One of the most effective ways to secure your financial future is to get rid of your current debt. Student loans are growing source of debt among Americans, second only to mortgage debt. According to Forbes, the average U.S. college graduate now enters the workforce with $26,000 in debt, and 10% accumulate over $40,000 in student loans. This level of debt can be a tremendous burden and force borrowers to delay life important life events such as home ownership, starting a business, or starting a family. Prolonged payments can also make it exceedingly difficult to save and invest for future needs. Fortunately, programs are available to help many borrowers lighten their debt load. If you are carrying student loan debt, dealing with it in the most cost-effective way possible should be a key part of your financial plan. It’s important to know if you qualify for reduced payments and/or forgiveness of all or part of your student loans. Failing to take advantage of programs like these might mean paying several thousand dollars more than you must toward your student loan debt. That is money that you could otherwise be using for retirement savings, buying a home, or funding your child’s education.
Teacher and public service loan forgiveness programs have been implemented to encourage work in certain high-need fields. The Public Service Loan Forgiveness (PSLF) program is available to borrowers of federal Direct Loans who make 120 consecutive, timely, and full scheduled payments while employed full-time at a public service organization. Public service organizations include any government entity or tax-exempt nonprofit. Certain nonexempt nonprofit organizations may also qualify if they provide specified public services, such as emergency management or services to the elderly. For a complete description of how to qualify for the PSLF program, see the Federal Student Aid website.
The Stafford Loan Forgiveness Program for Teachers provides for up to $17,500 in loan forgiveness for teachers who work full time for five consecutive years at specified schools or educational service agencies that serve low-income families. This program is available only to borrowers who did not have a Direct Loan or FEEL Loan balance as of October 1, 1998. Find full details here.
Whether or not you qualify for a loan forgiveness program, selecting an income-driven repayment plan may lower the amount you pay toward your student loan debt, both in the short term and in the long run. For example, if you qualify for the PSLF program, which provides forgiveness after ten years, lowering your monthly payment will also reduce the total amount you repay, despite the fact that the loan will accumulate more interest while you are in repayment.
Four types of income-driven repayment plans are available to eligible borrowers. The most generous are the Pay As You Earn (PAYE) plan and the Income-Based Repayment (IBR) plan for new borrowers (on or after July 1, 2014). These plans both calculate payments using 10% of the borrower’s discretionary income and provide forgiveness after 20 years of qualifying monthly payments. For the purposes of PAYE and IBR plans, discretionary income is defined as anything over 150% of the federal poverty guideline for your state and family size. Currently, PAYE is available only to those who were new borrowers as of October 1, 2007, and continued to borrow until at least October 1, 2011. In June of this year, however, President Obama signed an executive order expanding the program to those with older loans or who stopped borrowing earlier. The expansion is set to effect late next year.
For borrowers who don’t qualify for the programs above, there is also an IBR plan for borrowers who took out loans prior to July 1, 2014. It is somewhat less generous, as requires 25 years of monthly payments based on 15% of discretionary income.
Finally, the Income-Contingent Repayment (ICR) plan is the least generous in terms of lowering payments and forgiveness terms but may be a sound option for those who can afford to pay more toward their loans and do not need forgiveness. It calculates discretionary income using only 100% of the federal poverty guideline, and payments are 20% of income above this threshold. The plan provides forgiveness after 25 years, but if you will have a balance after that period, then the ICR is likely not the best option for you.
A qualified tax and financial advisor can help you determine the best course for dealing with your college debt by analyzing the details of your individual financial picture, including your current and projected income, tax obligation, and amount of debt. Call the professionals at Boelman Shaw for a free financial consultation, and find out how we can help you improve your financial outlook.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.