Struggling With Student Loans? 3 Forms of Help Available Now
President Obama recently signed a memo calling for a bit of relief for some student loan borrowers. It will allow these student debtors to cap their payments at 10 percent of their income. “No hardworking young person should be priced out of a higher education,” the president said about student loan debt. The President’s student loan orders are likely to be implemented in December of 2015.
With 71 percent of students who earn bachelor’s degrees doing so with a hefty loan bill of around $30,000 attached to their degree, many grads have difficulty balancing all of their finances. A large percentage of borrowers agree to these loans immediately upon reaching the age of majority. Not even old enough to legally buy a beer, students sign promissory agreements which will impact their lives for at least a decade following their graduation.
In October 2011, the Bureau of Labor Statistics reported the unemployment rate of recent college graduates at 12.6 percent. Upon graduating college, a student is expected to find a paying job, and begin repaying his loans. According to the Department of Education’s Federal Student Aid website, “direct subsidized loans, direct unsubsidized loans, subsidized Federal Stafford loans, and unsubsidized Federal Stafford loans, have a six-month grace period before payments are due… [a] grace period gives you time to get financially settled.” Perhaps a longer grace period would provide a more realistic time period during which a recent grad can become financially settled.
For some borrowers, repaying student loans just becomes financially infeasible. In these cases, a borrower budgets, plans, and saves as much as possible, but his or her income is just not high enough to cover the basic essentials and student loans. American Student Assistance reports that around 40 percent of borrowers become delinquent at some point during the first five years of repayment, and millions of borrowers are currently past due on their student loans. If you are in this type of situation, you have some options available to you today.
1. Income-based payments
Income-based repayment (IBR) plans may help you continue to remain current on your loans. If you have trouble paying because your loans are high relative to your income, these types of repayment plans may be able to adjust your payment down to a level you can afford. These types of federal loans are generally eligible for IBR:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans without underlying PLUS loans made to parents
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation Loans without underlying PLUS loans made to parents
Private education loans, PLUS loans to parents, and consolidation loans that include underlying PLUS loans to parents are not eligible for IBR. To qualify, you also must have a partial financial hardship. That is, the monthly payments under a traditional 10-year repayment plan are more than 15 percent of the difference between your adjusted gross income and 150 percent of the poverty income amount for your family size and location.
For instance, say for example under the traditional 10-year repayment plan, your payments would be $500 and you cannot afford to pay $500 per month payment. You are a family of two and your household income is $30,000 annually and $2,500 monthly. The poverty line for a family of two is $15,510 annually ($1,292.50 monthly) for the forty-eight states and D.C., which would make 150 percent of the poverty line calculate to $1,938.75 per month. The difference between your household pay and 150 percent of poverty in this fictitious example is $561 month per month. Because 15 percent of $561 (around $84) is not even close to that $500 payment amount, you would most likely qualify for income-based payments.
The chart above shows the maximum income-based repayment monthly amounts, based on poverty guidelines as of January 22, 2014. This chart can provide an idea of what type of payments you’ll be looking at with an income-based plan.
2. Deferment or Forbearance
A deferment hits the pause button on your loan so you can go back to school, complete a fellowship, find employment, seek a higher-paying job, or serve the military. While your loan is in deferment, the principal and potentially the interest are temporarily put on hold. On certain loans, (e.g. Federal Perkins loans, Direct Subsidized loans, and Subsidized Federal Stafford loans) the Government may actually your pays interest on the loan during the deferment time frame. During a deferment, however, certain loans will continue to accrue interest.
If you are not eligible for a deferment, you may apply for a forbearance. This option allows you to completely stop or reduce payments on your loan for up to one year. Loan services provide mandatory forbearances to those in residency programs, some National Guard members, certain national service workers, or those who qualify for special programs (e.g. teacher loan forgiveness or U.S. Department of Defense Student Loan Repayment Program). Those whose loans exceed 20 percent of their monthly gross income may also apply for a mandatory forbearance. Another type of forbearance is a discretionary forbearance, which loan servicers grant to those who have illnesses or financial hardship.
In very rare and specific cases, a loan servicer may forgive, cancel, or discharge a student loan. This happens in cases where a borrower becomes totally and permanently disabled, the borrower can prove in bankruptcy court that the loan will cause undue hardship, the borrower’s school closes while he is attending (or shortly after he withdraws), or the borrower’s school falsifies any documentation.
The public service loan forgiveness program renders certain public service workers eligible for forgiveness. Those who make 120 payments on their loans after October 1, 2007, may apply. Therefore, a police officer or EMT who began repaying in 2007 may have the remainder of his loans forgiven in 2017.
If you repay your loan for twenty or twenty-five years and you still have a remaining balance, you may be able to have the remainder of your loan balance forgiven. However, any forgiven amount is generally taxable and whether or not you receive a 1099-C form, it’s best seek advice on whether or not to include the forgiven amount as income on your tax return.