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Loan Repayment Tips In The News

30 Nov

repay-banner

Whether you’re a recent graduate whose loans are just entering repayment or you have been making payments for several years, there is a very real chance that educational loan payments may be causing you a financial hardship. For recent graduates, there is a lot of info covered in federal exit counseling and it would be easy to have missed some of it.

Loan Servicer Navient has put together a list of their Top 10 Things to do Before You Make Your 1st Loan Payment. The key to successfully repaying your loans with any Loan Servicer is understanding your responsibilities as a borrower and the wide range of tools available to help you throughout repayment. Your Loan Servicer doesn’t want you to default and you definitely don’t want to default on your loans either!

While there isn’t much that can be done about the amount you owe since you’ve already borrowed it, you can still choose from several different options for repayment.  The Institute for College Access and Success created a Top 10 Tips for recent graduates, a handy reference for borrowers.

Unless you chose otherwise, you’re probably enrolled in the Standard Repayment Plan which spreads your payments evenly over 10 years. This is both the default plan as well as the most aggressive repayment option available. However, there are several other options a borrower can choose which can limit the repayment per month to 10% of  discretionary income and reduce payments to as little as zero dollars per month (depending on income). For more information, check out Acacia Squire’s piece in NPR about her experiences and what options may be available to you.

 

Choosing the Right Loan Repayment Plan For You

28 Nov

All information on repayment plans is from this article by David Evans, Ph.D.
Additional info added by Casey Doten, Purdue Financial Aid Administrator

There are two main types of repayment plans you can choose from: traditional and income-driven. For borrowers that will qualify for Public Service Loan Forgiveness (PSLF), income-driven plans may be the better option. Income-driven plans will require an annual verification of income. This fact sheet describes each of the repayment plans as well as pros and cons of each. For more information about each of the repayment plans visit the Federal Student Aidwebsite.

Traditional Plansstudent-loan-repayment-plans

Standard Repayment Plan

The Standard Repayment plan consist of equal monthly payments over a 10-year period of time. This repayment plan is good for those who can handle making their monthly payments and make enough money to afford them. This payment plan is best for those who have minimal other debts and start working right out of school.

The Pros: You’ll pay off your loan faster compared to other plans, and pay less interest as a result.

The Cons: Your monthly payments will be higher than those made through other plans.

Graduated Repayment Plan

The Graduated and Extended Repayment plans could be an option for you if your income is low when you graduate but will increase quickly. Under a graduated plan, payments start out low and increase during the repayment period, usually every two years. This is a good plan if you can’t afford your current payments but know you will make more money in the years to come.

The Pros: Your loan is still paid off within 10 years.

The Cons: You’ll pay more interest over the lifetime of your loan compared to the Standard Plan.

Extended Repayment Plan

An Extended Repayment Plan is an option if your loan amount is more than $30,000 and you want to stretch your repayment to 25 years.

The Pros: Smaller monthly payments (since they’re spread out over as many as 25 years) and more time to pay off your loan.

The Cons: You’ll be saddled with payments for a longer period of time as well as pay more interest.

Income-Driven Plans

If you qualify for an Income-Driven plan, these are often the most attractive options if you’re willing to recertify your payment each year (it’s not very difficult). However, some of these are contingent on when you took out loans! If you’re interested in student loan forgiveness*, you’ll need to be enrolled in any one of these plans.

Income Based Repayment Plan

If you’re not making enough money to cover all of your monthly expenses the Income Based Repayment (IBR) Plan would be a good option. There are two separate calculations for IBR which are dependent upon when you took out your student loans.

The Pros: The IBR plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income** if you were a new borrower on or after July 1, 2014. Otherwise it will be 15%. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: You will have to pay income taxes on any forgiven debt unless you qualify for PSLF (this is true for all loan forgiveness).

Income Contingent Repayment Plan

If you have a federal Direct Loan (other than a PLUS loan), you could opt for the Income Contingent Repayment (ICR) Plan. Your payments could be as low $5 or even $0.

The Pros: Your monthly payment will be the lesser of 20% of your discretionary income or on a repayment plan with a fixed payment over 12 years. You can have your remaining loan balance forgiven after 25 years of regular payments.

