Stuck in Student Loan Debt? We've Got Answers
Every year, thousands of people default on their student loans. During this time of tough economic strife, many people have been unable to pay their loans because of job loss, reduction in hours or income, and even increased housing costs.
While there is no perfect answer for repaying students loans, there are many options. The key is that you have to know what programs to ask your student loan lender about. Sometimes, the people you talk to may not know about all of the student loan programs.
We present a lot of information below, however the Consumer Financial Protection Bureau (CFPB) recently came out with a great tool for helping you determine what student loan repayment options you may qualify for. The CFPB has developed a program that will walk you through an easy process of finding loan repayment programs that are right for you. Try their tool now by visiting this link.
A typical, federal student loan should be paid off in 10 years. They payment will vary depending on the amount of debt, but the amount will be enough to repay the debt in full after 120 payments. Below is a list of some of the other programs many federal student loan lenders offer.
Student Loan Repayment Options
- Graduated repayment plan – In this plan, the loan is still repaid in 10 years, however the payments start out at a lower amount. For instance, for the first year your payment may be $250. The second year that payment may increase to $300. The increase continues over the 10 years you are paying the student loan off.
- Income based repayment plan – Under this plan the student loan monthly payment will be based on your income during any period when you have a partial financial hardship. Your monthly payment may be adjusted annually. If you meet certain requirements over a specified period of time, you may qualify for cancellation of any outstanding balance of your loans. Using this option may make repayment more affordable, but be aware that you will probably pay longer than 10 years. In addition, since you are making a lower payment, you will pay back more in interest than you would in a standard or graduated plan.
- Income contingent repayment plan (ICR) – This plan gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income on your taxes (plus your spouse’s income if you’re married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:
- The amount you would pay if you repaid your student loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
- 20% of your monthly discretionary income.
If your payments are not large enough to cover the interest that has accumulated on your student loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.
The maximum repayment period is 25 years. If you haven’t fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged.
- Extended Repayment Plan – The plan extends the time you have to pay off your Direct student loans to 25 years. You must owe at least, $30,000 in Direct Loans in order to qualify for this extension. The extended time allows you to make smaller payments and those payments may be under a graduated plan or a standard (spread over 25 years) plan. Using this option will result in paying much more interest on the debt. See the second box below for an example.
Example of Standard, Graduated and Income Contingent Repayment
|Interest Rate:||6.8 %|
|Loan Amount:||$ 25000|
|Adjusted Gross Income (AGI):||$ 55000|
|Marital Status:||Married or head of household|
|State of Residence:||Continental U.S|
|Standard||120||$ 287.70||$ 34524.00|
(see Note 1 below)
|120||$ 197.54||$ 36388.89|
(see Note 2 below)
|141||$ 254.44||$ 36485.48|
Comparison of Repayment Options including Extended Repayment (Fixed and Graduated)
Total Student Loan Debt $30,001
|Standard||120||$ 345.25||$ 41430.00|
(see Note 1 below)
|120||$ 237.06||$ 43668.13|
(see Note 2 below)
|141||$ 305.34||$ 43783.77|
Note 1: This is an estimated monthly repayment amount for the first two years of the term and total loan payment. The monthly repayment amount will generally increase every two years, based on the gradation factor in the graduated repayment rules.
Note 2: This is an estimated repayment amount for the first year and total loan payment, based on the information you provided. This repayment amount will be recalculated annually and is subject to change based on the poverty guidelines for your family size as determined by the U.S. Dept of Health & Human Services. This plan has a maximum term of 25 years.
Unpaid Student Loans
There are serious implications for not repaying student loans. These include:
- Wage garnishment – The student loan lender may ask your employer to withhold a certain amount of each of your paychecks to repay the debt.
- Freezing your bank account – The lender puts a hold on your bank account that prevents you from accessing your money. They take any money that is in the account and apply it towards your student loan.
- Intercepting your tax refund – Rather than receiving your scheduled tax refund, it is sent to your lender and applied to your student loan.
In addition, unpaid student loans reflect poorly on your credit report and may prevent you from obtaining future home loans, auto loans, and even credit cards. You will not be able to obtain another student loan if your current loan is in default.
If You Need Help with Student Loans
To find out more information about student loans and the many repayment options, you can visit the U.S. Department of Education’s site. Also visit the Consumer Financial Protection Bureau‘s site for more repayment information.
In addition, American Financial Solutions’ certified credit counselors can help you examine your total financial situation and select the best option for successfully managing your finances. You can reach a counselor by visiting our home page or by calling (888)-282-5811.
Published Nov 1, 2011.