For many people, the path to prudent financial management begins by graduating college and establishing a career. But with nearly two out of every three students entering the workforce carrying some form of student debt, it’s clear that this path is proving to be an increasingly difficult financial obstacle for many young professionals to overcome.
On a positive note, you can certainly pay off your loans in a timely manner once you understand the repayment options available and find a solution to fit your specific situation.
With that in mind, here’s a quick refresher on the income-based repayment plan options that are available to help manage your debt load and hopefully save some money in the process.
Standard Repayment Plan
If you graduate and don’t choose another option, the standard repayment plan is what you’re automatically enrolled in. With nearly two-thirds of all borrowers enrolled in this plan, this is by far the most popular option.
On this particular plan, monthly payments are fixed (starting at a minimum of $50/month), and require that you remain on that fixed payment schedule for up to 10 years.
And while it’s likely that your payments will be higher than those made through other plans, you will pay off your loan a lot faster and save a significant amount of interest, as well.
Overview of the Income-Based Repayment Plan
The Income-Based Repayment Plan was established to help relieve the financial burden of individuals with student loan debt that accounted for a large percentage of their annual income. With this option, monthly payments are capped at 15% of your discretionary income, and readjusted each year based on your income and family size.
To qualify, you must demonstrate a partial financial hardship and continue to provide documentation to your loan servicer on annual basis in order to remain in the program. In addition, if you are late supplying that information, you will be automatically enrolled in the Standard Repayment Plan, which will likely lead to a significant jump in payments.
Pay As You Earn Repayment (PAYE Plan)
The Pay-As-You-Earn repayment option is similar to the Income-Based Repayment plan with a few additional stipulations. For instance, with the PAYE plan, the monthly payments are capped at 10% of your discretionary income — instead of 15% — but a financial hardship is still required to qualify and the repayment amount will continue to readjust each year based on your income and family size.
And despite the resemblance to the Income-Based Repayment Plan, the Pay-As-You-Earn option was created primarily for recent graduates that are entering the job market post-recession. To that point, this repayment option is only available to borrowers who have received a loan disbursement on or after October 1, 2011, and who were new borrowers as of October 1, 2007.
Similar to the other income-based repayment option, you must also provide documentation of your income to your loan servicer each year or risk being placed on the Standard Repayment Plan.
Income-Contingent Repayment Plan (ICR Plan)
The Income-Contingent Repayment plan is the ideal option for borrowers that don’t qualify for the Income-Based Repayment or Pay-As-You-Earn plans because they don’t necessarily have a financial hardship, but still want to keep their payments low.
This generally helps those who purposely chose low-income jobs, but graduated with high levels of student loan debt.
Borrowers that choose this option make payments for up to 25 years based on adjusted gross income, family size, and the total loan balance. On this plan, payments change as income changes and borrowers pay either an amount based on a 12-year repayment plan that’s multiplied by an income percentage factor or 20% of their monthly discretionary income — whichever is less.
Student Loan Forgiveness Options
If you have Federal student loans and you’ve pursued a career as a social worker, educator, or in the medical field, there may be options available to eliminate the debt without having to cover the total balance out of your own pocket.
The Complete List of Student Loan Forgiveness Programs and Options
Being employed in one of the fields listed above is just the beginning; in order to qualify for loan forgiveness, you must follow all rules and stipulations to the letter. This is important to remember because if you fail to follow through on your part, you may be completely disqualified from the loan forgiveness program.
Even once you’ve been approved for forgiveness, a few steps still remain. While you may no longer be required to make additional payments on the loan, you may be subject to taxes on the amount that was forgiven. But don’t fret! In fact, if you qualify for loan forgiveness, the amount you owe in taxes will be a fraction of your remaining student loan balance — seems like a decent trade off, if you ask me.
All things considered, you should feel empowered by all of the options available to help you manage your student loan debt burden. But the reality is, in some cases too many options can lead to decision-paralysis.
If that’s you and you’re still a little overwhelmed and unsure of what your next step should be, let’s meet and I can help make sense of all the different options available and guide you in creating a plan to effectively manage and repay your debt as quickly as possible.