Consumers are $500 million deeper in debt with student loans than credit cards.
So, where are all the breathless commercials and billboards for relief from academic loans like you see and hear everywhere for credit card debt?
If you’re looking for student loan debt relief, the answer might be sitting right in front of you.
That’s because you owe the money to Uncle Sam – and here’s a shocker – the government isn’t the best at communication.
They call it an “Income-Driven Student Loan Repayment Plan” which is government speak for student loan debt relief program. If your income is too low and you can’t afford to make payments, they will reduce your monthly payment to a realistic portion of your income. If the burden of debt is too much, but you make consistent, on-time payments, the balance is forgiven after 20 or 25 years.
Sounds an awful lot like debt relief to me, but to drive the point home, here is a definition for you: Debt relief is when someone who owes money is given a plan to pay the money back at a rate they can afford. A debt relief plan or program accommodates a borrower’s financial situation and sometimes reduces the amount owed by lowering interest rates or forgiving a portion of the debt.
Put another way: lower interest rates + loan forgiveness = debt relief.
The government has loan forgiveness options for low-income borrowers, but if you have a large amount of debt and a high income, you would benefit from a lower interest rate (the other type of debt relief). That’s achieved by consolidating your debt into a refinanced loan – corporate speak for a private student loan debt relief program.
Programs for Student Debt Relief
Unfortunately, the federal government doesn’t alter old repayment programs. They create new ones, but the old ones stay intact, for the most part. That makes for a confusing menu of student loan repayment plans – or debt-relief programs – that seem to offer the same benefits.
For example, Income-Contingent Repayment (ICR) and Income-Based Repayment (IBR) are two of the older income-driven repayment plans.
They were followed by Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) during the Obama presidency as an improved version of the old plans. However, the differences between PAYE and REPAYE can be hard to sort out.
- You need to show “financial hardship” which simply means that the payments under the income-driven repayment plans will be lower than what you would have to pay on the 10-Year Standard Plan.
- You must also be a new borrower as of October 1, 2007 to enroll in PAYE, but there is no new borrower condition to enroll in REPAYE.
- You need to have received a loan distribution as of October 1, 2011, or else you’ll need to consolidate your loans into a Direct Consolidation Loan to be eligible.
Income-Driven Student Loan Forgiveness
What you need to know is that if you qualify, PAYE is the best repayment plan. If you qualify for PAYE, take it!
If you borrowed loans before 2007, then your two options are either REPAYE or IBR and the final choice comes down to your marriage status. If you are married. REPAYE considers a spouse’s income when calculating monthly payments even if you are married and file taxes separately.
IBR, on the other hand, does not consider a spouse’s income. That means that if you are married you should have a lower monthly payment and thus more debt forgiven with IBR.
For single borrowers, REPAYE’s advantage is the interest subsidy. All three plans (PAYE, IBR and REPAYE) have an interest subsidy for subsidized loans – if your monthly payment doesn’t cover the accruing interest, the government will pay the difference for three years.
REPAYE extends that to cover half of the accruing interest for unsubsidized loans and as well. After the three-year period, the government will continue to pay half of the interest for subsidized and unsubsidized loans if your monthly payment still doesn’t cover the interest.
ICR is no longer a good option for student loan forgiveness.
- REPAYE – Monthly payments are capped at 10% of your discretionary income, and the remaining balance is forgiven after 20 years for undergraduate loans and 25 years for graduate loans.
- PAYE – Monthly payments are 10% of your discretionary income and never more than what it would have been under the Standard Plan. The remaining balance is forgiven after 20 years of repayment.
- IBR – Monthly payments are 10% of your discretionary income if you are a new borrower as of July 1, 2014, or 15% of your discretionary income if you borrowed before that date. Monthly payments are never more than what it would have been under the Standard Plan. The remaining balance is forgiven after 20 years for new borrowers and 25 years for those who borrowed before July 1, 2014.
- ICR – Monthly payments are either 20% of your discretionary income, or what you would pay on a 12-year repayment plan. Remaining balance is forgiven after 25 years.
Loan Forgiveness Programs Based on Career Path
A low monthly payment from one of the income-driven repayment plans combined with one of the student loan forgiveness plans associated with certain career paths can have student debt forgiven well before the usual 20-25 years.
Career-based loan forgiveness may come with the sacrifice of working for an underserved community on a lower wage than the private sector, but if you have a large amount of student loan debt, it might pay off.
Public Service Loan Forgiveness is one of the more well-known programs that will forgive any remaining loans after 10 years of working for the government or a qualified nonprofit. Other debt relief programs have their own qualifications and forgiveness terms.
If you plan to pursue a career in public service, medicine, teaching, military or automotive repair, research some of these programs that could provide debt relief:
- Public Service Loan Forgiveness
- Perkins Loan Cancellation
- Teacher Loan Forgiveness
- Loan Forgiveness for Nurses
- Students to Service Program for medical students
- National Health Service Corps
- Active Duty Health Professions Loan Repayment
- Military Student Loan Forgiveness
- Navy Financial Assistance Program
- SEMA Loan Forgiveness for automotive careers
- Veterinary Medicine Loan Repayment Program
Student Loan Cancellation
Student loans typically cannot be cancelled or discharged through bankruptcy, but there are rare circumstances in which student loan debt can be cancelled. Apply for cancellation if one of these situations has happened to you:
- Bankruptcy (extremely rare)
- School Closure
- Unauthorized Signature
- Unpaid Refunds
Companies That Provide Debt Relief Services
Keep an eye out for student loan debt relief companies that call, text or email you with promises to solve your student loan problems or with warnings that you are behind on your student loan payments. Those could be scams meant to mislead you into giving up your private information.
Your lender is the U.S. government if you have federal student loans, and every federal student loan borrower is assigned a loan servicer. They can give you the proper recommendations and help you manage your student loan debt for free.
If you choose to refinance your student loans with a private lender, be sure to do extensive research on the company. Check and see if they have any complaints against them with the Better Business Bureau or review sites like TrustPilot.
Deferment & Forbearance
During times of financial hardship, deferment or forbearance can be used to pause student loan repayments or reduce the amount you owe until you are back on your feet. The difference is that with deferment you may not be responsible for paying interest that accrues during the deferment period. You would be required to pay interest with forbearance.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
- FRED (2018 October 9) Student Loans Owned, Securitized, Outstanding. Retrieved from https://fred.stlouisfed.org/series/SLOAS
- Value Penguin (2018 November) Average Credit Card Debt in America: November 2018. Retrieved from https://www.valuepenguin.com/average-credit-card-debt
- Federal Student Aid (2018) Income-Driven Plans. Retrieved from https://studentaid.ed.gov/sa/node/594
- Federal Student Aid (2018) Avoiding Loan Scams. Retrieved from https://studentaid.ed.gov/sa/repay-loans/avoiding-loan-scams#legitimate-private-companies