November 23, 2015
I’m never going to be a good shopping buddy. I’ll never tell you to buy that new pair of jeans because you work so hard and deserve to spoil yourself. I’m just not that kind of girlfriend.
But I am the one you call crying when you can’t figure out which bills to pay first. I make “choose your own adventure” financial spreadsheets and model out different scenarios for my friends, because I know that money decisions are hard to visual, emotional and just plain complicated.
A few weeks ago, one of my friends started panicking about her student loans. She’d recently graduated with an education degree, which means her first loan payment would be due in a few months. When she calculated how much she’d be required to pay each month (about $400), she realized she’d have a major problem.
As a single mom, with other, she knew she couldn’t afford a payment this high. Then she factored in daycare costs. “It’s just not going to be possible,” she said, fearing that she’d never be able to get out of debt, buy a home, or help her daughter out with her own education costs.
What my friend didn’t realize is that there are repayment plans designed to help ease the burden of student loan debt. One program, in particular, offers payments as low as zero, depending on your income and household size: the Income-Based Repayment Plan. This plan is only available for Federal student loans. Your monthly payment is based on your income and household size, not on your balance.
This plan offers the most overall savings for people with a high loan balance and low income. The best value, however, comes when you couple the Income-Based Repayment Plan with Public Service Loan Forgiveness. This program offers loan forgiveness for public service workers, like teachers, after 10 years of payments.
An Income-Based payment of $0.00 qualifies as a payment. As long as my friend remains a teacher and makes her income-based payment (it will likely grow, as her salary increases), she’ll qualify to have the bulk of her student loans forgiven in ten years. For her, that’s a savings of more than $50,000.
Considering the many different types (Federal, private, subsidized, unsubsidized) and the long list of repayment options (Standard, Graduated, Extended, Income-Based, Income-Contingent, Pay-as-you-earn), student loans are one of the most complicated financial products that most people have.
Visit Debt.org/Students for help navigating repayment and consolidation options.