Student loan repayment is complicated, even under the best circumstances. Here are some basic guidelines to help you decide the best option for you.
Written by Rome Busa, Manager of Adult Programs, College Now Greater Cleveland
Everyone knows that personal finances can be a major stressor in life, and near the top of the list under this topic is paying off student loans. According to Forbes, in fact, student loan debt in 2021 is now a staggering $1.7 trillion. The best thing to know is that there are options when it comes to repayment – but what are they? We asked one of our current nonprofit grant recipients, College Now Greater Cleveland to share their expertise on the matter.
College Now Greater Cleveland assists teens and adults with all things having to do with college and other post-high school training. As part of this work, we also help people on the other side of college, to find the best option for them to repay their student loans. As was outlined in last month’s blog, there are SO many kinds of student loans available (federal, private, Parent PLUS, Graduate PLUS, direct, FFEL, Perkins, subsidized, unsubsidized, etc.) with almost as many repayment plans from which to choose. There are many variables, but I will outline the basics here.
Please note: the following facts refer to normal repayment situations. Currently, all federal student loans are in administrative forbearance due to the pandemic. The forbearance is scheduled to expire September 30, 2021.
When do my loans need to be repaid?
Student loans will need to begin to be repaid six months after one of the following occurs:
- If you graduate.
- If your attendance drops below ½ time, which is 6 credit hours per semester.
- If you stop attending completely.
How do I learn of my repayment options?
Your repayment options can be found at the US Department of Education’s website, https://studentaid.gov/manage-loans/repayment/plans. There you can log in using your FSA ID username and password to access a full list of your loans, their status and interest rates. You will be able to review the repayment options and calculate an estimated monthly payment using the “Loan Simulator” by entering your annual income, number in your family and tax filing status.
Repayment program options include:
- Standard
- Graduated
- Extended
- Pay as You Earn (PAYE)
- Revised Pay as You Earn (REPAYE)
- Income Based Repayment (IBR)
- Income Contingent Repayment (ICR)
As you review your options, notice not only the monthly payment amount, but also the total repayment amount and number of payments. The smaller the monthly amount, the longer it will take you to repay your loans with more interest. There is a wealth of information at this site that can help you make repayment decisions depending on your individual situation.
What happens to my loans if I do not choose a repayment plan?
If you do not choose a repayment plan, your account will automatically be enrolled in the standard repayment plan which will be a fixed monthly payment for ten years.
What happens if I fall behind on my payments?
If you are more than 10 days late on your monthly payment, that will equal a missed payment. After 9 months of missed payments, your loan will go into Default. This status will inversely affect your credit score and it will also prevent you from borrowing in the future. In addition, it will trigger a process called “wage garnishment”. During this process, your loan servicer will reach out to your place of employment and has ability to forcefully take up to 15% of your paycheck. This will continue to happen until your Default status has ended. There are a few ways out of Default; 1) pay the loan back in its entirety, 2) Consolidate your loans into a new loan and start making on time payments, or 3) start Rehabilitation. During Rehabilitation, a borrower will be able to “negotiate” a new monthly payment amount with their loan servicer. This payment can be as low as $5/month. After 10 months of paying this negotiated amount, the Default status will be REMOVED allowing you to return to normal payments, and it will also be ERASED from your credit history which will positively in fact your credit score and thus, your ability to continue borrowing.
Who is eligible for Public Service Loan Forgiveness (PSLF)?
You may be eligible for PSLF if you meet the following criteria:
- Work a minimum average of at least 30 hours per week at an eligible non-profit or government agency.
- Work for one or more such agencies for the entire 10 years while in repayment.
- Possess Direct Subsidized and Unsubsidized loans.
- Enroll in the program and recertify employment annually.
- Meet income eligibility limits.
If all the criteria are met, the remaining balance of student loans can be forgiven after making 120 on-time payments.
When should I use deferment and forbearance?
Deferment is the preferred tool to pause student loan repayments because interest stops accruing. If you return to school, your loans can be deferred. Deferment also occurs during economic hardship. Depending on your current financial situation, you can apply for deferment if you meet the standards for economic hardship. Forbearance also pauses required payments, but interest continues accruing. If you qualify for economic hardship, apply for Deferment first. If not, you are allotted up to 36 months of General Forbearance. After that, you must fall under economic hardship to qualify for pauses on your payments.
How are Parent PLUS loans different than student loans?
Parent PLUS loans, or loans that are borrowed by a parent for a child’s education, are eligible for fewer of the repayment plans. These loans cannot be transferred to the child. They can be refinanced through a private lender, but then will lose the benefits to use deferment and forbearance. Borrowers will also lose the benefit of repaying their loans under an income driven type plan, as well as any forgiveness or cancellation programs provided to Federal Loans.
Why should I start or continue paying on my federal student loans during the forbearance?
During the pandemic pause that is currently in place for all holders of student loans, no interest is accumulating. If you are able, you should continue making payments during this deferment because it will all go to the principal which will ultimately lower the overall amount you will need to pay off the loan in its entirety. Do not continue making payments if you are in the PSLF program as the non-payments during the deferment are counting toward the 120 payments that lead to forgiveness.
What about repaying private loans?
Private lenders operate under completely different sets of rules for repayment. They may not negotiate a reasonable monthly payment based on your income or allow you to defer payments due to financial hardship.
SOURCES: “Student Loan Debt Statistics in 2021: A Record $1.7 Trillion,” by Zack Friedman. Forbes. 20 February 2021. https://www.forbes.com/sites/zackfriedman/2021/02/20/student-loan-debt-statistics-in-2021-a-record-17-trillion/?sh=1c3773121431
