I imagine that number will continue to climb in the years ahead. As you can imagine, many of those 40 million people, many of which are young professionals, have questions. To help out this group of people, we’re going to run through a bunch of possible ways to work towards repaying your student loans.
The following list contains every option that I could come up with. Some of them only apply to certain types of loans, and certain programs only apply to certain job positions or individuals. With 70 percent of all Bachelor degree holders in debt, however, each option will apply to someone.
Away we go:
1. Come into a large amount of money. Win the lottery, a heater at the blackjack table, inheritance, these are all possibilities here…ok, ok you’re right! I’m just playing!
Let’s just focus on all the options that we actually have some control over. New working title: Every Reasonable Way to Pay off Your Student Loans! Also, I’m skipping things like “earn more money,” ‘cause honestly, I doubt you need me to tell you that would help. Just in case though…that always helps!
We are starting for real this time. Note: #1 - #10 applies only to federal loans.
1. Standard Repayment plan- It’s called standard for a reason! This is the plan that all loans start in when payments become due. Payments are based on a 10-year payoff (it can be extended to 30 years for consolidated loans). You pay a fixed amount per month for 10 years and then you’re done. It will generally be the highest per month payment, but the least costly over the life of the loans. Why? Less time for interest to accrue.
2. Graduated Repayment plan- Another 10-year plan that can be extended to 30 years for consolidated loans. Picture the exact same thing as the “Standard”, except that with the graduated plan, your monthly payments start off lower and increase as time goes by (usually every 2 years).
3. Extended Repayment plan- This plan’s payoff term is 25 years. You can either choose a fixed payment like the “standard” plan, or a rising payment like the “graduated” plan. Unfortunately, this plan requires an outstanding balance of $30,000 or more and loans no older than October 1998.
The above three are available to anybody with federal loans; you do not need to qualify for a hardship. The next five payment plans base the monthly payments on income. You will have to provide updated income data every year for payment recalculation. Remember, as with all things dealing with income tax related areas, it never hurts to consult your tax professional.
4. Income-Contingent Repayment (ICR) - This option is the loner of the group. It’s damn hard to find its proper grouping because of its unique twists. As the title suggests, the payment is calculated with your income in mind. The payment is the lesser of 20% of your discretionary income, defined in this particular case only as the difference between your income and 100% of your state’s poverty line, or the fixed payment necessary to pay off your loans in 12 years. This is the only income-based plan that allows inclusion of Parent Plus loans, although they still must be part of a consolidated loan. This plan does not require hardship to qualify.
The following do require a hardship. A hardship is broadly defined as a high debt-to-income ratio, but generally, if your loan balance is equal to or higher than your annual income, you’ll likely qualify. The next four payment plans base the monthly payments on discretionary income as well. Discretionary income for these plans is defined as the difference between your income and 150% of your state’s poverty line.
5. Pre-07/01/2014 Income-Based Repayment (Old IBR) - If you have any active loan balances that were originated before July 1, 2014, then IBR payments will be based on 15% of your discretionary income. The payment will never be more than the amount it would have been under the 10-year repayment option. Remember with this option as well as #6-8, you will have to provide updated income verification every year, so as your income goes up so will your payments. If you still have a loan balance after 25 years of payments, the remainder will be forgiven. Hooray…
6. Post-07/01/2014 Income-Based Repayment (New IBR) - If all of your loans were started on or after July 1, 2014, then you’re a lucky S.O.B. because you get new and more generous terms (comparatively speaking, anyway)! In this situation, your IBR payments are only 10% of your discretionary income capped at the 10-year amount. You also receive forgiveness after 20 years of payments instead of 25.
7. Pay As You Earn (PAYE) - Here’s where things get a bit tricky. Kidding! It was already stupidly tricky! Now it becomes more of a mind bender. This option is pretty much the same as the New IBR. Payments are 10% of discretionary income capped at the 10-year amount, and you receive forgiveness on any remaining balance after 20 years. Here’s the thing, though: you can qualify for this option with loans older than July 2014! To use this payment plan you can’t have active loans that were issued prior to October 1, 2007, AND you also have to have taken a new loan out on or after October 1, 2011. I know…it’s bonkers! This is why people choose to work with me. The other caveat is that you can’t use this option with Stafford loans, but you could use both IBR options.