The Cons: You’ll pay more over the lifetime of your loan than you would with a 10-year plan, your payment could be lower than the monthly accrued interest and your loan principal will grow. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Income Sensitive Repayment (ISR) Plan

The Income Sensitive Repayment (ISR) Plan is only available for those with Federal Family Education Loan (FFEL) Program. Payments are based on your annual income, family size, and total loan amount. You would pay the loan off in fifteen years.

The Pros: Each lender has their own calculation, but generally it is between 4% and 25% of your monthly gross income, although your payment must be greater than or equal to the interest that accrues.

The Cons: It’s only available for up to five years. After that time, you must switch to another repayment plan. You must reapply annually, and there’s no guarantee that you’ll have continued enrollment in the plan.

Pay as You Earn Repayment Plan

The Pay as You Earn Repayment (PAYE) Plan is another option for those not able to afford their current monthly payments.

The Pros: The PAYE plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 years.

The Cons: PAYE is only eligible to those who were new borrowers on or after October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Revised Pay as You Earn Repayment Plan

The Revised Pay as You Earn Repayment (REPAYE) Plan is very similar to PAYE. This plan was created to allow more borrowers the opportunity to have their payments lowered to 10% of discretionary income.

The Pros: Not dependent upon when you took out your student loan, the payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: If you are married, your spouse’s income will be considered whether taxes are filed jointly or separately. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Summary

Federal student loans offer various ways for repayment. If you are in a situation (like so many others who have taken out student loans) that is not ideal for standard repayment of your loan, consider these options. There is a lot to consider when you are trying to decide which repayment plan to choose. Using the Federal Student Loan Repayment Estimator can help you make your decision by showing you what your payments would be under each of the plans described above.

*A note about loan forgiveness: There are two different kinds of loan forgiveness, Public Service Loan Forgiveness (PSLF) and loan forgiveness from your income-driven repayment plan ending. While both plans require you to be enrolled in an income-driven plan to reap the benefits there are some key differences:
-PSLF requires being employed at a qualifying employer in public service (non-profits, government, etc.) for 10 years/ 120 qualifying payments before forgiveness takes place. Standard forgiveness is after 20 or 25 years depending on your repayment plan.

-Any loan amounts forgiven under PSLF are tax-free, but not under standard forgiveness! So if you still have a balance on your loans after 20 (or 25) years, you will owe taxes on it as if it is income. While it’s still better than paying the amount back, it’s important to know it will have ramifications.

**Discretionary income = Your income – 150% of the poverty level in your state for your family size

Making Your First Student Loan Payment

9 Nov

It’s been six months since you’ve left school and despite not wanting to think about it, the time has finally come to start paying on your loans. Your loan servicer (the company that will collect payment from you) should have contacted you to let you know who they are by now.

1st student loan payment.jpg

If they have not, be sure to log into the National Student Loan Database System (NSLDS) to find out who will be handling your loans. Be sure to let your servicer know how to contact you! If you think you can dodge them, they’ll just keep attempting to reach you at the contact info they have until your loan goes into default. And you don’t want that. You can also check your total federal loan balances on NSLDS to confirm how much you owe in total across all federal student loans.

Now that you know who you have in loan debt, be sure to log in to their website that’s provided on NSLDS to set up an account and see what your loan payments are per month.

Everyone is automatically enrolled in the standard 10-year repayment plan by default, which is actually the most aggressive repayment plan. Other repayment plans that are based off your expendable income might work better for you, especially as you get on your feet professionally.

While making higher payments is always preferable to pay down your loans as fast as possible and with the least amount of interest accrued, that’s not always possible on every budget. Ideally, your student loan payments won’t exceed 20% of your take-home pay. If it does, an income-driven payment plan might be needed to help shift the burden off your shoulders for now.

Once you know what payment plan you’re planning on and how much it’ll cost you monthly, it’s encouraged to sign up for auto-pay, also known as Direct Debit. Why pay your bill automatically when you probably prefer to choose when it comes out? Well, you’ll save 0.25% on your loan interest rate for federal loans.

For the average 2016 graduate with $37,172 in loan debt on the 10-year standard repayment plan this would equal $532 in savings. If you are enrolled in an income-driven repayment plan then you can save $1,252 for the 25 year term.

