Do you think that both private and federal student loans are really worth it? A lot of people seem to think so. In fact, this type of debt will always and forever be deemed as a good debt. You would think that people would step back a bit and cut back on this type of debt – but that is not what is happening.
According to an article published by the NewYorkFed.org, this is the only consumer debt that continued to rise since the peak of the debt levels in 2008. It went beyond the trillion mark and it continues to go higher. It has not become the second highest debt that consumers owe. People from all ages find themselves burdened with this type of debt.
The government is aware of this problem and that is why they are constantly coming up with ways to help borrowers pay back what they owe. Defaulting on this type of debt, especially if you have mostly federal student loans, can be financially catastrophic. Believe it or not, if you borrowed your student loans through the programs of the government, you have given them power to aggressively collect from you. Even without a court order, they can collect your wages, tax refunds and even your Social Security and disability benefits in the event you cannot pay back your college debt.
Thankfully, there are several repayment programs that have been put in place to help consumers get out of this tough debt.
What are your income-driven options to repay your student loans
There are many student loan payment options to choose from. Whether you owe federal or private student loans, there is an appropriate repayment plan that you can qualify for. It all depends on the type of debt that you have.
If you have mostly federal student loans, one of your best options is the income-driven repayment plans. At least, this is a great option if you want to lower your monthly payments. There are four different types to choose from.
- Income-Based Repayment Plan (IBR). To qualify for this plan, you need to be in a partial financial hardship state in your life. If you borrowed your loan before July 1, 2014, your monthly payment will be based on 15% of your discretionary income and you have 25 years to pay your loan. If you are a new borrower from July 1, 2014 onwards, the computation will be based on 10% of your discretionary income and it will take you approximately 20 years to pay back the loan. After the required number of repayment years (25 or 20 years), whatever is left of your debt will be forgiven. Take note that the final amount that you need to pay each month should never be more than the equivalent of your monthly payments for a 10-year Standard Repayment Plan. Not only that, the program also compares your total debt with your discretionary income. The former should be higher than the latter. To qualify for this loan, you need to have specific federal student loans. All Direct Loans and Stafford Loans, subsidized and unsubsidized, are eligible for this plan. Those with FFEL and Direct PLUS Loans are also eligible but only for graduates and professional student borrowers – not parents. FFEL and Direct Consolidation Loans are also eligible as long as it is for those that was not able to repay the FFEL or Direct PLUS loans of parent borrowers. Any Federal Perkins Loans is not immediately eligible unless you consolidate it under a Direct Consolidation Loan Program.
- Pay As You Earn Repayment Plan (PAYE). Like the previous, you also need to be in a partial financial hardship. Your payments through this income-driven plan will be 10% of your discretionary income. It will never be higher than the equivalents of your monthly payments for a 10-year Standard Repayment Plan. Your balance should also be higher than the discretionary income that you get each year. This repayment plan takes 20 years to complete – after which any balance will be forgiven. There are also specific loans that you can enrol in this repayment plan. All subsidized and unsubsidized Direct Loans are eligible. If you have Direct PLUS Loans, you will only qualify if you are a graduate or professional student and not a parent borrower. Direct Consolidation Loans are also eligible – which is why Federal Stafford Loans (subsidized and unsubsidized), Federal Perkins Loans, FFEL PLUS Loans and FFEL Consolidation Loans will only be eligible if consolidated under this program.
- Income-Contingent Repayment Plan (ICR). Unlike the other two, there is no income eligibility requirement for this repayment plan. Of course, there is a catch. This is will require you to make higher monthly payments. There are two ways to compute your payments. The first is to base it on 20% of your discretionary income. The second option is to pay it based on a 12 year fixed payment plan – still income adjusted. Whatever is lower of the two can be your payment plan. It takes 25 years of payments through the ICR before you can have whatever balance is left on your federal student loans. All loans under the Direct Loan and Direct Consolidation Loan Programs are eligible to use this repayment plan. Direct PLUS Loans, Federal Stafford Loans, Federal Perkins Loans, FFEL PLUS Loans, and FFEL Consolidation Loans will only be eligible if consolidated under the Debt Consolidation Loan Program.
- Income-Sensitive Repayment Plan. This is ideal for borrower of the FFEL Program loans. If you wish to make lower payments, this is what you want to use. Although the disbursement of this loan ended in July 1, 2010, all borrower with remaining balances can avail of this repayment program. You are allowed to choose the type of monthly payment that you want. It can go as low as 4% and up to 25% of your discretionary income. The lender will provide the formula that you will use to compute your monthly payments. Make sure that your monthly payments will always be bigger than your accruing interest – otherwise, you will not be able to make a dent on your student loans. You are only allowed to use this repayment plan for 10 years and no forgiveness is waiting for you at the end. The federal student loans that can benefit from this includes Federal Stafford Loans, FFEL PLUS Loans and FFEL Consolidation Loans.
How the income-driven repayment plans can help you pay off college debts
As attractive as all of these are, be careful when you are choosing between these four payment options. According to Suze Orman, through an article published on CNBC.com, while the lower monthly payments may be attractive, it will bloat your interest. The interest amount you will pay over the longer payment period will be more significant compared to what you would have paid under a Standard Repayment Plan that takes 10 years to complete.
If you can get around the bigger interest amount that you will pay over time, this is still a great option for those who are stuck at low income careers. According to an article published on Slate.com, 44% of recent 2014 graduates are in jobs that practically do not need a bachelor’s degree. This data was taken from the Federal Reserve Bank of New York. It tells us that graduates are actually finding work in low income careers.
In case you are one of these graduates, you should know that the income-driven repayment plans will help you make ends meet without defaulting on your federal student loans. At least, until you get a better paying job.
Of course, when you get a higher paying job, you know that increasing your income will cost you. That is because your payments will be higher too. But that is alright as long as you do not end up defaulting on your loans in case your income goes down again.