Student Loans Overview
Private vs Federal Loans – In general, private or institutional loans are going to have the fewest options for income-based repayment or forgiveness. If you have a private loan, you may need to look at refinancing into a Federal Direct loan before you will qualify for most programs. If you cannot move your private loan into a Federal Direct loan, then refinancing may be an option to lower your interest rates.
Death – Your student loans will be discharged after death. Your spouse (or family) will have to submit proof of death, but the bonus is that they will not have to take on your loans.
Disability – If you are permanently disabled, you can apply to have your loan discharged. There are different ways to qualify for disability forgiveness, but the most common is by qualifying for Social Security Disability Insurance (SSDI). Keep in mind that if you come off disability within three years after getting the loan discharged (or have new loans taken out, or an increase in your earnings) that your student loan will be reinstated (you will have to pay it back).
Bankruptcy – While there are some technical ways to get a student loan forgiven through bankruptcy, in reality, it is nearly impossible. There have been some interesting stories of people getting student loans forgiven through bankruptcy but in each case the federal government has fought to get the money back. The challenge is that if a bankruptcy is successful in getting rid of student loans, you would see millions of people applying for bankruptcy in a short period of time.
For-Profit Schools – If you went to a for-profit school, in particular ones like ITT and DeVry, you may be able to apply for your loan to be canceled under fraud statutes (or similar). Recently the Department of Education forgave $415 million in loans due to fraud at these schools.
Interest Rates – For most people, they have multiple student loans with a wide variety of interest rates. The average student loan interest rate is around 6%. What that works out to is that if you don’t pay off your loan, it will double approximately every 12 years. When your loan is in forbearance (with exception of the current COVID forbearance), it continues to add interest, even if you aren’t making payments.
Payment Schedule – The standard student loan payment schedule is 10 years. That means that if you pay your standard payment each month, on time, you will pay it off in 10 years. With an income-based program, this can be extended to 20-25 years, but keep in mind interest will still accrue.
Employer Student Loan Match – Some employers have decided to take advantage of recent IRS changes and are now offering a student loan match in lieu of a 401(k) match. Other employers have started to offer help paying off student loans as an employee benefit. In both cases, you will most likely have to claim this help from your employer as income (which is taxed) but any help is good.
Loan Forgiveness Programs
Student loan forgiveness is a hot-button issue. My expectation is that before we see any widespread loan forgiveness, we will see changes in the Public Service Loan Forgiveness (PSLF) program. We have seen changes recently (see discussion below) but most of the changes were to improve the process, not to increase who is eligible. If you are not eligible for PSLF, still keep an eye on it. The bottom line though is that if you do not qualify for PSLF, for now, plan on paying your entire loan yourself.
The Public Service Loan Forgiveness (PSLF) program is the largest federal loan forgiveness program, but it comes with a lot of strings attached. You have to be in a public service role full-time (see eligibility below) and make 120 on-time payments to qualify for forgiveness. Keep in mind that there is a lot of paperwork, and if you miss a payment, or your employer does not qualify for a period of time, you can lose all progress in the PSLF program. At the time of writing, there is currently a Temporary Expanded PSLF program https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness that allows you to request consideration (such as for a missed payment) but it is for a limited time.
PSLF Eligibility: (from Studentaid.gov)
To qualify for PSLF you must:
The bonus of the PSLF program is that if you are approved, your loan will be forgiven after 120 payments and any amount forgiven is not taxable. The thing to keep an eye on is that historically, who is approved for forgiveness has been related to the current political climate and leadership. Over the past year, there have been more approved applications for PSLF forgiveness than in the entire 4 years of the past administration (which approved less than 1%). The challenge is that you might qualify now, get started on your 120 payments and you have no idea if the program is going to exist (or if forgiveness will be approved) 10 years from now.
To take advantage of the PSLF program, you will have to move to an income-driven repayment program. An income-based program will spread your payments over 20-25 years (see below for more) as the standard payment structure would pay off your loan in 10 years (120 payments). Also, the current COVID forbearance counts as payments made on time, even though you may not be making payments.