That’s not a bad trade-off considering you have to make the payments anyway and can choose what day of the month your payments are withdrawn when setting up auto-pay.

Once you’ve done all this, you are good to go! You’ve figured out who you are making payments to, made sure they fit into your budget with the correct payment plan, and can even set up automatic payments in the future so you don’t have to remember every month!

Repayment for May Grads Begins in November

3 Oct

All information on repayment plans is from this article by David Evans, Ph. D.
Additional info added by Casey Doten, Purdue Financial Aid Administrator

Most student loans begin repayment six months after the student leaves school. With November coming up quickly, now is the perfect time to review your repayment options and set up your payment plan before the first payment comes due!

There are two main types of repayment plans you can choose from: traditional and income-driven. For borrowers that will qualify for Public Service Loan Forgiveness (PSLF), income-driven plans may be the better option. Income-driven plans will require an annual verification of income. This fact sheet describes each of the repayment plans as well as pros and cons of each. For more information about each of the repayment plans visit the Federal Student Aid website.

Traditional Plansstudent-loan-repayment-plans

Standard Repayment Plan

The Standard Repayment plan consist of equal monthly payments over a 10-year period of time. This repayment plan is good for those who can handle making their monthly payments and make enough money to afford them. This payment plan is best for those who have minimal other debts and start working right out of school.

The Pros: You’ll pay off your loan faster compared to other plans, and pay less interest as a result.

The Cons: Your monthly payments will be higher than those made through other plans.

Graduated Repayment Plan

The Graduated and Extended Repayment plans could be an option for you if your income is low when you graduate but will increase quickly. Under a graduated plan, payments start out low and increase during the repayment period, usually every two years. This is a good plan if you can’t afford your current payments but know you will make more money in the years to come.

The Pros: Your loan is still paid off within 10 years.

The Cons: You’ll pay more interest over the lifetime of your loan compared to the Standard Plan.

Extended Repayment Plan

An Extended Repayment Plan is an option if your loan amount is more than $30,000 and you want to stretch your repayment to 25 years.

The Pros: Smaller monthly payments (since they’re spread out over as many as 25 years) and more time to pay off your loan.

The Cons: You’ll be saddled with payments for a longer period of time as well as pay more interest.

Income-Driven Plans

If you qualify for an Income-Driven plan, these are often the most attractive options if you’re willing to recertify your payment each year (it’s not very difficult). However, some of these are contingent on when you took out loans! If you’re interested in student loan forgiveness*, you’ll need to be enrolled in any one of these plans.

Income Based Repayment Plan

If you’re not making enough money to cover all of your monthly expenses the Income Based Repayment (IBR) Plan would be a good option. There are two separate calculations for IBR which are dependent upon when you took out your student loans.

The Pros: The IBR plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income** if you were a new borrower on or after July 1, 2014. Otherwise it will be 15%. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: You will have to pay income taxes on any forgiven debt unless you qualify for PSLF (this is true for all loan forgiveness).

Income Contingent Repayment Plan

If you have a federal Direct Loan (other than a PLUS loan), you could opt for the Income Contingent Repayment (ICR) Plan. Your payments could be as low $5 or even $0.

The Pros: Your monthly payment will be the lesser of 20% of your discretionary income or on a repayment plan with a fixed payment over 12 years. You can have your remaining loan balance forgiven after 25 years of regular payments.

The Cons: You’ll pay more over the lifetime of your loan than you would with a 10-year plan, your payment could be lower than the monthly accrued interest and your loan principal will grow. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Income Sensitive Repayment (ISR) Plan

The Income Sensitive Repayment (ISR) Plan is only available for those with Federal Family Education Loan (FFEL) Program. Payments are based on your annual income, family size, and total loan amount. You would pay the loan off in fifteen years.

The Pros: Each lender has their own calculation, but generally it is between 4% and 25% of your monthly gross income, although your payment must be greater than or equal to the interest that accrues.

The Cons: It’s only available for up to five years. After that time, you must switch to another repayment plan. You must reapply annually, and there’s no guarantee that you’ll have continued enrollment in the plan.

Pay as You Earn Repayment Plan

The Pay as You Earn Repayment (PAYE) Plan is another option for those not able to afford their current monthly payments.

