The Bill Stark Guide to Repaying Federal Student Loans

If you’re like millions of Americans you have student loan debt and you’re interested in figuring out how to pay your student loans back. Or perhaps you want to know how to lower your student loan payments, lower your student loan interest rate, or lower your student loan repayment total. Luckily for you there are loads of ways to accomplish all of these things with programs offered by the federal government. Today we’re going to talk about the many ways you can make managing your student loans easier.

IBR (Income-Based Repayment)

With student loan debt ballooning to nearly a trillion dollars and a global economic crash in 2008 that sunk the job market turning expensive college degrees into overpriced pieces of paper something needed to be done to help alleviate the pain of student debt. The answer? Income-based repayment or IBR which allows you to pay back your student loan debt as you can afford it, not at the traditional 10-year Standard Repayment Plan amount. IBR proved to be so successful it has since been updated and expanded.

To qualify for IBR you need to have a partial financial hardship while holding qualifying federal student loans which are not in default. In case you’re wondering, a partial financial hardship means the cost of your student loans is greater than 15% of what the government calls “discretionary income.” What does that mean? Discretionary income is all the money you have left over after paying for your necessary living expenses. Unfortunately you don’t get to determine how much money you need to “live” on each month; the government does. They use a calculation that changes over time as it’s impacted by inflation but breaks down like this: 150% of the poverty level for the number of family members in your household is what you need to pay your expenses while the rest of your income counts as “discretionary.” Here’s a handy chart for these numbers with a family of up to 8 people.

So how do you qualify for IBR and what exactly happens when you do? There are actually two versions of this program, both called IBR though sometimes colloquially referred to as Original IBR and 2014 IBR (the year the program was updated and expanded). If you’ve taken federal student loans since 2009 but before July 1, 2014, are not in default, and have a partial financial hardship you can apply for Original IBR consideration. Once accepted your payments will be capped at no more than 15% of your discretionary income or the fixed 10-year Standard Repayment Plan, whichever is lower. After making payments consistently for 25 years if there is remaining debt it’s wiped clean and “forgiven.”

If you took federal student loans after July 1, 2014, are not in default, and have a financial hardship you can apply for 2014 IBR consideration. Once accepted into that program you’ll make payments of up to 10% of your discretionary income or the fixed 10-year Standard Repayment Plan, whichever is lower. After making your payments consistently for 20 years if there is remaining debt it’s wiped clean and “forgiven.”

With IBR if your payments are too high for your income you can lower them to a more manageable percentage of your earnings (10% or 15% of discretionary income), which could be as much as $0/month if your income is low enough. Over time if your income goes up so much that your 10% or 15% payment would be more than what your monthly payment would have been under the original agreement you switch to paying the lower amount. One word of caution: if your payments don’t keep up with the interest accruing on your account the Department of Education will pay the growing interest for the first three years of repayment. After that the total amount of interest is added to what you owe meaning under IBR you might wind up owing more than you did originally. However, no matter what gets added when you reach your loan forgiveness period whatever is remaining is wiped out.

You can apply for IBR through StudentLoans.gov here.

PAYE (Pay As You Earn)

The PAYE income based repayment plan was put into place to help federal student loan debtors whose payments were high compared to their income, much like IBR. To qualify for PAYE you have to be a new federal student loan borrower on or after October 1, 2007 (meaning you had no student loans prior to that date) and you received a payment from a student loan on or after Oct. 1, 2011, you’re not in default, and you have a partial financial hardship. PAYE adjusts your student loan payment to 10% of your discretionary income or the 10-year Standard Repayment Plan amount, whichever is lower. Plus, if you make your payments consistently for 20 years any remaining student loan debt on the PAYE plan is forgiven. While you’re paying off the loan if your monthly payment doesn’t cover the total interest you’re accruing the Department of Education will pay all of that interest for up to three years.

What does this mean in practice? Provided your monthly federal student loan payments are more than 10% of your discretionary income (you won’t qualify for PAYE if they’re not), you can apply for acceptance to PAYE. Once you’re accepted your payments will become just that 10% of your monthly income or, if at a later date your income goes up significantly, the payment might become the 10-year Standard Repayment Plan if that costs you less each month. What makes PAYE different than IBR? It extends the 10% discretionary income payment to more borrowers as well as lowering the 25 year loan forgiveness timeframe to 20 years for more students as well.

You can apply for PAYE through StudentLoans.gov here.

REPAYE (Revised Pay As You Earn)

Building on the success of the IBR and PAYE programs, the REPAYE program was introduced in 2015. It extended income based repayment options to more borrowers by removing restrictions on when those borrowers took out their loans to qualify and also removing income restrictions. As a result, regardless of debt load or income you can qualify for federal student loan repayment help through REPAYE (you still need to be in a non-defaulted status). For those on the REPAYE plan your monthly payments are capped at 10% of monthly discretionary income. In addition, if you make those payments consistently the remainder of your loan can be forgiven after a certain number of years. For those borrowers who only have undergraduate loans you’ll have your debts forgiven if you make your REPAYE payments consistently for 20 years. If any of your debt is for graduate loans you’ll have to make payments for 25 years. After reaching that point in time the rest of your loans are considered paid in full!

