Everything You Need to Know About Repaying Student Loans
Borrowing student loans can be relatively easy. Repaying student loans can be a lot more difficult.
Of course, the same applies to other types of debt, but student loans are different in a number of ways. To start with, they tend to involve a lot of money: The New York Federal Reserve reckons more than 2 million Americans owed more than $100,000 on student loans at the end of 2015, and more than 400,000 owed more than $200,000. Well over 15 million owed more than $25,000 on their student loans. Today, the average undergraduate leaves college owing more than $30,000 in student debt, according to the Institute for College Access and Success. Those sorts of sums make these the single biggest non-mortgage debt many will take on in their lives.
Then there are other differences. For example, student debt does not go away if you have to file for bankruptcy. And many are struggling to keep up with payments. Back in January 2017, The Wall Street Journal reported, “at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years.”
All this makes it critically important to choose the right student loan when you first borrow. If that particular ship has already sailed and left you on the quay, read on to discover some of the options that may be open to you …
How to Find the Best Student Loan Repayment Plan for You
When determining the best repayment plan for you, it’s important to consider factors such as your family size, job, and income. Repayment options will depend also on whether you owe the federal government or a private lender. Of course, those with multiple loans may owe both and will have to treat each loan appropriately.
You probably already know to whom you owe money. But, if you are unsure, here’s how to find out:
- Do a search for your loan(s) on the National Student Loan Data System (NSLDS) online database. If it is not there, chances are it is a private loan.
- Call your lender or loan servicer (the company that collects your payments) and ask.
As you are about to discover, it is essential you know whether your lender is a private company or the federal government.
Private Student Loans
Scroll down to the bottom of this article for a section intended just for you.
Federal Student Loans
The federal government provides eight different plans for those repaying student loans. And there is a good chance one will help you.
You can log into the Federal Student Aid (an office of the U.S. Department of Education) website and use its online Repayment Estimator to model your options. If it turns out you would be better off on a different repayment plan from your current one, contact your loan servicer. You can change your plan(s) on federal loans at any time and for free.
Income-Driven Repayment Plans vs. Basic Federal Repayment Plans
These eight plans, which apply only to federal student loans, break down into two main groups: those where your payments are tied to your actual income and those where they are not. Generally speaking, your quickest and cheapest way to free yourself from student debt is to stick with one of the plans that are not income-driven.
Characteristics of Income-Driven Plans
Life doesn’t always go according to plan. If you are finding repaying student loans an impossible burden, an income-driven option can be a great option. They can provide a lifeline to those drowning in student debt.
Payments on income-driven repayment plans are tied to your actual discretionary income. That is the difference between your actual income (and that of your spouse, if you have one) and 150 percent of the official Federal Poverty Guidelines, which vary depending on the size of your family. There is one exception: If you choose an Income-Contingent Repayment plan, your discretionary income will be based on only 100 percent of the guideline figure that applies to you. You can find 2017’s poverty guidelines on this U.S. Department of Health web page.
Payments are usually calculated annually, based on changes to your income, government guidelines, and the size of your family. However, you are free to request a recalculation at any time if your circumstances change. Depending on the plan you choose, your payment may be 10, 15, or 20 percent of your discretionary income.
Phew! That’s complicated. So let’s try an example. Suppose you are still single and have no dependents. According to the guidelines, you are on the poverty line if you earn $11,880 unless you are in Alaska, Hawaii, or Puerto Rico. But, assuming you do not opt for that Income-Contingent Repayment plan, you can count 150 percent of that, which is $17,820. If you earn less than that, you won’t have to make any payments on your loan. If you earn more, you’ll have to pay 10, 15 or 20 percent of the amount by which your income exceeds that threshold, depending on your chosen plan. So, for instance, if you have a plan with a 10 percent rate and are earning $20,000, the math would be:
$20,000 (actual income) – $17,820 (150 percent of poverty guideline) = $2,180 (discretionary income). $2,180 x 10% (your plan’s rate) = $218 p.a. $218 a year divided by 12 months = $18.17 per month.
And there’s another big advantage with most of these income-driven plans (but not the Income-Sensitive Repayment Plan): Your loan may eventually be forgiven. All the other income-related plans allow for forgiveness of any outstanding balances after 20 or 25 years. But be warned: The IRS may come after you for the tax you owe on the value of the benefit you receive from loan forgiveness.
Just remember: interest will be accumulating for longer if you drag out the term of your loan. And that will see you pay more in the long run, at least unless you end up having your debt forgiven.
These plans don’t apply to Perkins Loans. If you are having trouble with one of those, talk to your school about other plans that are designed to help you.
Once you are on an income-driven plan, you MUST recertify your eligibility each year. Fail to do that on time, and the consequences could be dire. Recertification involves completing a form and furnishing your loan servicer (see below) with new documentary proof of your income and family size.
Don’t assume that your loan servicer will be efficient, or that you will not suffer as a result of its processing delays. Get your annual recertification documents in as early as possible.