8. Revised Pay As You Earn (REPAYE) - This is the newest option. It became available on December 17, 2015, and was met with some fanfare. Why? Well, it’s available to anybody with eligible direct loans (see all the eligible loan types for each income-driven plan we’ve discussed in more detailed glory). Kind of a big deal, no more “loans have to be after this date but before this date” nonsense. It works similar to PAYE; payments are 10% of your discretionary income. As with all things, however, there are some catches. Payments aren’t capped! So, as your income goes up so will your payments, even past the 10-year standard amount. Forgiveness occurs at 20 years for undergrad loans, but for loans accrued during graduate or professional programs, it’s at 25 years. The other potential big issue is that your discretionary income will always include your spouse’s, no matter how you file taxes.
Sidebar! On getting married: Income-driven payment plans are always based on household tax returns and loan balances. If you are single, you are the only being in your household. If you’re married, there are now obviously 2 of you, and the fed loan servicers will base payment calculations on your joint tax return and cumulative loan balances. This can often result in much higher payments. The way around this is to file taxes separately, except when using the above REPAYE plan, which may or may not make sense based on your situation.
9. Forgiveness- The fact that your loans could be forgiven after 20-25 years with a federal payment plan sounds pretty cool! And for a lot of people with really high balances, it can be extremely powerful. However, do not assume that it is the path you should try for. Interest is still accruing the whole time, and it can still cost you a shit load of money to get to that 20-year point. You also may have a tax liability for whatever amount is forgiven.
10. Public Service Loan Forgiveness (PSLF) - This may be the most powerful option available from the federal government. To qualify, you need to work in public service, what a surprise! That’s defined as working for a governmental organization or a non-profit institution, usually classified as a 501(c)(3) entity. You can look up 501(c)(3) entities here. The next step is to make 120 qualifying payments (10 years worth). For the program to work, your qualifying payment needs to be made via one of the previously discussed income-driven plans #4-8. Unlike the forgiveness options discussed above, any balance forgiven under this plan is not taxable.
The next three could potentially apply to all loan types, but will be most useful with regard to private loans.
11. Pay based on originally stipulated terms- this one is pretty damn simple. You agreed to specific terms when you took out your private loan. Follow those terms, make your required payments, and eventually, the loan will be gone.
12. Refinance- The one possible way to change those terms, at least with a private loan, is to refinance. In the last few years, there has been an explosion of online lenders who are willing to refinance student loans. Exercise caution when considering this option for federal loans, however. In some situations, it can make sense, but you will lose all the federal payments and forgiveness options if you refinance.
13. Use a home equity loan- This has become more feasible and popular as home prices have risen these last few years, especially for those first-time home buyers. Due to low mortgage rates, it’s often looked upon as an easy way to reduce your interest rate. The key takeaway here: It’s an option, but a risky one that requires lots of research into your situation.
These next few are job-specific opportunities.
14. Teachers- Want to have your federal loan balance reduced by $17,500 within 5 years? It’s possible. You have to work at a Title 1 elementary or secondary school for five consecutive years. You can’t be in default, so you’ll want to make sure you’re making payments under a plan. If you have a very specific loan type called a “Perkins Loan”, you could be eligible for a full cancellation. Learn more about the ins and outs of both loan forgiveness and cancellation.
15. Military- Guess what? The military is a public service! If you work in the military for 10 years, you’re eligible for the same PSLF program discussed above. There are also specific programs and loans available like the National Defense Student Loan.
16. Doctors- For federal loans, working at a hospital owned by a 501(c)(3) entity qualifies for the PSLF program. That also applies to all other medical professionals. There are also quite a few state-run programs that offer repayment help as well as forgiveness. The AAMC has a comprehensive list of them.
17. Employee Benefits- Employers are starting to offer loan repayment help as part of their benefits packages. I wouldn’t say it’s popular, but it’s picking up a little steam. This article has a list of some of the bigger companies offering loan repayment help.
Whew, there’s a lot going on there! So, which one or combination of options is best for you? That’s a hell of a question! It depends on all the unique variables of your life and situation. It’s one of the reasons I’m a fan of custom financial planning work. A good planner will be able to help you figure it out and fit it into the puzzle that is your financial life. Which, by the way, if you’re looking for a financial planner then maybe we should talk.