The Pros: The PAYE plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 years.

The Cons: PAYE is only eligible to those who were new borrowers on or after October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Revised Pay as You Earn Repayment Plan

The Revised Pay as You Earn Repayment (REPAYE) Plan is very similar to PAYE. This plan was created to allow more borrowers the opportunity to have their payments lowered to 10% of discretionary income.

The Pros: Not dependent upon when you took out your student loan, the payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: If you are married, your spouse’s income will be considered whether taxes are filed jointly or separately. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Summary

Federal student loans offer various ways for repayment. If you are in a situation (like so many others who have taken out student loans) that is not ideal for standard repayment of your loan, consider these options. There is a lot to consider when you are trying to decide which repayment plan to choose. Using the Federal Student Loan Repayment Estimator can help you make your decision by showing you what your payments would be under each of the plans described above.

*A note about loan forgiveness: There are two different kinds of loan forgiveness, Public Service Loan Forgiveness (PSLF) and loan forgiveness from your income-driven repayment plan ending. While both plans require you to be enrolled in an income-driven plan to reap the benefits there are some key differences:
-PSLF requires being employed at a qualifying employer in public service (non-profits, government, etc.) for 10 years/ 120 qualifying payments before forgiveness takes place. Standard forgiveness is after 20 or 25 years depending on your repayment plan.

-Any loan amounts forgiven under PSLF are tax-free, but not under standard forgiveness! So if you still have a balance on your loans after 20 (or 25) years, you will owe taxes on it as if it is income. While it’s still better than paying the amount back, it’s important to know it will have ramifications.

**Discretionary income = Your income – 150% of the poverty level in your state for your family size

5 Habits of Successful Student Loan Borrowers

7 Sep

In 2015 student loan servicer Navient completed a study to analyze the behaviors of 6.8 million former students who are successfully managing their student loan payments.

They concluded that there are 5 key habits to staying on track to student loan payoff.

Don’t Put It Off5 Habits 22.jpg

Student loans have several options for deferment and forbearance that can be utilized if your circumstances necessitate taking a break from payments. If your situation is difficult they can work with you to help reduce your payments or even put them on pause. However, they recommend not doing so unless it is truly necessary.

By keeping deferments and forbearances to a minimum, you can reduce the total cost of your loan and shorten the total time that you are repaying it!

Borrowers who use less than six months of forbearance are almost twice as likely to successfully repay than those who take longer postponements. If you need it, use it! Just remember that the loan will still be there when the forbearance ends and you’ll need a plan to repay it then!

Stay Connected

Borrowers who track their progress tend to be more successful in repaying their loans. Just by checking in regularly into your online student loan account can help you stay on track of your loans. It makes you more aware of your current balance, allows you to explore and renew payment plans, and gives you valuable tax information in addition to other useful tools they provide.

Also be sure to provide your servicer with up-to-date contact information so that any communication they send you reaches you in a timely manner! You never know when a time-sensitive document may be on its way.

Graduate

Nothing is more important to getting a return on your educational investment than graduating! 

When you’re still in school, maximize your meetings with your advisor and take 15+ credits per semester to graduate on-time! Extra years in college cost over $138,000 in lost wages, retirement savings and your tuition for the same degree.

However, even for those who didn’t graduate with a degree successful repayment can still be within reach. If college is still in your future, come up with a plan on how you will pay for your degree (including all portions of the Cost of Attendance) to help ensure you graduate and prevent any surprises while you’re still in college.

Stick with Repayment

the longer that you can make payments on your student loans, the more likely you are to successfully repay them. Even when times are tough, continuing to make even small payments is an important factor in completing your repayment.

Whether it on the standard repayment plan, or one of the income-driven plans available, even a small percentage of your discretionary income can keep you on-track with your repayment. Missed payments will damage your credit and cost you more over the life of the loan. 

Talk to Your Servicer

Your student loan servicer is there to help answer your questions and get you through your repayment successfully. Borrowers who reach out with their questions tend to be more successful with their repayment.

9 times of 10, Navient finds that when they talk to a federal loan customer they can help them avoid default and enter into an affordable payment plan. 

If you have any concerns about missing payments, details or enrolling in different payment plans, or just general questions about your loans, engage with your servicer!

