Student loan forbearance or deferment are popular options for
those who are finding it hard to pay student loans, but borrowers may be
making an expensive mistake when they enroll in one of these programs.
First, here’s a brief overview of the four main income-based
repayment programs. Keep in mind these apply to federal loans, not
private loans. With private loans, you are at the mercy of the lender,
as they aren’t required to offer any of these options.
Your Options to Pay Student Loans
Deferment
While your loan is in deferment, you do not have to make student loan
payments. If you have a subsidized loan, no interest will accrue during
the deferment. With an unsubsidized loan, interest will accrue.
Interest not paid during deferment is “capitalized” which means it is
added to the balance, and interest will be charged on interest.
Forbearance
If you don’t qualify for deferment to pay student loans, you may be
eligible for forbearance, which allows you to make no payments, or
reduced payments, for up to a year. Interest will accrue on your
subsidized and unsubsidized loans (including all PLUS loans) and unpaid
interest will be capitalized.
Income-Based Repayment (IBR)
There are plenty of reasons to take out federal loans in lieu of private student loans, but the
Income-Based Repayment plan takes the cake. If you qualify for IBR, your maximum monthly payments will be 15% of
discretionary income, using a specific formula. Under the newer Pay As
You Earn (PAYE) program available to recent borrowers, the cap is 10% of
discretionary income. Payments can be as low as $0 if you are
unemployed. Balances will be forgiven after 10, 20 or 25 years,
depending on the program you are in and whether you work in a qualified
public service job.
With subsidized loans in IBR, the government will pay up to three
consecutive years of interest that accrues but is not repaid. With
unsubsidized loans, interest accrues. In both cases, interest is
capitalized if you are determined to no longer have a “partial financial
hardship,” or if you drop out of IBR.
Who qualifies for IBR?
IBR helps people whose
federal student loan debt is high relative to income and family size.
Currently, your loan servicer (the company you make your loan payments
to) determines your eligibility, but starting in September 2012,
students won’t have to contact their loan servicer to apply—they will be
able to apply directly through the Department of Education’s website,
thanks to a new directive from President Obama.
You can use the
U.S. Department of Education’s IBR calculator to
estimate whether you are likely to qualify for the plan. The calculator
looks at your income, family size, and state of residence to calculate
your IBR monthly payment amount. If that amount is lower than the
monthly payment you are paying on your eligible loans under a 10-year
standard repayment plan, then you are eligible to repay your loans under
IBR.
Will my eligibility change if I'm married? What if my spouse also has loans?
If
you are married and file a joint federal tax return with your spouse,
both your income and your spouse’s income are used to calculate your IBR
monthly payment amount.
If you are married and you and your
spouse file a joint federal tax return, and if your spouse also has
IBR-eligible loans, your spouse’s eligible loan debt is combined with
yours when determining whether you are eligible for IBR. If the combined
monthly amount you and your spouse would pay under IBR is lower than
the combined monthly amount you and your spouse are paying under a
10-year standard repayment plan, you and your spouse are eligible for
IBR.
How will enrolling in IBR affect my monthly payments compared to the standard repayment plan?
It
depends on your income. But, take for example a nurse who is earning
$45,000 and has $60,000 in federal student loans. Under the standard
repayment plan, her monthly repayment amount is $690. The currently
available IBR plan would reduce her payment by $332, to $358. President
Obama’s improved “Pay As You Earn” plan -- reducing the cap from 15
percent to 10 percent -- will reduce her payment by an additional $119,
to a more manageable $239 -- a total reduction of $451 a month.
How will enrolling in IBR affect my payments over the life of the loan compared to the standard repayment plan?
In
general, your payments will increase as your income does, but they will
never be more than they would have been under the standard 10-year
repayment plan. Although lower monthly payments may be better for some
borrowers, lower payments may also mean you make payments for longer and
the longer it takes to pay your loans, the more interest you pay
compared to the standard repayment plan.
Is it possible my payments will be higher under IBR than they would under the standard repayment plan?
IBR
will never cause your payments to increase more than they would have
been under the standard repayment plan. It is possible, however, that
your income and the size of your outstanding loan balance may mean that
IBR is not beneficial to you. If your payments would be higher in IBR
than they would be in the standard repayment plan, the IBR option will
not be available to you.
Also, because a reduced monthly payment
in IBR generally extends your repayment period, you may pay more total
interest over the life of the loan than you would under other repayment
plans.
How do I opt in to IBR?