REPAYE goes farther in helping you offset interest costs than other repayment programs like PAYE or IBR. If your 10% monthly payment isn’t enough to offset the interest that is accruing on your account REPAYE pays for it. That’s right, just like with IBR or the PAYE program the Department of Education will cover 100% of the interest you accrue for up to three years. If you reach that maximum they’ll continue to cover 50% of the additional interest indefinitely. Then, of course, once you reach 20 or 25 years of repayment the remaining balance will be forgiven.

While there are definitely upsides to the REPAYE option there are a few potential downsides too. Unlike other repayment programs REPAYE considers your spouse’s income and debt load regardless of whether you file for taxes jointly or separately. That means if your partner’s income is high enough your student loan payments could actually go up under REPAYE so make sure to take that into consideration before applying.

In addition to the spousal consideration REPAYE also has no cap for your minimum monthly payment. If your income rises dramatically over time your payment will remain 10% of your discretionary income, even if that costs you more than a standard 10-year Standard Repayment Plan or the original terms of the loan, though you won’t ever pay more than you owed on the loans in total. Let’s look at an example.

Bill earns $1,700 in discretionary income each month (approximately $20,000/year). His student loan payment is $500/month. He applies for REPAYE and is accepted, which adjusts his student loan payment to 10% of his discretionary income, or $170/month. After a few promotions and some additional professional training Bill finds himself earning $5,800/month (about $70,000/year) in discretionary income. His REPAYE student loan payment is still 10% of his income which means he now pays close to $600 each month in student loans, more than he paid originally. That means he’s paying off the debt more aggressively (whether he wants to or not) and when he completes repayment on the total debt owed, even if it’s before the 20 or 25 year debt forgiveness timeframe, he’s finished repaying the loan entirely. His 10% payments don’t continue. If Bill opts to leave the REPAYE program all the interest that accrued on his account will capitalize; that is, be added to the principal of the loan he originally borrowed.

You can apply for REPAYE through StudentLoans.gov here.

ICR (Income Contingent Repayment)

Not to be confused with IBR, ICR has been around for a lot longer and offers different benefits than its younger cousin. Borrowers who have taken federal student loans out sometime between 1994 and now qualify provided they’re not in default. You don’t have to have a partial financial hardship to be accepted into the ICR program.

The benefits are a little steeper for ICR than they are for IBR, PAYE, or REPAYE but the net of applicants who qualify is much wider. The ICR adjusts your payment to be one of the following, whichever is lower: 20% of your discretionary income or the standard 12-year repayment rate. It also allows you to have your debt forgiven after 25 years of payments.

ICR has some significant downsides and is an option mostly for borrowers who hold loans too old to qualify for IBR or PAYE. For example, if you’re not able to keep up with the accrual of interest on your account it will capitalize each year and be added to the principal of your debt up to 10% of the total value of your original loan. That means with ICR you could wind up paying more money over time (until you reach the 25 year mark and everything is forgiven). The biggest advantage may be that ICR is the only option for parents with Parent Plus loans to receive an income-based repayment plan. It may require consolidating loans using a Direct Consolidation Loan and then applying for ICR.

You can apply for ICR through StudentLoans.gov here.

A note on taxes and loan forgiveness

We’ve covered a number of programs that allow you to reduce your monthly payment on your student loan debt and potentially pay them off entirely with debt forgiveness. If you successfully reach the end of a repayment program and have a portion of your debt forgiven you may owe taxes on that amount. The taxes you owe are a percentage of the total amount of the debt so it will always be more beneficial monetarily to have the debt forgiven and pay taxes on it then continue paying the debt to avoid the taxes. How much you owe in taxes depends on your income tax rate and the tax law at the time you have your debt forgiven. Keep that in mind when considering your plans.

Direct Consolidation Loan

Consolidating debt means combining a bunch of individual debts into one big debt you owe to a single lender. Usually borrowers choose this option because the single lender is willing to offer them a lower interest rate for all the debt than they were previously getting when it was split into multiple debts. Consolidating your federal student loans is possible, though the advantages to doing so are a bit different than the usual debt consolidation plan.

Consolidating your federal student loans into a Direct Consolidation loan is cost-free; you don’t have to pay an application fee to do it. It can give you options to more repayment plans, like the ones featured above (for example, if you have Parent Plus loans as a parent, a Direct Consolidation Loan can provide you access to ICR), and lower your monthly payment by extending your repayment period to 30 years. Doing so can cost you benefits you had from other repayment plans, however, like debt forgiveness, interest rate discounts, and can increase the amount you actually pay on the loans by stretching the payments out over a longer period of time leading to more interest accruing. Consolidating your student loans is permanent: once you move forward on that plan, you can’t go back.