Source: 5 Habits of Successful Student Loan Borrowers, Navient Solutions, Inc.

Setting FIRE to your Retirement

3 Jul

Although the term may bring back memories of losing your first job or an unfortunate incident as a child learning what “hot” means, FIRE is not just a good thing – it’s a great thing. FIRE stands for “Financially Independent, Retiring Early”.

Retiring early doesn’t just mean ducking out of the workforce at 62, it’s usually your 30s or early 40s.

A recent survey showed that a stunning 83% of those aged 18-34 (the “millennial” age group) said they will never retire in the traditional sense. By contrast, 83% of today’s retirees don’t plan to work in retirement as opposed to 15% of the millennials surveyed.FIRE retirement.jpg

Young grads today are just hoping that they will be able to retire at all, so the idea of retiring early is almost mythical. While achieving FIRE does require careful planning and plenty of things to go your way, it is by no means impossible for the younger portion of today’s workforce.

The idea behind FIRE is that you will no longer need income from work to afford to live.

The issue that many people run into isn’t that they don’t make enough, rather they spend too much. This gets into the very common issue of needs versus wants when it comes to spending. What if those little luxuries you’ve become accustomed to are the barrier between you and retiring young?

A big key to this is eliminating debt. It’s difficult, or even impossible, to save a large percent of your income when you’re paying down a mortgage, student loans and car payments.

We all need a place to live, but what do those extra bedrooms do other than hold stuff that rarely gets used? And yes eating is a must, but you can avoid eating out almost entirely with just a little bit of planning and preparation.

In turn, you start putting this money you were spending elsewhere into accounts that will get a return. Remember, a traditional savings account won’t earn enough interest to keep up with inflation so once it’s up to a comfortable emergency amount it’s time to start putting your money to work.

graph showing the amount needed to be saved compared to how many years to retirement
While putting 45% or more of your income into savings may sound impossible, the trade-off to working 20 less years is incredibly enticing.

So if the idea of working only because you want to sounds like your cup of tea, there’s a whole community out there of people who have attempted FIRE and succeeded.

 

Who Owns Your Student Loans?

6 Jun

Carrie L. Johnson, Ph.D. | North Dakota State University

When leaving college, whether you are graduating or taking some time off, it is important to know how much you owe in student loans and who you will be paying back. You may have kept track over the years, or maybe you didn’t. There are two types of student loans: federal and private. This fact sheet will show you how to determine the amount of student loans you owe and who you need to pay.

Federal Student Loans

The National Student Loan Data System (NSLDS) website is the best place to start when looking for history on your federal student loans (Direct Loans and Perkins Loans). To access your student loan information, you need your FSA ID to log in.

nslds1-2.jpg

The main page is broken down into four sections:

  1. Summary information for borrower; this includes your enrollment status and the date that status became effective.

  2. The next section will have any “warnings” that may be on your account such as nearing your aggregate borrowing limit or if you are in default on your loans.

  3. The Loans section lists every federal loan you have ever had and totals for your federal loans.

  4. Section 4 shows your Pell Grants.

To identify your loan holders and repayment amounts, focus on the third section shown below.
nslds4

By clicking on the blue button with the number in the first column you can see even more details about your loan. You will be shown the type of loan, what school you were attending when the loan was obtained, various important dates, amounts, disbursements and statuses, and your servicer information. The servicer is who you contact about repayment.

There are currently ten servicers the Department of Education uses for Direct Loans; you can find a list here. The servicer on a Perkins Loan is typically the school that extended the loan. However, some schools do have outside servicers or assign your loan to Department of Education. The example below shows what the servicer section on NSLDS looks like.

nslds3

Private Student Loans

The best way to determine information about the status of private student loans is to obtain a copy of your credit report. The credit report will include will total amount owed and the name of your lender. A free copy of your credit report can be requested by mail, telephone, or online every 12 months from each of the three credit reporting agencies (Equifax, Experian, and TransUnion).

By going to AnnualCreditReport.com you can get access to information about your credit history, including student loan payments. You will need your personal information to log on and you will also be asked a series of security questions based on your report. You can also request your credit report by calling 1-877-322-8228 or by mail using this form.

