Student Loan Debt Relief

It’s staggering to ponder the amount of money Americans owe in student loans.

In late 2023, the total owed to take Philosophy 101 and earn a Chemistry degree was $1.6 trillion.

Yes, with a T.

Average student loan debt for 2023 graduates was $37,338, and just more than seven million borrowers were in default on their loans, according to the U.S. Department of Education.

The COVID pause on payments ended in October of 2023, and it is again the borrowers’ burden to repay that debt. In many cases that is not easy. It’s also not easy to wade through the options for student loan debt relief.  However, the right student loan help can make a difference.

The problem is that many students don’t plan ahead for repayment. In fact, many simply default into a repayment program rather than discussing options with their parents, loan officers at their school or a credit counseling service.

Here we’ll take a look at student loan payment options and the possible student loan debt relief options that might help.

Standard Repayment Plan

The Standard Repayment Plan is the most basic plan for borrowers. It may mean a higher monthly payment compared to other plans, but the benefit is the loan is paid in full in the shortest amount of time, which means total interest paid is the lowest of all options.

Borrowers are typically placed in this plan automatically, unless they opt for a different option during the six-month grace period after graduation. The attraction for borrowers is making the same payment – i.e. standard – every month for 10 years.

If you have borrowed $50,000 – the amount nine million borrowers owe – and use the Standard Repayment Plan at the current federal interest rate of 5.5%, you would pay $542.73 per month for 10 years. If you borrowed $30,000, the payment for 10 years would be $325.58 per month.

This is not a small figure – $542.73 per month is $6,512.76 per year. That number clearly illustrates the real-life consequences of borrowing for college.

But it does mean paying the loan off in a defined time period.

Options for Student Loan Debt Relief

Options to save money on student loan repayments may not be simple to find or understand, but they do exist. In the summer of 2023, President Joe Biden created a plan that would cut some payments based on borrowers’ income and reduced any payment to zero for those making less than $15 per hour. He added more options and eased the rules that allow debt discharge via bankruptcy. These ideas go with other established plans that might offer some relief to borrowers.

Let’s go over a few.

Income Driven Repayment Plans

The federal government offers several alternatives to the Standard Repayment Plan and divides them into two categories: income-driven repayment plans and basic repayment plans.

Income driven repayment (IDR) plans are based on earnings and the monthly payment is determined by a percentage of your income.

If you choose an IDR, you could extend your loan term from 10 years to 20 or even 25 years. Payments will be more manageable month-to-month, but you will end up paying more for the loan because of the added years. However, if certain criteria are met after 25 years, any remaining balance would be forgiven.

There are five types of IDRs. These plans best serve those who have a lot of student debt and not a lot of income coming out of college.

• Pay as you earn (PAYE)
• Revised pay as you earn (REPAYE)
• Income-based Repayment (IBR)
• Income-contingent Repayment (ICR)
• Income sensitive
• Savings on a Valuable Education (SAVE)

It is important to note that you must re-apply for IDRs every year. Your payments could go up or down because of a change in income or family size. IDRs do offer loan forgiveness programs if you haven’t paid off your balance by the end of your term, but only if you remain current on payments every month.

If you have a Federal Family Education Loan (FFEL), you may qualify for an income-sensitive repayment program.

This program is aimed at low-income borrowers, who have organized a budget and know exactly how much they can afford to pay each month. Borrowers submit tax returns or pay stubs to establish exactly what their income is and help determine the amount they can afford to pay.

The borrower can choose to use anywhere between 4% and 25% of his or her income to be the required monthly payment.

Go to the Department of Education’s website or contact your loan servicer to enroll in one of these repayment plans.

Graduated and Extended Repayment Plans

If you don’t qualify for an IDR, the other options are the Graduated and Extended Repayment Plans.

The Graduated Plan starts with low payments that increase over time, usually every two years. The increases that occur late in the plan are significant – almost triple what you pay at the start of the plan – so compare them closely before making this choice.

For example, if you have a $37,000 loan at 4.7% interest, and $50,000 income, your payments would start at $219 per month and end at $658. Your total payment after 10 years will be $49,080, almost $2,500 more than the total payout if you had chosen the Standard Repayment Plan.

The Extended Repayment Plan, as the name suggests, extends your term up to 25 years in fixed or graduated monthly payments. Beware the interest paid in this program. It will be substantial.

In the same loan situation—$37,000 borrowed, at 4.7% interest and a $50,000 income—the payments will be $211 a month for 25 years.  Your total repayment is $63,257 or about 35% more than you would pay on the Standard Repayment Plan.

Student Loan Forgiveness

Up to $17,5000 in loans can be forgiven if you work five years as a teacher or in public service. To qualify for Public Service Loan Forgiveness, you must work for the government at some level (federal, state, local, tribal) or for a not-for-profit organization that is tax exempt.

This includes working as a teacher, police officer, firefighter or a health care employee at a nonprofit hospital. To qualify for Teacher Loan Forgiveness, you must teach full-time for five years at a school that serves low-income families.

Bankruptcy

The Biden Administration has eased the rules that allow student loan debt to be considered in bankruptcy. Borrowers who meet certain economic conditions can even see their loans discharged through bankruptcy.

