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Student Loan Debt Relief Through IBR

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 a certain number of years, unpaid debt is forgiven..

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Guide to Taking Out Student Loans

In this guide, 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.

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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.

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The years of stressing over exams and research papers might be over for college graduates, but there’s still some anxiety to deal with: 71% left school with student loan debt.

How are you going pay it back?

The average 2016 college graduate owes $37,172 in student loans. Their grace period (six months after graduation, the first payment is due) is over so it’s time to find an affordable plan that suits your income. The choices are plentiful, but so are the consequences if you make the wrong choice.

There are 44 million borrowers in the student loan program, but only 36% of them (15.7 million) are current in repaying the loan. Another 3.9 million are in default, meaning they haven’t made a payment in more than 270 days. Many are postponing the inevitable by falling back on deferment (3.4 million) or forbearance (2.7 million) while they search for a way to repay the loans.

The problem is that most 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.

Standard Repayment Plan Top Choice

The most popular repayment choice – often by default – is called the Standard Repayment Plan (SRP). That’s a 10-year program in which borrowers pay a fixed amount for 120 consecutive months.

If you don’t enroll in another of the many payment options during your six month grace period, you will default to the SRP.

According to LendEDU, more than 11.2 million borrowers use the Standard Repayment Plan, making it by far the most popular choice (or default) among student borrowers. The second most-popular is the Income Based Repayment Plan, with 3.1 million borrowers.

The SRP suits a lot of graduates because it’s a fixed amount with definitive start and finish date. However, if you don’t find a decent-paying job immediately, the monthly payments may be too high the first few years out of school. The average payment for borrowers ages 20-30 years old is $351 a month.

There are plenty of alternatives, but it takes a little research and planning to find the one right for you.

The first step is to create a monthly budget of income and expenses to help find out what you can afford. Subtract the expenses from your income and whatever is left is how much you have available to pay your loans.

It might be a lot if you’re among those receiving the average salary for 2016 graduates of $50,556. It might not be much – or even zero! – if you’re a teacher, whose average starting salary is just $34,891, or worse than that, haven’t found a job yet.

Whatever it is, take that figure and go to the Repayment Estimator at www.studentloans.gov. Fill out the questionnaire and the site will tell you which of the many repayment plans you qualify for and even give you a chart for the monthly payment for each plan.

Income Driven Repayment Programs

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.

If you choose an income-driven repayment (IDR) plan, you could extend your loan term from 10 years to 20 or even 25 years. The IDRs determine your monthly payment by a percentage of your income and size of your family. Your payments will be more manageable month-to-month, but you will end up paying more overall for the loan because of the added years.

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 (IBR)
  • Income-contingent (ICR)
  • Income sensitive

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.

Standard Repayment Plan Pros

  • Fixed payments for 10 years.
  • All borrowers eligible for the plan
  • Pay less interest over life of the loan.
 Cons

  • Higher monthly payment
  • May have to pay multiple lenders
  • Need good-paying job almost immediately
 Summary

This plan works if you come out of school with good job and want to repay your loan quickly.
Graduated Repayment Plan Pros

  • Low monthly payments to start
  • All borrowers eligible
  • Loan is still paid off in 10 years
 Cons

  • Monthly payments rise dramatically
  • Pay more interest over life of the loan
  • Income must improve to afford payments
 Summary

This plan is best for people who expect significant income increases early in their working career.
Extended Repayment Plan Pros

  • Up to 25 years to pay off loans
  • Lower monthly payments
  • Choice of fixed or graduated payments
 Cons

  • Paying considerably more interest
  • Must have $30,000 in eligible loans
  • Ineligible for PSLF
 Summary

Income not a factor for eligibility so if all you want is low monthly payments, this plan works.
Income-Sensitive Repayment Plan Pros

  • Payment is only 4-25% of monthly gross income
  • Borrower determines what percentage to be paid
 Cons

  • Maximum repayment time is 10 years
  • Must re-apply each year
  • Only available for FFEL loans
 Summary

Plan is short-term relief for graduates with low-paying jobs. Not highly recommended.
Income-Dependent Repayment Plans: IBR, PAYE, REPAYE and ICR Pros

  • Monthly payments are 10-15% of income, depending on program
  • Loan forgiveness after 10 years if qualified for PSLF
  • Loan forgiveness available for anyone after 20-25 years of payments
 Cons

  • Must update income and family-size information every year
  • High interest payments
  • Forgiven loan balance may be taxed
  • Partial hardship required for IBR and PAYE programs
 Summary

Each plan helps keep payment cost at manageable number. Forgiveness plans are attractive, especially for those who plan to go into public service.

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.

Other Possible Repayment Plans

In some cases, you could try online lenders such as SoFi, Collegeave or Earnest, and find a lower interest rate. However, you will need a steady job and a really good credit score to qualify for their lowest rates.

You also could choose to consolidate your federal education loans into a Direct Consolidation Loan. All of your loans will be bundled into one loan at a lower monthly payment with a term up to 30 years.

If you are truly overwhelmed, you could have your student debt forgiven by enrolling in an approved area of the Public Service Loan Forgiveness program. The PSLF program requires that you serve five years as a teacher or 10 years in public service. You must stay current on monthly payments throughout your time in the program to get loan forgiveness.

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. There are other qualifications you must meet, but you could have up to $17,500 of student loan debt forgiven.

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.

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, who can offer several options to borrowers with student loans that will help keep the loan from reaching default status.

NFCC counselors will identify the various repayment programs available; discuss the pros and cons of each program; talk about steps to consolidate student loans, reduce the interest paid and what to do if you struggle to make payments.

The credit counseling service is free at most NFCC-approved agencies.

Sources:

Trull, J. (2017, January 11). A Look at the Shocking Student Loan Debt Statistics for 2017. Retrieved from https://studentloanhero.com/student-loan-debt-statistics/

NA, (2016) Types of repayment plans. Retrieved from https://studentaid.ed.gov/sa/repay-loans/understand/plans#estimator

NA, ND. Wondering whether you can get your federal student loans forgiven or canceled for your service as a teacher? Retrieved from https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/teacher

Federal Student Aid (2016) The increases late in the plan are significant, almost triple what you would pay at the start of the plan. Retrieved from https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

Gitlen, J (2016, July 1) More than 11.2 million borrowers use the Standard Repayment Plan. The second most-popular choice is the Income Based Repayment Plan, with 3.1 million borrowers. Retrieved from https://lendedu.com/blog/average-student-loan-debt-statistics

Powell, F (2016, May 9) 70% who left school with student loan debt. Retrieved from https://www.usnews.com/education/best-colleges/paying-for-college/slideshows/10-student-loan-facts-college-grads-need-to-know

Student Loan Hero (2016) The average 2016 college graduate owes $37,172 in student loans. Retrieved from https://studentloanhero.com/student-loan-debt-statistics/