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Student Loan Repayment Options Explained
Posted on 4/15/15 at 11:10 am
Posted on 4/15/15 at 11:10 am
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.
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.
This post was edited on 4/15/15 at 11:30 am
Posted on 4/15/15 at 11:13 am to anc
You are on point today. Found this very helpful.
Posted on 4/15/15 at 11:19 am to anc
quote:
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
Currently doing this, and I printed out the IRS publication that mentions it being tax free. I'm almost 95% sure that when it comes time to write it off someone will drop the ball and issue me a 1099. At which point I will take the position it is not taxable and attach a copy of my IRS publication.
Posted on 4/15/15 at 11:24 am to GreenTrout
quote:
Currently doing this, and I printed out the IRS publication that mentions it being tax free. I'm almost 95% sure that when it comes time to write it off someone will drop the ball and issue me a 1099. At which point I will take the position it is not taxable and attach a copy of my IRS publication.
Thats a great idea. Besides being 10 years less, the biggest difference in the normal forgiveness and the Public Service forgiveness is the tax liability.
Posted on 4/15/15 at 11:27 am to anc
Public Loan Forgiveness should be more widely discussed. So, so many people can benefit from it: nonprofit employment (no matter the field), state/federal or other government employment, teaching...literally millions who qualify are probably unaware that they do.
Posted on 4/15/15 at 11:28 am to anc
Standard repayment plan is 10 years so to me it wasn't any difference in terms of payment length. Using the PLSF and the IBR plan is currently saving me a buttload each year. Granted at current career trajectory it will end up being a wash in the later years.
Posted on 4/15/15 at 11:30 am to GreenTrout
quote:
Using the PLSF and the IBR plan is currently saving me a buttload each year. Granted at current career trajectory it will end up being a wash in the later years.
There's a lot of math involved. You have inflation working in your favor. Also, the amounts you save can be invested over that 25 year period. You also have the fact that you'll pay the taxable percentage of the forgiven amount, not the whole amount. The more mundane thing is that IBR allows you to sock away an emergency fund so you don't become a ward of the state (in the traditional sense).
There's a reason why IBR "loopholes" are being discussed for closing, since high wage earners with high debt would be smart to take IBR or PAYE all the way to forgiveness, even with the tax bomb.
This post was edited on 4/15/15 at 11:33 am
Posted on 4/15/15 at 11:32 am to Teddy Ruxpin
If you are eligible for PLSF, then you should pay the lowest per month that you can. There's going to be some high earners (think Ph.D's, some attorneys, some doctors) that have their loans completely forgiven after 10 years of standard payments.
I'm eligible for PLSF, but my standard payment is cheaper than my IBR/PAYE. Only five more years to go.
I'm eligible for PLSF, but my standard payment is cheaper than my IBR/PAYE. Only five more years to go.
Posted on 4/15/15 at 11:36 am to Teddy Ruxpin
In my case I only have to make 120 payments (10 years) to qualify for forgiveness. On the 120th payment I get to walk away from the balance tax free. So instead of paying $450 per month I'm only paying $75. Over time it'll either approach or reach the standard amount.
Posted on 4/15/15 at 11:38 am to GreenTrout
Ya, I wasn't arguing NOT to do Public Service Forgiveness. That one is the best one!
I was discussing the "back end" when high wage earners may hit standard repayment once their income gets even higher. You technically can never be "kicked out" of IBR. Even if you hit standard repayment whatever is left after 25 years is forgiven plus taxes. Just making that point clear for the thread and that it isn't an option just for low wage earners like Becky in the OP example.
I was discussing the "back end" when high wage earners may hit standard repayment once their income gets even higher. You technically can never be "kicked out" of IBR. Even if you hit standard repayment whatever is left after 25 years is forgiven plus taxes. Just making that point clear for the thread and that it isn't an option just for low wage earners like Becky in the OP example.
This post was edited on 4/15/15 at 11:43 am
Posted on 4/15/15 at 11:42 am to Teddy Ruxpin
It can certainly be exploited.
Say I am a MD making $150k with $250k in student loans.
My standard payment is $1,342 for 30 years ($483,120), or $2,651 for 10 years ($318,120).
But under PAYE, my payment is $1,000 and in 20 years ($240,000), the balance is forgiven
Say I am a MD making $150k with $250k in student loans.
My standard payment is $1,342 for 30 years ($483,120), or $2,651 for 10 years ($318,120).
But under PAYE, my payment is $1,000 and in 20 years ($240,000), the balance is forgiven
This post was edited on 4/15/15 at 11:48 am
Posted on 4/15/15 at 1:03 pm to anc
quote:
the balance is forgiven
Not entirely accurate. While it is forgiven, you pay the balance forgiven as taxable income. Hence the tax bomb.
High income/high debt people have very tough decisions on how to handle this problem.
The information you provided in OP is great and this thread should be stickied.
Posted on 4/15/15 at 1:17 pm to anc
are Stafford and Consolidated loans both covered by PSFA?
Posted on 4/15/15 at 1:32 pm to gizmoflak
quote:
are Stafford and Consolidated loans both covered by PSFA?
All federal student loans are covered by public forgiveness as long as you enroll and have 10 years of timely payments.
Posted on 4/15/15 at 1:46 pm to GreenTrout
quote:
Currently doing this, and I printed out the IRS publication that mentions it being tax free. I'm almost 95% sure that when it comes time to write it off someone will drop the ball and issue me a 1099.
Just remember that the govt forgiveness plan only applies to public NOT Private Loans. Most of my wife's grad school loans are private- and in excess of 100k.
This post was edited on 4/15/15 at 1:48 pm
Posted on 4/15/15 at 1:51 pm to NYNolaguy1
quote:
Most of my wife's grad school loans are private
How did that even happen? Them being private that is. The gov hands out money like candy.
I went to law school so hence my curiosity and confusion.
This post was edited on 4/15/15 at 1:52 pm
Posted on 4/15/15 at 2:03 pm to schlow mo
deleted
This post was edited on 4/15/15 at 2:14 pm
Posted on 4/15/15 at 2:19 pm to GreenTrout
quote:
Currently doing this, and I printed out the IRS publication that mentions it being tax free. I'm almost 95% sure that when it comes time to write it off someone will drop the ball and issue me a 1099. At which point I will take the position it is not taxable and attach a copy of my IRS publication.
I've had a bit of trouble locating specific language, aside from this, which I found to be vague with regard to nailing down the point that amounts forgiven under PSLF are not taxable
Can you provide the IRS language in question, or were you looking at Pub. 970 as well? TIA
Posted on 4/15/15 at 2:30 pm to Feed Me Popeyes
I don't have it in front of me, but when I get home I'll go look for it through my papers.
I'll also do a search on the IRS site and see if I can find it again. I know it took me awhile originally to find it.
I'll also do a search on the IRS site and see if I can find it again. I know it took me awhile originally to find it.
Posted on 4/15/15 at 2:43 pm to GreenTrout
Just a few references after doing a quick search (and yes it appears Publication 970 is the one that covers it).
1. ) Studentaid site(it ends in .gov, but I'm not sure if it's actually a government site)
2.) Publication 970 - Chapter 5
3.) Financial Aid site (general information)
1. ) Studentaid site(it ends in .gov, but I'm not sure if it's actually a government site)
2.) Publication 970 - Chapter 5
3.) Financial Aid site (general information)
This post was edited on 4/15/15 at 2:44 pm
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