Resources

AnnualCreditReport.com 

National Student Loan Database System

Saving for College

 

The Impact of the Potential Cut to Subsidized Student Loans

24 May

Casey Doten, Financial Aid Administrator – Purdue University

The newest federal budget proposal has proposed reductions to several federal student aid programs including cuts to Pell Grants, Work Study, and ending the Perkins loan program, Federal Supplemental Education Opportunity Grant (FSEOG), Public Service Loan Forgiveness, and subsidized federal loans to students. This budget proposal in its current state would have a direct financial impact upon any student with financial need, not just those in the lowest income brackets.
Cuts to Sub Loan.jpg

Ending subsidized federal loans would likely have the widest impact of the proposed cuts as there are currently over 29 million borrowers of these loans.

Subsidized loans are one of the most common forms of financial aid available to students who demonstrate financial need. They differ from unsubsidized federal loans because interest does not accrue on them while the student is still in school. If a student takes out a $3,500 subsidized loan their freshman year, it will still be $3,500 when they leave school while an unsubsidized loan would have accrued an extra $612 of interest in that time.

The difference becomes more stark when you compare subsidized versus unsubsidized over four years. A student taking out the maximum in federal loans each year for four years would borrow $27,000, of which $19,000 is subsidized. That student would have $27,785 of debt when leaving college versus a student who only had unsubsidized loan (which is what the budget proposal would lead to) would owe $29,353 when entering their grace period on the exact same amount borrowed, with the exact same interest rate.

Once a student begins repayment, all of that accrued interest gets added on to their loan balance and further gathers interest. For a student using the most aggressive payment plan, they will pay $2,081 more over the life of the loan because their loans were not subsidized.

Keep in mind these figures use interest rates from the past several years. Since student loan interest rates are keyed off treasury bonds rates, if the economy were to increase at the rate projected in the budget then student loan interest rates raise even higher as treasury bonds interest increases. This would further exacerbate the difference between subsidized and unsubsidized loans.

While graduating in four years is considered the norm, only 36% of students pursuing bachelor’s degrees do so. If a student takes even one more year to get their degree, the time for their interest to accrue becomes even greater. Loans for these students who can receive subsidized loans totals $32,341 on graduation, while unsubsidized-only adds up to $35,305. These two groups have a $3,513 difference in the life of the loan.

All told, subsidized loans would collectively save the 29.5 million current borrowers $45.5 billion assuming they all graduated in four years. That number only grows higher when realizing that many students take more than four years to graduate.

Which Student Loan Repayment Plan is Right For You?

12 May

All information on repayment plans is from this article by David Evans, Ph.D.
Additional info added by Casey Doten, Purdue Financial Aid Administrator

Congratulations on your graduation! It’s an exciting time as you move into new jobs and new places! However, something from your past will be coming back soon – your student loans. Six months after leaving school most student loans are due for repayment. By default you are put into the the Standard Repayment Plan (which is also the most aggressive repayment option), but you have more options! Choose which Federal Loan repayment plan is the best one for your life.

There are two main types of repayment plans you can choose from: traditional and income-driven. For borrowers that will qualify for Public Service Loan Forgiveness (PSLF), income-driven plans may be the better option. Income-driven plans will require an annual verification of income. This fact sheet describes each of the repayment plans as well as pros and cons of each. For more information about each of the repayment plans visit the Federal Student Aid website.

Traditional Plansstudent-loan-repayment-plans

Standard Repayment Plan

The Standard Repayment plan consist of equal monthly payments over a 10-year period of time. This repayment plan is good for those who can handle making their monthly payments and make enough money to afford them. This payment plan is best for those who have minimal other debts and start working right out of school.

The Pros: You’ll pay off your loan faster compared to other plans, and pay less interest as a result.

The Cons: Your monthly payments will be higher than those made through other plans.

Graduated Repayment Plan

The Graduated and Extended Repayment plans could be an option for you if your income is low when you graduate but will increase quickly. Under a graduated plan, payments start out low and increase during the repayment period, usually every two years. This is a good plan if you can’t afford your current payments but know you will make more money in the years to come.

The Pros: Your loan is still paid off within 10 years.

The Cons: You’ll pay more interest over the lifetime of your loan compared to the Standard Plan.

