We previously talked about the student loan crisis in the US. Student loan debt exceeds both automobile loans and credit card debt. 44 million student loan borrowers owe a total of $1.5 trillion student loan debt.
Student loan borrowers experience higher levels of financial distress, they have poorer psychological functioning, they wait to marry, and they wait to make large purchases like vehicles and homes.
So what are student loan borrowers to do? This blog discusses the various Income-Driven Repayment programs available to student loan borrowers. Certain IDR’s are available for certain types of Student Loans. So we start with the types of student loans.
TYPES OF STUDENT LOANS
PRIVATE STUDENT LOANS
– Subject to Statute of Limitations like other written contracts.
- Please note that the Statute of Limitations runs from the date of the last payment made.
FEDERAL STUDENT LOANS
– There is no Statute of Limitations on Federal Student Loans. The following are common types Federal Student Loans:
- FFELP – student loan made by a private lender but guaranteed and reinsured by the Department of Education.
- DIRECT Loans – student loan made by the Department of Education. All student loans made after July 2010 directly provided by and serviced by the Department of Education.
- PLUS Loans – student loans offered to parents of students enrolled at least half time at college.
GETTING OUT DEFAULT
Failure to make Federal student loan payments for 270 days puts you in “default.” 11% of student loan borrowers are in default. Federal student loan borrowers in default are subject to wage garnishment, tax refund offset, and collection costs. And, such borrowers are not eligible for Income-Driven Repayment programs. So how do you get out of default? There are two ways to get out of default.
LOAN REHABILITATION
– Federal student loan borrower gets a one-time chance at loan rehabilitation. There are no two bites at the apple.
- How you do it.
- Agree to a “reasonable rate,”
- And, make 9 one-time payments over a 10-month period.
- Benefits of Loan Rehab
- Stop wage garnishments,
- Stop tax refund offset (take your tax refund to offset student loan debt owed),
- Reduce collection costs assessed,
- Now eligible to participate in IDR’s.
LOAN CONSOLIDATION
– Another one-time opportunity to get out of default.
- How you do it.
- Make 3 on-time payments,
- Or, choose Income-Based Repayment plan.
- Reduces collection costs assessed.
- Can participate in repayment programs.
INCOME-DRIVEN REPAYMENT PROGRAMS
IDR is the name for various student loan repayment programs available to Federal Student Loan Borrowers. At the completion of the repayment plan the student loan balance is forgiven. Not all IDR’s are created equal. Some IDR’s are available for only DIRECT loans whereas others allow FFELP and PLUS loans too. Some will result in a lower monthly payment or payment term. So choose wisely.
INCOME BASED REPAYMENT (IBR)
– Available for both DIRECT and FFELP loans (but no PLUS loans).
- Payment – Generally, 15% of your annual household income above 150% of the applicable poverty level for family of borrower’s size.
- Example: If income is $35,000 and poverty level is $20,000, then payment is 15% of $5,000 = $750/year (and $62.50/month).
- Term – 25 years
- At completion of 25-year term the student loan balance is forgiven.
- Please note that a “New Borrower” is subject to a different payment calculation and a 20-year term.
INCOME CONTINGENT REPAYMENT (ICR)
– Available for DIRECT, FFELP, and PLUS loans.
- Advantage of ICR over IBR
- Married couples who file separate tax returns use the Individual AGI (instead of AGI of both spouses) in calculating the payment BUT count both spouses’ expenses.
- Payment – 20% of income above 100% of poverty level for family of borrower’s size.
- Example: If income is $35,000 and poverty level is $20,000, then payment is 20% of $15,000 = $3,000/year (and $250/month).
- Term – 25 years
- At completion of 25-year term the student loan balance is forgiven.
PAY AS YOU EARN (PAYE)
– Available for DIRECT loans only. But you can consolidate FFELP loans to get around this requirement.
- Have to be a New Borrower.
- You had no outstanding balance on a DIRECT loan or FFEL loan when you received a DIRECT or FFEL loan on or after October 1, 2007;
- And, you received a disbursement on a DIRECT loan on or after October 1, 2011.
- Payment – 10% of income greater than 150% of the poverty level for family of borrower’s size.
- Example: If income is $35,000 and poverty level is $20,000, then payment is 10% of $5,000 = $500/year (and $41.66/month).
- Term – 20 years
- At completion of 20-year term the student loan balance is forgiven.
- Lower payment and shorter term compared to IBR and ICR!
REVISED PAY AS YOU EARN (RPAYE) –
Again, available only for DIRECT loans. But can consolidate FFELP loans to get around this requirement.
- Don’t have to be a new borrower!
- Payment – 10% of discretionary income (lower than IBR and ICR)
- Term
- Undergraduate loans only – 20 years
- Both undergraduate and graduate loans – 25 years
