Student Loan Repayment Options Explained

As a higher ed administrator with no money sense, it is odd that I do know about this topic. I thought I would make a possible sticky on the subject.

When you are no longer a student, you have about 6 months before you have to start to pay back your loans. What most people do not realize is that there are options to paying your loans back, and possibly having them forgiven.

The first thing anyone should do is to consolidate their loans into one. You can do that at StudentLoans.gov with just a few clicks. During the process, you will be presented some repayment options.

First, a look at the basic repayment plans

Standard. This is the option that most people choose. You repay your loans at a set interest rate over a period of 120 months. The minimum payment is $50. If you have more than $60,000 in loans, you can take this out for up to 360 months.

Examples:

Jill has $4,000 in student loans consolidated at a 5% interest rate. Her scheduled payment is $42.43/month for 10 years, but with a $50 minimum payment, she can pay it off a little quicker by just making minimum payments.

John has $25,000 in student loans consolidated at 5%. John's payments will be around $265 for 10 years.

Becky has an Art History degree and took out $100,000 in student loans. Becky is allowed to take her payments over 30 years. Her payment would be $536 for 10 years.

My recommendation: If you can comfortably afford it, and you are not working for a non-profit organization, then the standard payment is best.

But what if you can't afford the payments under the standard plan? What are your options. Well, there are several.

First, the Graduated Repayment Plan is based off the standard plan, and the payments adjust every 2 years. Using John's example above, his payment might be $165 for 2 years, $215 for 2 years, $265 for 2 years, $315 for 2 years and $365 for 2 years. This is a good option for those who expect their income to rise significantly.

Both the Standard and Graduated Plans have Extended Options if your balance is over $30,000. You can extend up to 25 years unless your balance is over $60,000, in which you can take advantage of 30 year options.

But what about the Income Based Plans that we have heard so much about. Well, they are there, and they are complex. Here's a basic look.

Income Based Repayment (IBR): This is a good option if your income is under $35,000. Let's look at Becky.

Becky parlays her degree in Art History into a job as a secretary shortly after her marriage. She make's $28,000. Using the IBR plan, her payments are set at 15% of her discretionary income, set at the difference between her income and 150% of the poverty level.

For a family of 2, the poverty level is $15,730, so 150% is $23,595. Her discretionary income is $4,405, so her payments are $660.75 per year, or $55 a month. Not bad for $100k in debt, right? And if she pays this for 25 years, she has gotten no where on principal, but the entire balance will be forgiven.

But the IBR has a disadvantage. 10 years in, The place where she has been a secretary decides to hire a Vice President for Art History. She is offered the job with a $100,000 salary. She is no longer eligible for the IBR, and must go to the standard plan on the new balance, which has increased significantly because $55 a month did not cover the $400+ in interest that accrued.

The Pay as You Earn plan is similar, but it is for newer borrowers and only requires 10 percent of discretionary income. John's example above - He got a good degree, but his starts out with a $50,000 salary and $25,000 in loans. He finds himself married with a child and needs a break from the $265 payment.

The poverty guidelines for a family of 3 is $19,790, so 150% is $29,685. His discretionary income is $20,315, and 10 percent is $2032. Using the PAYE plan, he can drop his payments to $169. If he finds himself in this plan for 20 years, then the balance is forgiven.

The IBR and PAYE plans have a caveat as well. Any amount forgiven is taxable. Becky, for example would get her loans forgiven, but would see an income of an extra $192,000 or so in the year of forgiveness and be hit with a $67,000 tax bill.

But what if Becky or John were to find themselves employed by a government agency, a non-profit, a school (teachers), a university (secretaries), etc.

Then they are eligible under the Public Service Forgiveness Act. Make any eligible payments (Standard, Graduated, IBR, PAYE) made for 10 years while employed by such agency, and the loan balance is forgiven - without being taxable.

What if Becky and John were to be married (i.e. both have student loans). Their combined income is $78,000, and their combined balance is $125,000. They are eligible for the PAYE plan. The 150% for their family is $29,685, so their discretionary income is $48,315. 10% is $4832, so their required combined payment is $402. $321.60 would technically go to Becky's loans (80% of the balance), and the rest would technically go to John's.

They are both eligible for loan forgiveness under normal and Public service options.

There is another plan, the Income Contingent Repayment plan, but it is not a good option for 99.9% of people.