To sign
up for IBR, call your loan servicer. The loan servicer is the company
that sends you your monthly student loan bills. If you don’t know who
your servicer is or would like more information about your loans, such
as the balance and interest rates, you can look it up on
www.nslds.ed.gov.
To see a list of and contact information for common servicers of
student loans held by the US Department of Education, you may visit the
Loan Servicer page.
What does today’s Presidential Memorandum mean for IBR?
The PM will do three things:
Streamline the IBR application process:
The Department of Education, in collaboration with the Treasury
Department and Internal Revenue Service, will create a streamlined
online application process for IBR that allows student loan borrowers
with federally held loans to import their IRS tax return income data
directly into the IBR application. This process will allow income
information to be seamlessly transmitted so that borrowers can complete
the application at one sitting. Federal direct student loan borrowers
will no longer be required to contact their loan servicer as the first
step to apply.
Enhance online and mobile resources for loan repayment options and debt management: The
Department of Education will create integrated online and mobile
resources for students and former students to use in learning about
Federal student aid, including an explanation of the various options to
cap monthly payments based on income. The Department will also develop
and make available to borrowers an online tool to help students make
better financial decisions, including understanding their loan debt and
its impact on their everyday lives. This tool would incorporate key
elements of best practices in financial literacy and link to students’
actual Federal loan data to help them understand their individual
circumstances and options for repayment.
Increase awareness of IBR:
The Department of Education will instruct Federal direct student loan
servicers to make borrowers aware of the option to participate in IBR
before a student leaves school and upon entering repayment. The
Department of Education will make available for institutions of higher
education a model exit counseling module that will enable students to
understand their repayment options before leaving school and to choose a
repayment plan for their student loans that best meets their needs.
How can I find out more?
Income-Contingent Repayment (ICR)
Under this plan, borrowers’ monthly payments are pegged to income,
family size and the amount owed. After 25 years, any remaining balance
is forgiven. (Or after 10 years for public service loan forgiveness.)
Accrued interest is capitalized annually.
Short-Term Gain, Long-Term Pain
Deferment or forbearance may seem like a blessing if you are not able
to make your student loan payments, but they may wind up being a curse.
While they may offer a reprieve for someone facing a short-term
financial hardship, they don’t offer long-term relief from overwhelming
debt.
Our reader Robyn explained that she borrowed about $20,000 in student loans:
I worked and paid…paid and worked. Took a couple of forbearance(s).
Upon restarting payment, I had to pay $500.00… Sallie Mae suggested a
consolidation. I did it. Then the loan total rose to $55,000. Interest
$27,000.
“Deferment and forbearance is like putting a Bandaid on a stab
wound,” warns Joshua Cohen, also known as The Student Loan Lawyer. “What
happens in 12 months when that deferment (or forbearance) ends?”
Some of the fault may lie with servicers who find it easier and
faster to push those options instead of IBR. Borrowers may be “pressured
to go into forbearance without even being told about their options,”
warns Lauren Asher, president of The Institute for College Access and
Success. She points to a memo that discussed how three-quarters of
delinquent borrowers whose loans are handled by four large companies
were “cured” by putting their loans into deferment, while only 24% had
made payments on their loans.
That means the majority ended up with at least as much debt as when
they went into default — and quite likely more — if their loans accrued
interest, which is likely as Asher notes that 82% of borrowers with
subsidized Stafford loans also have unsubsidized loans. Our reader D.
Kranz commented on the Credit.com blog:
One thing that would help is if they would stop the capitalization of
interest when the loans are deferred or placed in forbearance… All this
is doing is moving us backwards…Why can’t they waive the interest on
students or even have it at an affordable rate 1-2% and no
capitalization? Even finance companies don’t capitalize.
The reason IBR, ICR — and now PAYE — may be more effective is that
borrowers may get reduced payments now and then also be eligible for
loan forgiveness in the future. In other words, there is a light at the
end of the tunnel.
In the past, Asher notes, it was more difficult to apply for IBR and
so borrowers would take the easiest route (usually deferment), which was
also the one usually recommended when they reached out to their lender
for help. But hopefully that’s changing.
Borrowers now have access to an online portal where they can find out
which student loan repayment programs they are eligible for. Once you
sign in, explains Asher, you can “any of the income driven repayment
options. You don’t even have to know which one you qualify for. You can
even draw the IRS data (from your tax returns) into the form.”
