Features

September/October 2012 Got Student Debt?

By Danny Vinik and Minjae Park

Over the years, government policy has created an array of repayment options for people struggling to keep up with their federal student loans. But these options are difficult to learn about and often difficult to execute. They also differ depending on what type of loan you have, and are not available if you are already in default. Below we’ve tried to explain them as clearly as possible—more clearly, believe us, than do servicing and debt-collection firms. (Be aware that processing the paperwork on some of these options can take weeks and sometimes longer.)

Deferment: If you’re facing unemployment or other economic hardship, you may qualify to postpone repayment of your principal balance for up to three years. If your loan is subsidized, the government pays the interest. If it’s unsubsidized, you pay the interest, and if you fail to do so, the unpaid interest will be added to the balance at the end of your deferment. To get a deferment, you have to apply with your loan servicer.

Forbearance: If you cannot make your loan payments you may also qualify for forbearance, which allows you to postpone or reduce your monthly amount for a limited period of time. You’re responsible for paying the interest on all loans, including subsidized loans. Your servicer is required to grant you forbearance for up to five years, if you meet the eligibility criteria (you can find them here). Keep in mind that interest accrues during forbearance.

Extended Repayment: If you have total outstanding principal and interest exceeding $30,000, you may qualify for an extended repayment plan, under which you may repay on a fixed or graduated payment schedule for a period not exceeding twenty-five years.

Graduated Repayment: Under these plans, borrowers have the option to pay between 50 percent and 150 percent of their standard payment, and the payment increases every two years. The plan lasts for ten years, unless it is part of an extended repayment, in which case it can then last up to thirty years. However, the longer the length of the loan, the more the borrower pays in interest. These plans tend to work best for borrowers who are likely to see their earnings increase sharply over time.

Income-Based Repayment (IBR): If you face uneven or modest income, you may qualify for the income-based repayment plan, which limits your monthly payments to an amount based on your income and family size. Your loan servicer should determine your eligibility, taking into account the amount you owe and your income, family size, and state of residence. Under the program, if you make payments for twenty or twenty-five years (terms vary according to when you originally took out the loan), the remainder of your debt is forgiven. You can find a calculator that shows how much you might pay under this plan here.

Income-Contingent Repayment (ICR): The government also offers a plan called income-contingent repayment. Struggling borrowers generally have lower payments in IBR than ICR, but not always. Under ICR, borrowers pay the lesser of either 20 percent of their discretionary income or the amount they would pay if they repaid their loan over twelve years, multiplied by an income percentage factor, based on adjusted gross income, family size, and the amount of loans. Under ICR, borrowers make payments for a maximum of twenty-five years. For more information, see here and here.

Income-Sensitive Repayment (ISR): Borrowers who still hold loans issued by the now-defunct Federal Family Education Loan (FFEL) program do not qualify for ICR, but they are eligible for the income-sensitive repayment (ISR) plan. In the application, borrowers choose their monthly payment, which must be between 4 percent and 25 percent of their gross monthly income. They then must reapply annually, for a maximum of ten years. After ten years, the borrower must continue their original payment plan to pay off the remaining principal. For more information, see here.

Direct Consolidation Loan: The government allows borrowers with multiple federal loans to combine them into a direct consolidation loan. The new principal is the sum of the original loans’ principal, and the new interest rate is a weighted average of the original loans’ rates (not to exceed 8.25 percent). Consolidating loans may lengthen the repayment period, increasing the total interest paid, so not all borrowers will want to consolidate. For more information and the online application, see here.

Public Service Loan Forgiveness: Borrowers employed in public service jobs (government, public safety, law enforcement, public health, public education, and so on) are eligible for loan forgiveness after making 120 on-time monthly payments, including under IBR or ICR plans, starting after October 1, 2007. For more information, see here but they are eligible for the income-sensitive repayment (ISR) plan. In the application, borrowers choose their monthly payment, which must be between 4 percent and 25 percent of their gross monthly income. They then must reapply annually, for a maximum of ten years. After ten years, the borrower must continue their original payment plan to pay off the remaining principal. For more information, see here.

Danny Vinik and Minjae Park are interns at the Washington Monthly.

Comments

  • Mossup on August 22, 2012 7:55 AM:

    This only describes repayment plans for Stafford loans. For consolidation loans, borrowers have access to lengths of Extended and Graduated repayment terms based on outstanding debt: 15 years, 20 years, 25 years and 30 years.
    http://loanconsolidation.ed.gov/examples/repyperiod.html

    These more flexible plans also used to be available to Stafford and PLUS Direct Loan borrowers until 2007. Washington was hostile to DL at that point and tried to make the program less appealing.

    The extra interest paid under a longer-term repayment plan is minor when compared with the downsides of trying to squeeze one's life into an artificial 10-year plan carrying much higher monthly bills: (1) risk of ruining one's credit by becoming delinquent or defaulted; and (2) putting one's life on hold (and postponing other life priorities) to accommodate the much larger monthly payment.