Student Loan Repayment

The benefits of a college education are clear. The average bachelor’s degree graduate earns $1.2 million more over the course of their career than the average high school graduate, although outcomes vary widely depending on course of study. Still, postsecondary education can be very costly. Rising college costs over the last several decades have left most students and families turning to federal student loans to pay for college. Over six in ten bachelor’s degree graduates left school with student loan debt in 2019 and 43 million Americans now hold federal student loans—up from 38 million in 2012. There are several options for loan repayment; though most borrowers use the standard 10-year repayment plan, a majority of the outstanding student debt is held by borrowers who have plans based on their income. Those who fail to repay face delinquency or default, and one’s likelihood of falling into delinquency or default varies by demographics and institutional sector. This primer documents how student loan borrowers can repay their loans and how federal repayment policies impact borrowers.

The precursor to today’s federal student loan program started under the Higher Education Act of 1965’s Guaranteed Student Loan program, also known as the Federal Family Education Loan (FFEL) program. Under the FFEL program, ED encouraged private lenders to participate in the program by offering subsidies to those who participated. In addition to these subsidies, the government guaranteed that lenders would be compensated for a portion of their losses if a borrower defaulted. In 1993, Congress implemented the Direct Loan program, which allows students and their families to borrow directly from the federal government through ED with U.S. Treasury funds. With no lender subsidies to pay, this program reduced the government’s cost of making a student loan.

For nearly 20 years, the Direct Loan and FFEL programs coexisted, with schools selecting which program to participate in and borrowers receiving nearly identical loan terms that were set in statute. In 2008, largely due to the credit crisis, several private lenders no longer found it feasible to participate in the FFEL program. To ensure the stability of the student loan market, ED offered to repurchase FFEL program loans from private lenders and absorb these loans into the Direct Loan program as part of the Ensuring Continued Access to Student Loans Act (ECASLA). These repurchased loans are referred to as “Department-held FFEL.” In 2010, the Student Aid and Fiscal Responsibility Act (SAFRA) halted the availability of new FFEL program loans and mandated a complete switch to direct lending by June 30, 2010.3 By June 2021, remaining FFEL program loans represented only 15% ($234.1 billion) of the $1.6 trillion in outstanding federal student loans. The remaining loan volume consisted of almost all Direct Loans ($1.35 trillion).