All of these programs are largely off-limits to parents who took out
Parent PLUS loans, with one exception: when Parent PLUS loans are
consolidated with a Federal Direct Consolidation Loan, they become
eligible for ICR. The formula for determining ICR eligibility is
complicated, Cohen warns: “There’s a square root in it.” But for some,
it can be a tremendous benefit. “It’s possible the term can be shorter
than 25 years,” he notes.
Still Out of Reach?
Still, even the low payments offered under IBR can be out of reach
for some borrowers. Our reader, Liz, for example, is struggling with
cancer and about $97,000 in student loan debt. She wrote, “As someone
with an older loan that requires 15% of one’s income, not the 10%, at a
lower income level this is also too onerous.”
Usually, though, borrowers can use IBR to pay student loans if they
very carefully manage their spending. “A lot of times they think they
can’t afford (the payment under IBR), but it’s often the budget,”
observes Cohen.
And what other choice to do borrowers have? Until it is easier for
borrowers who are deeply in debt to discharge student loans in
bankruptcy, this is often the only hope they have of ever seeing a zero
balance.
Need Help on Your Student Loans?
If you’re struggling to pay student loans, research these programs
immediately. Try the tools offered at the government’s student loan
website, and talk to the company servicing your loan. But if your lender
pushes forbearance, don’t assume that’s the only — or best — option.
“No one can predict the future but forbearance can be very costly,”
Asher says. “It’s far too costly to use for a long-term strategy.”
If you are still having trouble understanding or evaluating your
options, you may want to talk with a consumer law attorney with
expertise in these programs. These attorneys often charge affordable
fees, knowing their clients are in a financial bind. In addition to
helping clients in his home state of Connecticut, Cohen trains consumer
lawyers across the country and maintains a directory of them on his
website.
How to Pay Your Student Loans Without Actually Paying Them
There are two rhetorical positions commonly adopted when addressing
the topic of student loans, one held by those with robust monthly
incomes, the other championed by magical thinkers whose earning powers
border on the anemic. Try to guess which is which:
1) “You
shouldn’t have gotten into so much debt in the first place if you didn’t
have a responsible plan to pay it off. Quit complaining and get to
work.”
2) “Student loans exploit children by luring them with the
promise of non-existent careers into borrowing inconceivable sums. The
system is broken; defaulting counts as civil disobedience.”
If
you’re partial to the first of these arguments, then you should stop
reading this immediately and go hang out in your bathtub full of
gold-plated caviar (or whatever it is you people do), but if you’re
listing toward the latter position, then it only stands to reason that
you should get out of your student loan debt as quickly and painlessly
as possible. And there are actually ways to do that. Check it out:
(Note:
Most of this stuff only works if you have public student loans
furnished through the federal government. If you’ve got loans from
private lenders, then I’m sorry, but you’re pretty much doomed to wander
the earth in ashes and sackcloth. Look me up and I’ll buy you a drink,
you poor bastard.)
LIVE SOMEPLACE AWFUL
How
bad is it to live in Kansas? It’s so bad that the state will actually
pay you 15 grand (or at least pay 15 grand toward your student loan
debt) just for agreeing to get your mail there for five uninterrupted
years. Fifty counties within the state have designated themselves “
Rural Improvement Zones,”
which is code for “We have neither money nor people, please help.” Show
up to one of these ROZs with diploma in hand to receive the
aforementioned debt forgiveness, along with a kindly opportunity to
recuse yourself from the state’s income tax. Nebraska has a similar
program in the works, so if you wait it out for a minute you might have
more locales to choose from, though in both cases you’ll have to weigh
the financial benefits against the inevitable pain of discovering just
why it is that there’s no one there in the first place.
MAKE ALMOST NO MONEY AT ALL
A “friend” of mine recently discovered that if you apply for
Income-Based Repayment
on your federal student loans (which you should do in any case, because
it’s awesome), you can actually wind up with an income-based monthly
payment of nothing. The federal government defines your income-based
payment as 15 percent of your discretionary income, which it in turn
defines as the difference between your Adjusted Gross Income and 150
percent of the poverty guidelines for your state.
So, if the
poverty line for your state is set at the federal standard of $11,170
per year, and you make anything less than $16,755 per year, you can have
your monthly student loan payment officially set at $0 per month. Keep
this up for 25 years and the government will straight-up cancel your
student loan debt. This plan involves being really, really poor for a
really, really long time, but for the stubborn and fiscally incompetent,
it can’t be beat.
