As a Student Loan Lawyer, most of what I do in helping clients manage their student loans, is:
- Analyze their current student loan and financial situation
- Prepare a full review of my clients’ options to get out of default (if they’re in default on their student loans)
- Show my client the full range of payment and student loan forgiveness options available to them (yes, there are several EXCELLENT ways to get your student loan forgiven. Call me if you don’t know about them)
Most of my clients have no idea that they can get out of default at all, and no idea how the various payment options work. Here is a brief summary of the repayment options available to you under most student loans:
The Department of Education has been getting in touch with student loan borrowers who have been struggling to pay back their student loans, to make sure the borrowers are informed about the various student loan repayment options that are available to you (if this is you).
Even though most student loan borrowers decide to repay their loans on the standard 10-year plan, other options, like those based on income, can make repaying student loans easier on the wallet—and lower your risk of default.
Depending on which source you ask, between 10% and 14.7% of student loans are currently in default. Once your loan defaults, it will report to your credit report, lower your FICO score, and has the potential to damage your financial life.
However, if you’re one of the 600,000 borrowers who defaulted last year, or if youv’e been in default on your student loans for a long time, take note: there are a multitude of repayment programs available to you.
Even if you’re currently on a repayment program, you may not be on the best program for your current finances. It’s a confusing maze of rules and regulations (which is why I offer my service to analyze your loans, get you out of default, show you all of your options, and execute on your decision for you).
Standard Student Loan Repayment Plan
How It Works: This is the “default” student loan repayment plan. If you don’t choose anything else, you’ll be automatically enrolled in the Standard Repayment plan. The Standard Plan requires you to make fixed monthly payments of at least $50 for up to 10 years.
Pro: You’ll pay off your loan faster compared to other plans, and pay less interest.
Con: This is the least affordable plan if you’re having cash flow problems. Your monthly payments will be higher than those made through other plans.
Is It Right For You? Anyone who can afford the high monthly payments. It’s, by far, the most popular option: Two-thirds of all direct-loan borrowers—nearly 10 million people—are on the standard 10-year payment plan as of June 2013. Learn more about the Standard Repayment Plan at studentaid.gov.
Graduated Student Loan Repayment Plan
How It Works: Your payments start low, and increase every two years, in graduated steps.
Pro: Your student loan is paid off within 10 years.
Con: You’ll pay more interest over the lifetime of your loan compared to the Standard Plan.
Is It Right For You? The payments are higher, so if you can’t currently handle the higher monthly payments under the Standard Repayment Plan, but you are certain that your income will increase steadily, this might be an appropriate student loan repayment plan for you. More than 1.2 million borrowers are currently enrolled in this plan.
Extended Student Loan Repayment Plan
How It Works: The repayment window for this plan is up to 25 years. You have the option of setting fixed monthly payments, like with the Standard Student Loan Repayment Plan, or increasing them over time, as with the Graduated Student Loan Repayment Plan. To be eligible, a borrower must have more than $30,000 in Direct Loans or Federal Family Education Loans borrowed after October 7, 1998.
Pro: Smaller monthly payments (since they’re spread out over as many as 25 years) and more time to pay off your loan.
Con: You’ll be saddled with payments for a longer period of time as well as pay more interest.
Is It Right For You? Borrowers who need to lower their monthly student loan payments—in exchange for paying more over the lifetime of the loan. Around 1.6 million borrowers currently take advantage of this option.
Income-Based Student Loan Repayment (IBR)
How It Works: Monthly payments are capped at 15% of your discretionary income, and readjusted each year based on your income and family size for up to 25 years. To be eligible, you must qualify for what’s called a “partial financial hardship,” so payments calculated under this plan would be less than under the Standard Plan.
Pro: If you make regular payments, you may be eligible to have any remaining debt forgiven after 25 years. If you work in public service, you could have some debts forgiven after 10 years. The government will also pay unpaid accrued interest on certain loans for up to three consecutive years if your payments don’t cover it.
Con: You have recertify annually by providing documentation of your income to your loan servicer, so that your repayments can be adjusted. If you are late supplying that information, you will be automatically enrolled in the Standard Repayment Plan, which can mean a big jump in payments. You may also pay more interest over the course of this loan than you would with other plans, and you may also have to pay income taxes on the amount of debt that is forgiven after 25 years. However, there is currently lots of effort going into revising the laws, so that, with luck, in 25 years, the forgiven portion of your student loan debt might (MIGHT) be non-taxable.
Is It Right For You? Eligible borrowers with outsized loans who are looking to make their repayments more affordable. Currently, fewer than a million borrowers take advantage of this plan.
Pay As You Earn Student Loan Repayment (PAYE)
How It Works: Monthly payments are capped at 10% of your discretionary income, and readjusted each year based on your income and family size. As with the IBR plan, you must qualify for a partial financial hardship to be eligible.
Pro: If you make regular payments, you could have your remaining debt forgiven after 20 years. If you work in public service, you could have your debt forgiven after 10 years. Under certain conditions, the government will pay your unpaid accrued interest for up to three consecutive years from the date you started repaying your loans under PAYE.
Interest is not capitalized (added to your principle, therefore increasing the amount owed) unless you no longer have a partial financial hardship, in which case the amount of interest that may be capitalized is limited to 10% of your original principle when you began using PAYE. In general, how often your interest is capitalized is determined by the terms of your loan—and the more often it’s capitalized, the more expensive it may be.
Con: If you graduated before 2011, you are out of luck. PAYE is only available to borrowers who have received a loan disbursement (meaning they or their school were given money from the lender) on or after October 1, 2011, and who were new borrowers as of October 1, 2007. You must also provide documentation of your income to your loan servicer each year (or be placed on the Standard Repayment Plan), and you may be on the hook for income taxes on the amount of debt that is forgiven.
Is It Right For You? Recent graduates who want to keep their monthly payments low and affordable. It may be particularly advantageous for graduate students in high-cost programs, like law and business school. Learn more about the PAYE Plan at studentaid.gov.
Income-Contingent Student Loan Payment Plan
How It Works: Payments, made for up to 25 years, are based on your adjusted gross income, family size, and the amount of your loans. Your payments change as your income changes: You pay either an amount based on a 12-year repayment plan that’s multiplied by an income percentage factor or 20% of your monthly discretionary income—whichever is less.
Pro: You can have your remaining loan balance forgiven after 25 years of regular payments.
Con: You’ll pay more over the lifetime of your loan than you would with a 10-year plan, and you may have to pay income taxes on any forgiven debt. If your monthly payment under the plan doesn’t cover accrued interest, the interest on your loan is capitalized once per year until the total balance is 10% higher than your original balance when you began paying off the loan. Any interest accrued during deferment or forbearance (both are types of payment hiatus) is not included in that rule.
Is It Right For You? Borrowers who don’t qualify for IBR or PAYE plans because they don’t demonstrate a partial financial hardship, but who want to keep monthly payments low.
If I can be of any help, and you need a California Student Loan Lawyer, please call me, Student Loan Lawyer Eric Ridley