Types of Income-Driven Repayment Plans
There are five income-driven plans for repaying student loans:
- Revised Pay-As-You-Earn (REPAYE) Repayment Plan – You pay 10 percent of your discretionary income. During good times, your monthly payment could exceed the amount you would pay under the 10-year Standard Plan (below).
- Pay-As-You-Earn (PAYE) Repayment Plan – “You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011,” says Federal Student Aid. You must also have high debt for your income level, but your monthly payment will NOT exceed the amount you would pay under the 10-year Standard Plan (below). Other than that, this is similar to REPAYE.
- Income-Based Repayment Plan (IBR) – You will pay 10 or 15 percent of your discretionary income, and you must have a high debt-to-income ratio. But your monthly payment will never exceed what you should pay under the 10-year Standard Plan. Remember, your discretionary income under this plan is based on 100 percent of the Federal Poverty Guidelines, not the 150 percent that applies to other plans.
- Income-Contingent Repayment Plan (ICR) – You will pay whichever is less out of EITHER 20 percent of discretionary income OR the amount you would pay if you were on a repayment plan with fixed payments over 12 years, adjusted according to your income. Your monthly payment can exceed the amount you would pay under the 10-year Standard Plan. This plan can also be utilized by parent borrowers who first consolidate their Parent PLUS loans into a Direct Consolidation Loan.
- Income-Sensitive Repayment Plan – Your monthly payment will be agreed by you and your lender, based on your annual income, but without automatic reference to the Federal Poverty Guidelines. You will have up to 15 years to clear your debt and loan forgiveness is not an option.
For more information on each plan, check out this Federal Student Aid web page.
Types of Basic Federal Repayment Plans
There are three basic plans:
- Standard Repayment Plan – This 10-year fixed payment plan works out cheapest in the long run, if you can afford it.
- Graduated Repayment Plan – This too typically lasts 10 years, but you start off with low payments that gradually grow, usually once every two years. It will cost you a bit more to borrow under this plan.
- Extended Repayment Plan – This lets you pay back over up to 25 years, which should significantly reduce your monthly payments. But you must owe at least $30,000 to qualify and the longer term will see your total cost of borrowing rise.
Again, there are various other eligibility criteria, so get more details from the Federal Student Aid website.
How to Apply for Income-Driven Repayment Plans
If you are comfortable with online services, you can apply pretty much entirely online through the StudentLoans.gov website. This is the case whether you are applying for the first time or switching from one plan to another.
You have to do so within a single session, but the site reckons most applicants complete the process within 10 minutes or less. Normally, you are able to upload as electronic files documentary proof of your income, family size, and so on to that website. However, at the time of writing, that facility is unavailable, and you have to fax or mail those documents directly to your loan servicer. That service may have been reinstated by the time you read this.
Your loan servicer is the company that collects your payments and manages your account, but if you are unsure about its identity and contact details, you can log into your account on the Federal Student Aid website to find the information. You can also call the Federal Student Aid Information Center (FSAIC) at 1-800-4-FED-AID (1-800-433-3243).
If you have multiple federal loans, you may have multiple loan servicers and you need to contact each of them.
Those who prefer to avoid online applications can make paper-based ones. Call your loan servicer and ask for an Income-Driven Repayment Plan Request form. That will guide you through the rest of the process, which mainly involves returning the completed form along with supporting documentation.
Things can change quickly. For example, suppose the adjusted gross income (AGI) on you last tax return does not accurately reflect your current circumstances. Don’t worry. Tell your loan servicer and provide proof of your current income.
And, if you have no income and no documents, you can self-certify your situation. There are many similar “anomalies,” and if you are worried about issues such as whether to count welfare income or children who don’t live with you, download Federal Student Aid’s PDF “Income-Driven Repayment Plans: Questions and Answers.”
Repaying Private Student Loans
Those repaying student loans to private lenders do not have access to the standardized repayment plans above. But that does not mean you cannot get help.
Your lender has one overriding priority: to get their money back. So it is in their interest to help you through tough times. And that gives you leverage.
To get your lender on your side, you need to persuade it that:
- You share their priority, and your goal is to get your loan back on track as soon as possible.
- You are taking your situation seriously, and are doing all you can to resolve your issues.
- You are willing to make sacrifices and endure some financial pain to achieve your goal.
Fail to persuade your lender of those, and you risk leaving the impression you do not care about your debt or are prioritizing a lifestyle you cannot afford over making payments. That will not win you much sympathy or leeway.
Talk to your lender about your options. Some may offer loan modification, which involves changing some aspect(s) of your loan agreement, perhaps lengthening how long it lasts or the interest rate you pay. Others may have standard repayment plans that are not all that different from some of the ones available to those who owe the federal government.
If your lender does not have those, come up with your own repayment plan that is realistic (you can stick to it), that involves you denying yourself some luxuries, and that is flexible, meaning it sees you making bigger payments once you are able to do so.
If you win over your lender, you may be pleasantly surprised by their willingness to help you out.
Also keep in mind, if you happen to have stronger credit from when you first took out your private student loan you may qualify for a lower interest rate with a student loan refinance. A lower interest rate could lower your monthly payment and/or shorten the amount of time it takes you to repay your student loans.