GET A JOB THAT WOULD ALLOW YOU TO PAY BACK YOUR STUDENT LOANS ANYWAY
That
special programs exist to help nurses (median yearly income: $65,950)
and teachers (median yearly income: $51,380) pay back their student
loans makes somewhat less sense than, say, the development of similar
programs aimed at baristas and data entry clerks, but there you have it.
Should you choose to enter the profession of nursing, such options as
the
Nursing Education Loan Repayment Program make
viable the option of erasing your student debt, provided you’re willing
to work in a “Critical Shortage Facility.” Similar programs exist for
teachers willing to work in low-income school districts.
Federal Perkins loans offer a
reckless orgy of cancellation options
along these lines, including loan cancellation for full-time nurses,
science teachers, school librarians, and tribal language college
professors. Direct and Federal Family Education Loans tend to be more
tight-fisted in this regard, but still, if you’re willing to commit to
five years of teaching in a school with an armed security presence, or
entering the amorphous field of “public service,” you can consider
yourself debt-free.
DECLARE FANCY BANKRUPTCY
Common
opinion has it that you can’t shirk student loan debt via bankruptcy,
but this is only sort of true. If you can prove that payments “will
impose an undue hardship on you and your dependents,” some courts will
allow you to throw your educational debt onto the fire along with your
laughable home mortgage and general credit card shitstorm.
The key
here lies in proving that the circumstances currently making you broke
as shit are likely to continue unabated. This can be a tall order.
Claiming persistent alcoholism can appear at first like a convenient
option, but it’s been tried and courts have chucked it out in the past. A
more reliable strategy involves having children, getting a crappy job,
and insisting that you’ll never be able to make more than the paltry sum
you already take home (which, let’s face it, is probably the case
already, minus the children part).
Congress has recently
held hearings on this subject, so if you wait it out and cross your fingers, the powers that be may loosen the rules far enough for you to make it happen.
JUST DEFAULT AND SEE WHAT HAPPENS
You’ll
never again lay hands on a credit card, mortgage, or lease agreement,
but for the desperately indebted and socially brass-balled, defaulting
on your student loans presents a viable option.
Getting started on
this plan is straightforward enough: Just ignore your payments. First,
you’ll get letters from your lender politely asking that you pony up the
30/60/90-days past-due lump of cash in question. Pay these no mind, as
you will do with all correspondence marked “Sallie Mae.” In fact,
develop a habit of ignoring all mail, because it’s about to become one
of your principle occupations.
After your loan holder has
exhausted its capacity for polite indignation, you’ll start getting
menacing letters from a collection agency. Expect these at a rate of two
to three per day. Each collection agency has its own special sauce of
bureaucratic finger cracking, but whatever your circumstances, pressure
will be forthcoming from some unusual sources.
I’ve heard of
collection agencies sending financial death threats to the parents of
loan holders, debt collectors coming to the doors of unsuspecting
defaulters in the guise of Mormon missionaries, and multiple accounts of
collections agencies performing a specialized bait-and-switch in which
you open the door to a UPS deliveryman expecting to receive something
you ordered online, and instead find a demand for more cash.
Things
will get uncomfortable, that much is guaranteed, but if you stick it
out, there’s really not that much that debt collectors can do. (This is
true at least so far as federal loans are concerned; if you’ve got
private loans then you’ll probably wind up in court.) Without actually
bringing suit, your federal loan holder can start lopping 15 percent off
the top of your “disposable pay,” in addition to withholding your
income tax refunds, but that’s about as far as they can go.
My Story.
Looking for generous people to gift me a donation to help pay down my student loans.
After serving in the US Marine Corps infantry. The only thing I learned was self discipline, how to kill and blow things up. This did me no good when I came back to the civilian live. I decided to go to collage to earn an Engineering Degree. Now I have an Associates degree in Electronic Engineering. How ever. the economy is so bad. I cant find a job. Fast forward a couple of years. I now have a job as an engineer a wife and my son. However life is still hard. I still live paycheck to pay check. I cut all luxuries. No fancy cellphone, no cable TV. I drive a beat up car. Yes I have a good job. But I still don't clear $40k a year. My student loans are $350. per month. Every year they keep going up. I have filed for Deferment a couple of times. I have filed for IBR which brought my payments down to $350. I sometimes wish that there were programs to help the middle class.
Help a Vet Pay for Student Loans
It is not fare that there are many Americans who dropped out of high school, committed crimes, went to jail. Then our government helps them survive. or, you can have 4-5 kids, live in government housing, apply for food stamps, while selling drugs on the side and live life. Obama will also give you a cell phone, off our (Tax Payer's) expense.