The rules, established in 2022, require borrowers to show their expenses are equal to or exceed their income. If that is the case, the Justice Department recommends the borrower cannot reasonably repay the debt. Decisions are made by a bankruptcy judge, who will then issue a full or partial discharge of the debt.

Prior to this approach, it was virtually impossible to discharge student loans via bankruptcy. The new process measures whether the present status of a borrower means he or she will not be able to repay the debt in the future, and takes into account factors as varied as disability, long-term unemployment or if the borrower did not obtain his or her degree.

Bankruptcy is a significant step that must be weighed carefully, but the Biden standards have made that step a little easier with student loans – if you qualify.

Student Loan Refinancing or Consolidation

Consolidation means combining all student loans into one loan with one lender at a lower interest rate. A single payment would be lower than the total of several, but the life of the loan would be extended to 30 years.

Consolidation only applies to federal loans. For those with private loans, refinancing may be an option. That means applying for a new loan with a lender, who pays off the old loan. This only makes sense if you can lower your interest rate. If you do, you will have a lower monthly payment.

Service Member Benefits

Those who have served our nation in the military have options that can help with student loan debt relief. These include:

• SCRA limits: The ServiceMember Civil Relief Act lowers the interest rate on student loans to 6% while a member is on active duty. If that service is in a dangerous area, it could be lowered to 0%.
• Payment reduction through the HEROES Act: In some cases, the HEROES Act allows a servicemember to extend income-based repayment options if the benefits expire while on active duty.
• Military Service Deferment: ServiceMembers can postpone monthly payments on federal loans during and after certain types of service.
• Post-Active Duty Student Deferment: If you plan to go back to school after your service, this program can let you defer payments.

Forbearance and Deferment Options

There are times in the student loans repayment process when it’s beneficial to hit the “pause” button, which is where deferment and forbearance come in.

These two options allow borrowers to stop making payments – for up to 3 years with deferment; up to 12 months with forbearance – if you are approved by your lender.

Deferment is the preferred avenue, if you qualify. You can request to stop making payments for the following reasons:

• You have enrolled for at least half-time at college or a technical school.
• You are in an approved graduate fellowship program or rehabilitation program for the disabled.
• You have economic hardship or are unemployed.
• You are in active duty military service, a member of the National Guard or other reserve components of the armed forces.

To receive deferment, you must submit a request to your loan servicer or the school you attended if you are asking for deferment for a Perkins Loan. Deferments are not automatic.

If you have a subsidized federal loan or Perkins Loan, the government may pay the interest on your loan. The government does not pay interest on unsubsidized loans.

If you don’t qualify for a deferment, your loan servicer may offer forbearance, which means you can stop making payments for up to 12 months. The interest on your loans will continue to accrue and in some cases, you will need documentation to support your request.

The most common reasons for requesting forbearance are a medical illness or financial hardship, such as losing a job. You must apply and there is no guarantee you will receive it.

It is important to remember that when you apply for deferment or forbearance, you must continue making payments on your student loans until your request is approved.

Student Loan Discharge

If a school closes suddenly and you used a federal loan to attend that school, your loan could be discharged. Qualifying for discharge is not easy. If your school closed when you were enrolled or if it’s within a certain period after you withdraw, you may qualify. You also may qualify if you become disabled.

Federal student loans also will be discharged if the student dies, or the person who took out a PLUS loan to pay for the student’s education dies.

Finally, if a school violated state laws or misled you related to the loan or education, you may be eligible for forgiveness of a federal loan.

Credit Counseling for Student Loans

Credit counseling from a nonprofit agency is a valuable resource that goes largely untapped in the student loan repayment process.

The National Foundation for Credit Counseling (NFCC) trains and certifies counselors at approved agencies. The counselors can offer several options to borrowers with student loans that will help keep the loan from reaching default status.

The credit counseling service is free at most nonprofit agencies.

Credit counselors can also help provide solutions to other financial problem that may have popped up during or soon after your college years, especially troubles paying credit card debt. Counselors will work with you to create an affordable budget that will include payment for credit card debt through a debt management program.

Student Loan Debt Relief: IBR

You can reduce your monthly federal student loan payments by enrolling in the Income Based Repayment program. Under IBR, your payments will be capped at an affordable amount, based on your income. After 20 years of payments (for anyone borrowing after July 1, 2014), your unpaid debt is forgiven.

• Can A Student Loan Be Discharged For Disability
• Student Loan Forgiveness for Police Officers
• Student Loan Forgiveness for Fire Fighters

Guide to Taking Out Student Loans

In the guides linked below, you’ll learn about student loans: how much is a safe amount to borrow for a given career path, why you should calculate the total cost of your education before you go, and how to calculate your future payment, based on interest rates and repayment plans.

More on your guide to taking out student loans

• How To Make College More Affordable
• Help! I Co-Signed On My Daughter’s Student Loans

Student Loan or Credit Card Debt

It’s a common question: what should you do with extra money? Pay it toward your student loan debt, credit card debt or both? Find out how to achieve sustainable debt relief and lower monthly payments on both your student loans and credit card debt.

More about student loans and debt

• Student Loan Repayment Checklist