If you provide Primary Care, Dental Care, or Behavioral & Mental Health Care, HRSA’s NHSC (National Health Service Corps) program might be an option for you. The upside is that you can get up to $50,000 of loan repayment (federal income tax-exempt) for serving at an NHSC site. NHSC sites tend to be in high need areas, including urban and rural sites. If you are in the medical field it is worth taking a look as you can even get continuation contracts and get your whole loan paid off over time. There are limited application dates but they come up regularly.
Other forgiveness programs
There are additional federal and state loan forgiveness or repayment programs for certain positions and locations. Google your state, your career, and loan forgiveness. Each program has its own quirks, but you may find that if you agree to a certain amount of time that they may forgive or repay your loan. Just be sure to find out the exact requirements and any tax implications.
Income-Driven repayment programs
There are currently 4 Income-Driven repayment plans offered:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan) – For REPAYE, the monthly payment will be 10% of discretionary income, for 20 years (undergraduate loans) or 25 years (graduate loans).
- Pay As You Earn Repayment Plan (PAYE Plan) – For PAYE, the monthly payment will be 10% of discretionary income (no more than the standard 10-year payment), for 20 years.
- Income-Based Repayment Plan (IBR Plan) – For IBR, the monthly payment will be 10% of discretionary income (no more than the standard 10-year payment), for 20 years if your loan was made after 7/1/2014 (or 15% of discretionary income for loans before 7/1/2014).
- Income-Contingent Repayment Plan (ICR Plan) – For ICR, the monthly payment will be the lesser of 20% of discretionary income or a fixed payment over 12 years adjusted for your income, for 25 years.
Not all loans are eligible for income-driven repayment, and some loans are only eligible for specific programs. If your loan is in default (you haven’t been paying it and are overdue), you will have to take it out of default (start paying again) before being considered. See the full list of conditions at https://studentaid.gov/manage-loans/repayment/plans/income-driven
Some things to consider before going on an income-driven program:
Discretionary Income – So here is an area where being Childfree hurts us. Discretionary income is defined for these programs as your adjusted gross income (AGI) – 150% of the annual poverty guideline for your family size in your state. Since we don’t have kids, your family size is going to be 1 or 2 and will mean you have a higher discretionary income in the eyes of the federal government. There is nothing we can do about that. You can look up the current poverty guidelines here.
20-25 years – By signing up for an income-driven program, you are spreading the payments out over 20 or 25 years. Whatever is left after that time is forgiven, but you WILL pay income taxes on the amount forgiven. You will be paying the interest over 20-25 years, so the loan may feel like it isn’t going down at all.
Tax Impact – Any amount that is forgiven (after 20-25) will result in an income tax bill to you in the year it is forgiven. For example, if you have $100k forgiven, it will look like you made $100k more that year, and you will be paying taxes on it. At current tax rates, if you had no other income you would pay 24% tax on that $100k ($24k tax bill, not exact but you get the idea).
Refinancing Student Loans
Refinancing can help you to lower the interest rate, but be careful. Changing the type of loan (such as from a federal direct to a private loan) may disqualify you for income-driven repayment plans, and may ‘reset’ the clock for the PSLF program. Make sure if you are looking at refinancing that you look at more than just the interest rate. Consider refinancing if you have already run out of other options and know you will never qualify for the current options.
So, what the hell do I do with my student loans?
Great question. The first step is to spend some quality time on StudentAid.gov and see what you may (or may not) qualify for. You need to weigh out the options. Make sure you consider both the impact of the payments on your budget and the total interest you will pay including any tax implications. Student loan interest is currently deductible up to $2,500 so at least there is that.
If you have a considerable amount of student loans or you are overwhelmed, you might want to talk to an Advice-Only, Fee-Only, Fiduciary, CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional can help you work through your options, look at your budget, and the impact of your student loans on your future. If you would like help, we offer a no-cost 60-minute introductory meeting at https://calendly.com/coachdrjay/childfree