If you borrowed student loans for school and now your required monthly payment is $0, that can come with mixed emotions. On the one hand, heck yeah! No loan payments! But on the other hand, you might feel like you don’t know how long this will last or what it will mean for you in the long term.
When it comes to your financial future, you want to understand as much as you can upfront. No one wants surprises with student loans. Here’s why your student loan payments might be $0 and what it means for you.
Possible Reasons for a $0 Student Loan Payment
You might have a $0 monthly student loan payment for a handful of reasons. Each has different timelines and next steps you need to be ready for.
Grace Periods
One of the most common reasons you might have a $0 monthly student loan payment right now is because you’re in something called your grace period. This is generally the six-month period after you leave college when no loan payments are required.
It can take a minute to get used to life after college. You have to figure out where you’ll be living and find a job with a steady income. So, consider your grace period a courtesy that allows you some time and breathing room to figure things out.
But remember, interest continues to accrue (or grow) during your grace period. Soon, it will be capitalized, which means it will be added to your original balance.
Here’s an example:
Imagine you took out a $10,000 student loan with a 6% interest rate for your first year of college. And no payments were required while in school, so you didn’t make any.
When it comes time to make payments, 48 months later, you would have accrued $2,400 in interest. And when that capitalizes, your new loan balance would be $12,400. That’s a pretty big deal.
Even if no payments are required during a grace period, you can make payments whenever you want. If you’re able to make payments during this time, or at least keep with the interest, it will help you get rid of your student loan debt faster and save you money in the long run.
Deferment
If you were going through tough times, you might have applied for economic hardship deferment or unemployment deferment, which means you applied to delay making student loan payments. Deferment can be helpful if you need it. But it’s really a last resort. Even in deferment, the clock is ticking, and most student loans will continue to accrue interest, except for subsidized loans.
One crucial distinction is between deferment and forbearance. Forbearance allows you to temporarily stop making your monthly loan payments or make lower monthly payments due to things like financial difficulties, medical expenses, or changes in employment.
You need to apply for forbearance, and it’s up to your loan servicer whether or not they will grant it to you. However, there are some situations where servicers are required to grant a forbearance, like for a medical internship, being a member of the National Guard, and a few other circumstances.
Enrollment in School
Generally, federal student loans don’t require you to make payments if you’re still enrolled in college at least half-time. With unsubsidized student loans, interest accrues during school, and you are expected to pay it all back eventually. With subsidized student loans (which fewer people qualify for), the federal government pays the interest while you’re in school.
Also, you may have applied for a graduate school deferment if you’re enrolled in graduate school at least half-time and still have no required payments from your undergrad student loans.
Income-Driven Repayment Plans
Another reason you might not have a required student loan payment right now because you enrolled in an income-driven repayment (IDR) plan. These plans apply to federal student loans only and are designed to help make student loan payments more manageable for borrowers.
How Income-Driven Repayment Plans Work
There are a few different types of income-driven repayment plans. These plans base the amount of your required loan payments on a percentage of your discretionary income instead of the amount you owe. That way, you should always have enough money for essentials like food and housing.
You need to apply to be considered for an income-driven repayment plan. Enrolling in an income-driven repayment plan can help lower your monthly payment if you have federal student loans. In some cases, your payment could even be $0 per month. It depends on your income, family size, and some other factors.
Saving on a Valuable Education (SAVE) Plan – The Newest IDR Plan
One specific income-driven repayment plan is the Saving on a Valuable Education (SAVE) Plan. It’s worth highlighting because it’s a relatively new plan designed to provide the lowest monthly payments of any income-driven repayment plan — and it’s available to almost all student loan borrowers. There are a few main benefits of the new SAVE Plan.
1. The SAVE Plan can significantly lower your monthly student loan payments.
The way it works is technical. But the SAVE Plan bases your monthly payment on a few things:
- Your income
- Your family size
- And the federal poverty guidelines by state (These are dollar amounts estimated by the U.S. government that indicate the minimum income a person or family needs to live in that state.)
Under the SAVE Plan, you would have a $0 monthly loan payment if your income is less than 225% of the poverty line.
2. Your balance will not grow due to unpaid interest.
Okay, now this is huge. Something important to note about the SAVE Plan is that it includes an interest benefit that stops your balance from growing. As long as your new (lower) monthly payment is on-time each month, any unpaid interest beyond that amount is waived. This means you can work to pay down the loan without the interest continuing to grow.
That’s a big difference from older versions of income-driven repayment plans, where a borrower could be approved for a lower payment each month, but their total loan cost would keep growing because they weren’t keeping up with the interest!
3. Your loans may be forgiven in as little as 10 years — earlier than ever.
After reaching your repayment term, which is the amount of time you need to make payments before you can qualify for forgiveness, you’ll become eligible to have any remaining loan balance wiped away. Even $0 “payments” can count toward student loan forgiveness, including the 120 payments required for Public Service Loan Forgiveness.
The government evaluates all your loans eligible for the SAVE Plan to determine your eligibility for early forgiveness. However, you might have other loans that are part of other IDR plans and on a different forgiveness timeline.
Under the SAVE Plan, you might be eligible for loan forgiveness after as few as 10 years of monthly payments—about half of the previous amount of time to be considered for forgiveness.
Your repayment term depends on how much you originally borrowed for school and the details of that loan agreement. For example, if you originally borrowed less than $12,001 in undergrad loans, you could be eligible for forgiveness in as few as 10 years. At the higher end, balances over $21,000 become eligible for forgiveness after 20 years.
Recertification of Income and Family Size
If you agree to share your tax info with Federal Student Aid, an office of the Department of Education, they’ll have information about any changes to your income and family size. They’ll automatically review and recertify your IDR plan and adjust your monthly payment once a year. They’ll let you know if your payment changes.
You can also choose to recertify your plan manually if you’d rather do it yourself.
Things to Watch Out for With $0 Loan Payments
If you currently aren’t required to make any student loan payments, it’s great that you have some flexibility. But it’s no reason to lose track of your loans or downplay the loan’s impact on your financial future.
You Can Have a $0 Monthly Payment and Still Accrue Interest
It’s absolutely critical you understand why your loan payment is $0 and if interest is still accruing. Often, it is — like if you were in your grace period, for example. You’ll want to keep up with interest payments as best you can to get out of debt faster and pay less for your loan overall.
All Student Loans Do Not Qualify for $0 Payments
While income-driven repayment plans like SAVE are available to federal student loan borrowers, private student loans are another deal. Private student loans come from banks and financial companies. Those lenders are not required to lower your payments or forgive anything. And private student loans generally have higher interest rates, too. So make sure you know what types of loans you have and who the loan servicers are.
A $0 Student Loan Payment is Not Always Permanent
A $0 monthly student loan payment generally depends on your financial situation, including your income. A single borrower making up to $30,000 per year might have a $0 student loan payment, but if you began earning more money and had to verify your new income, say over $40,000, you might have a loan payment closer to $60 per month. Don’t assume you’ll never have to make loan payments again.
Student Loan Repayment is Changing for Many Americans
It might sound contradictory, but $0 student loan payments exist now. For some borrowers, it’s part of their loan repayment plan and their path toward student loan forgiveness or financial security.
Mark Kantrowitz contributed to the original version of this article.