Extended Repayment Plan

An Extended Repayment Plan is an option if your loan amount is more than $30,000 and you want to stretch your repayment to 25 years.

The Pros: Smaller monthly payments (since they’re spread out over as many as 25 years) and more time to pay off your loan.

The Cons: You’ll be saddled with payments for a longer period of time as well as pay more interest.

Income-Driven Plans

If you qualify for an Income-Driven plan, these are often the most attractive options if you’re willing to recertify your payment each year (it’s not very difficult). However, some of these are contingent on when you took out loans! If you’re interested in student loan forgiveness*, you’ll need to be enrolled in any one of these plans.

Income Based Repayment Plan

If you’re not making enough money to cover all of your monthly expenses the Income Based Repayment (IBR) Plan would be a good option. There are two separate calculations for IBR which are dependent upon when you took out your student loans.

The Pros: The IBR plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income** if you were a new borrower on or after July 1, 2014. Otherwise it will be 15%. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: You will have to pay income taxes on any forgiven debt unless you qualify for PSLF (this is true for all loan forgiveness).

Income Contingent Repayment Plan

If you have a federal Direct Loan (other than a PLUS loan), you could opt for the Income Contingent Repayment (ICR) Plan. Your payments could be as low $5 or even $0.

The Pros: Your monthly payment will be the lesser of 20% of your discretionary income or on a repayment plan with a fixed payment over 12 years. You can have your remaining loan balance forgiven after 25 years of regular payments.

The Cons: You’ll pay more over the lifetime of your loan than you would with a 10-year plan, your payment could be lower than the monthly accrued interest and your loan principal will grow. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Income Sensitive Repayment (ISR) Plan

The Income Sensitive Repayment (ISR) Plan is only available for those with Federal Family Education Loan (FFEL) Program. Payments are based on your annual income, family size, and total loan amount. You would pay the loan off in fifteen years.

The Pros: Each lender has their own calculation, but generally it is between 4% and 25% of your monthly gross income, although your payment must be greater than or equal to the interest that accrues.

The Cons: It’s only available for up to five years. After that time, you must switch to another repayment plan. You must reapply annually, and there’s no guarantee that you’ll have continued enrollment in the plan.

Pay as You Earn Repayment Plan

The Pay as You Earn Repayment (PAYE) Plan is another option for those not able to afford their current monthly payments.

The Pros: The PAYE plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 years.

The Cons: PAYE is only eligible to those who were new borrowers on or after October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Revised Pay as You Earn Repayment Plan

The Revised Pay as You Earn Repayment (REPAYE) Plan is very similar to PAYE. This plan was created to allow more borrowers the opportunity to have their payments lowered to 10% of discretionary income.

The Pros: Not dependent upon when you took out your student loan, the payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: If you are married, your spouse’s income will be considered whether taxes are filed jointly or separately. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Summary

Federal student loans offer various ways for repayment. If you are in a situation (like so many others who have taken out student loans) that is not ideal for standard repayment of your loan, consider these options. There is a lot to consider when you are trying to decide which repayment plan to choose. Using the Federal Student Loan Repayment Estimator can help you make your decision by showing you what your payments would be under each of the plans described above.

*A note about loan forgiveness: There are two different kinds of loan forgiveness, Public Service Loan Forgiveness (PSLF) and loan forgiveness from your income-driven repayment plan ending. While both plans require you to be enrolled in an income-driven plan to reap the benefits there are some key differences:
-PSLF requires being employed at a qualifying employer in public service (non-profits, government, etc.) for 10 years/ 120 qualifying payments before forgiveness takes place. Standard forgiveness is after 20 or 25 years depending on your repayment plan.

-Any loan amounts forgiven under PSLF are tax-free, but not under standard forgiveness! So if you still have a balance on your loans after 20 (or 25) years, you will owe taxes on what is forgiven as if it is income. While it’s still better than paying the amount back, it’s important to know it will have ramifications.

**Discretionary income = Your income – 150% of the poverty level in your state for your family size

Dear Class of 2017, About Your Loans

10 May

From WiseBread New Graduate Help Center: Reyna Gobel, Student Loans Expert

girl surprised by letter

 

Dear Not-Yet-In-Trouble Federal Student Loan Borrower,

You might have heard that the Department of Education will be sending out letters to millions of student loans borrowers. The letters target borrowers whose grace periods are ending, as well as borrowers who exhibit signs of trouble that could lead to defaulting on their loans. If you haven’t started repayment yet but are fretting about how you’re going to possibly repay all that money — stop worrying.