At the time of writing, most federal student loans qualified for inclusion in a Direct Consolidation Loan. Even if you’re in default you can make arrangements to get back into good standing and then consolidate your loans. When you consolidate your interest rate changes to the weighted average of the interest rates on the loans you’re consolidating, rounded up to the nearest 1/8^th percent. That means you won’t really save money by consolidating, particularly because there’s no cap on the interest rate for a Direct Consolidation Loan, but if you have variable interest rate loans they’ll be fixed which means you can count on what your payment will be from month to month.

You can apply for a Direct Consolidated Loan through StudentLoans.gov here.

Deferment

Deferment is being granted permission to stop paying on a debt for a period of time. If you’re a federal student loan borrower you’ve likely already benefited from deferment with your loan payments on hold while you were in school. It’s also possible to receive a loan deferment after you complete school if certain circumstances arise. They are:

·         If you are actively enrolled at least halftime in qualified academic institutions

·         If you’re in approved graduate study or fellowship programs

·         If you’re in a period of unemployment or are unable to find employment

·         If you’re in a period of economic hardship (like working for the Peace Corps)

·         If you’re an active duty member of the military serving abroad or during a national emergency

Under those circumstances you may qualify to defer your loan during which time the government will stop requiring your monthly payments and may even pay accruing interest for you. To determine if you qualify, however, is a bit trickier than some of the other programs here. You’ll need to contact your loan servicer directly to find out information about their application for forbearance and move forward with the process of applying through them.

Forbearance

If you’re struggling to make your monthly payments on your federal student loans and you don’t qualify for a deferment you may be able to receive a forbearance on your loans. We’re going to talk about the two different types of loan forbearances: mandatory and discretionary.

Discretionary Forbearance

As its name implies, a discretionary forbearance is entirely up to the discretion of the lender to grant. Like a deferment you’ll need to apply directly through your loan servicer and you’ll need a good reason for requesting the forbearance. Generally there are only two: financial hardship or illness, both of which you may need to prove.

Mandatory Forbearance

If you qualify for a mandatory forbearance your loan provider has to play ball whether they want to or not. You qualify if you meet the following criteria:

·         You’re a National Guard member who is activated but doesn’t otherwise qualify for a military deferment

·         You’re serving in any national service position that awarded you a National Service Award (a program like AmeriCorps, for example)

·         If the total amount of your loan payment each month is more than 20% of your total monthly gross income, though additional conditions may apply

·         You qualify for the U.S. Department of Defense Student Loan Repayment Program

·         You’re a teacher who qualifies for teacher loan forgiveness

·         You’re serving in a qualified medical or dental internship/residency and meet specific requirements

If you meet any of these criteria you can apply through your loan provider for your forbearance. Once you enter forbearance your loans may still accrue interest so you’ll either need to continue paying off the interest or risk having it capitalized and added to the principal of your loans.

PSLF (Public Service Loan Forgiveness Program)

To make certain public sector jobs more attractive as a profession and to help offset their sometimes lacking pay packages, the government provides a chance for some public sector employees to have their student loans forgiven entirely. This is called the Public Service Loan Forgiveness Program. There are a few things you need to do to qualify.

First, you must work full-time for one of two types of organizations:

·         Any government organization (federal, state, local, even tribal)

·         Certain types of non-profit organizations

To get your federal loans forgiven you need to make 120 qualifying payments; once you reach that threshold and are still employed full-time with a qualifying organization the remaining balance on your loans is considered paid in full. What’s a qualifying payment? Any student loan payment you make after October 1, 2007 under a qualified repayment plan (the standard 10-year repayment plan, REPAYE, PAYE, IBR, or ICR) for the full amount of your monthly payment, paid on-time, while employed by a qualifying organization. While your 120 payments don’t have to be made consecutively, they don’t count if you’re in forbearance, deferment, still in school, in the grace period of your loans, or in default. Once you’ve made your 120 payments the forgiveness isn’t automatic; you actually have to apply to ensure you qualify by contacting your federal loan servicer directly.

In addition to the PSLF there are a few other programs that can help you get your student loan forgiven if you qualify. Here’s a short list with links to more information:

·         Health Professionals Loan Repayment Program (HPLRP)

o   Washington DC

o   Navy

·         Perkins Loan Cancellation

·         Teacher Loan Forgiveness

·         Total and Permanent Disability Discharge

·         SponsorChange.org

o   SponsorChange is a relatively new organization offering students the chance to volunteer for debt repayment; your mileage may vary

Managing your student loan debt

As you can see there are numerous means by which you can manage your student loan debt. Whether you want to reduce your payments, reduce your loan, consolidate your debt, or have your debt forgiven entirely there are steps you can take to do so provided you qualify. We’ll look at how to reduce private student loan debt payments in the future.