necessarily need you to pay less over the life of the loan as long as you can afford the payments for the duration of the loan. Paying less is something that might just feel right for you. Note, this likely comes with a higher monthly payment. 

Ok, I’m ready to make changes but need some help

Here’s the best part - you can do this in just a few easy clicks within the Origin platform! Learn what your options are and reapply for a new pay structure all within your account. If you have any questions about the process just reach out to your Origin planner today. 


*Backman, Maurie, “Student Loan Debt Statistics for 2019” The Motley Fool, February 5, 2020,