I’m writing you this letter to not only give you important details about student loan repayment, but also to help you be aware of potential issues well before trouble starts.

I Defaulted — Here’s How to Avoid My Mistakes

I defaulted on a federal student loan simply because I didn’t know it existed. I had over a dozen student loans from different lenders; I forgot about one loan and went into default. It’s easy to do, but it’s also easy to avoid. Just log in to the National Student Loan Data System. You’ll see all your federal student loans on this site, along with contact information. Either arrange to pay each individually, or consolidate them into one loan. This is also a great time to get a free credit report – it can alert you to any problems you might have, like having missed a loan or bill payment.

Then, know yourself. If you can’t keep track of each individual loan, you really need to consolidate them into one loan to streamline payments (ask your loan servicer about consolidation options). Once consolidated, you can still choose a plan where payments are based on income, such as Pay as You Earn. And if you’re interested in the public service loan forgiveness program, know that it’s only available through loans originated by or consolidated with Federal Direct Loans.

Realize That Even With the Pay as You Earn Plan, You Might Have Payment Problems

The income-based Pay as You Earn repayment plan bases payments on your income and family size, but it doesn’t fully consider your expenses if your circumstances change. For example, at some point, you may have to help support a sick parent or child. You could also have bought a home when your income was higher. After a pay cut, a majority of your income could go towards your mortgage.

If you experience a financial setback, you have three options:

  • Call your servicer and see if your Pay as You Earn payment amount can be adjusted. You have to supply your income annually, and you may have forgotten to do so this year, causing your payments to set based a higher income level.
  • Ask for a deferment or forbearance, which are temporary payment breaks. Taking a break should only be done if the situation isn’t permanent. Always take a deferment when possible over a forbearance when any of your student loans are subsidized. The government pays the interest on subsidized student loans during periods of deferment.
  • If your income is lower because you took family leave for six months, you may not want to change your plan. However, for long-term pay cuts where your income-based repayment is too high for your budget, you should ask your servicer to also calculate payment options and see which payment option offers the lowest monthly payment.

Don’t Feel Embarrassed If You Don’t Know Something About Student Loans

I wrote two editions of a 240-page book on student loans, and I still don’t know everything about them. I read articles and play with the student loan repayment calculators every day. There’s always something new to learn. For instance, the public service loan forgiveness employer verification form wasn’t created until after the first edition was released. Now, thanks to that form, you can find out if you qualify for the public service loan forgiveness program right away and register for it right after you start working or after you’ve already started repayment — the choice is up to you. Never be afraid to ask your servicer questions about any of these programs.

Talk to Your Friends Who Are or Will Be in Repayment Soon

I’m not the only person who has experience with and advice about student loans. Talking to your friends can help you figure out repayment options and possibly pick better ones based on their choices and experiences. Just remember, they might have different circumstances than you, such as income level, children, or other debt that impacted their choices. Therefore, you shouldn’t copy their decisions. But you’ll be more informed and learn questions to ask your servicer. Plus, they may have missed payments, recovered, and now have advice about that. Learn from others’ student loan mistakes and victories.

The Most Important Part of This Letter?

The help you get doesn’t end here. You can tweet me anytime — @ReynaGobel— and ask questions. My articles will be posted here every week. You can ask me questions in my CollegeWeekLive web chats or get more helpful advice in my book CliffsNotes Graduation Debt.

Finally, remember you never want to receive a “dear troubled borrower” letter. The second you think you might miss a payment, talk to your loan servicer about options for a payment break or new repayment plan. With federal student loans, that one call will likely save your credit.

Reyna Gobel is a writer, author, public speaker, and student loans expert.  Her financial advice appears on Wise Bread’s New Graduates Help Center, in her video course How to Repay Federal Student Loans, in CollegeWeekLive newsletters and keynotes speeches, and in her audiobook How Smart Students Pay for School, now in its second edition. Be sure to check out her website for more helpful information on repaying your student loans.

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