Student Loan Types and Repayment Options
Did you know that student loan debt is accelerating faster than our economy can handle? In 2019, it will have risen for the 20th consecutive year in a row. In fact, student debt is accelerating at a rate that borrowing for higher education has doubled in just eight years alone.
Debt.org advises, “If you have student loan debt, find out how to manage it responsibly before it becomes a hardship on your future.” Today, young adults across the country are burdened with so much student debt that they’re delaying major life decisions like getting married, buying a first home, and even entering a career field of their choice.
Some people say that student loan debt is a pending financial crisis waiting to happen. It’s not pending. It’s here and it’s having a profound effect on the lives of young adults and our economy.
Student Loan Debt Facts:
- Total U.S. student loan debt has risen to $1.53 trillion.
- 44.2 million Americans have student loan debt
- The average student loan balance for 2017 was $39,400
- The average monthly student loan payment (for borrowers 20-30 years of age): $351
- 7-in-10 students borrow to pay for college.
- There is a student loan delinquency rate of 11.2%
* Data from the Federal Reserve System.
It’s important to note that the statistics above are just averages. There are many young adults with much higher student loan balances, paying double (even triple) the average student loan payment.
The good news is there’s a chance that many borrowers can qualify for some form of student loan forgiveness or discharge. However, qualifying for student loan forgiveness can be tricky.
Generally speaking, to qualify for student loan forgiveness, you need to have the right kinds of loans. You need to be making the right kind of payments. In addition, if you’re pursuing Public Service Loan Forgiveness (PSLF), you need to be working for the right kind of employer. There’s nothing more devastating than making years of payments on your student loans only to find out that none of them qualify. What’s worse is ifyou cannot resolve the problem and making those payments retroactively will not help you towards forgiveness.
At Clear Path Financial Planning, we help early career professionals achieve ideal outcomes with their student loans. Making student loan payments into your fifties is not ideal.
To help you understand what kind of student loans you have, and your options for paying them, I put together this complete guide to understanding student loans and repayment plans.
Types of Student Loans
The first step to understanding whether or not you’re a candidate for student loan forgiveness is to understand what kind of student loans you have. Essentially, there are only two types of student loans: federal student loans and private student loans.
Federal student loans are typically lent to you by the federal government. Federal student loans offer borrowers many options. They offer a number of flexible repayment options, deferment, forbearance, as well as the ability to earn forgiveness. In certain situations, you can also have a portion of your loans discharged forever.
Private student loans are lent to you by private institutions, such as banks, commercial lenders like Sallie Mae, as well as not-for-profit organizations and state agencies. Private lenders aren’t as flexible as the federal government. They don’t typically offer borrowers many options like flexible repayment plans or the opportunity to earn forgiveness. They kind of work like credit cards. However, to gain a competitive advantage, a few private lenders are now offering some flexible options to borrowers like deferment and forbearance.
Understanding how much federal student loans you have can help you understand your potential to benefit from forgiveness. If you owe more in private student loans than in federal student loans, your options become limited.
Federal Student Loans
The majority of federal student loans issued after 2010 are Direct Federal Loans. These loans should reflect as “Direct Loans” on the statement from your loan servicer (Navient, NelNet, FedLoan Servicing, or Great Lakes). These loans are issued by the Department of Education.
Direct Federal Loans come in several different flavors and some are better than others. Understanding what types of loans you have will help you determine what your options are. Essentially, there are five types of federal loans.
Federal Stafford Loans
Federal Stafford Loans are the most common form of Direct Federal Loans. And there are two types: Direct Subsidized Loans and Direct Unsubsidized Loans. Today, these loans are only available to undergraduate students. But in the past, you could take out these loans whether you were an undergraduate or graduate student.
Whether you have the subsidized or unsubsidized version, you’ll have the same interest rate and same options. But with the subsidized version, the government paid the interest on your loans while you’re enrolled in school (and other qualifying periods).
That’s a game changer. Subsidized loans are a huge help. And that’s why you need to demonstrate financial need to get them.
With unsubsidized loans, interest accrues on day one. Students with these loans tend to get shocked when they realize that the balance of their student loans is much higher than they calculated (due to compounding interest).
Federal Graduate PLUS Loans
Federal Graduate PLUS loans are only offered to students enrolled in graduate or professional studies. They come with a steeper cost, in the form of higher origination fees (upfront fee to secure the loan) and a higher interest rate than Stafford loans.
Students can literally take out their entire Cost of Attendance (CoA) on Graduate PLUS loans. That includes tuition and fees, books and supplies, room and board, transportation, and some personal expenses.
Given that most graduate students have undergraduate student loans, adding these loans into the mix can be dangerous. Especially if you’re a public-interest lawyer or teacher, earning just enough income to get by each month.
Federal Perkins Loans
Federal Perkins Loans are a unique type of student loan in that they’re are neither federal student loans, nor are they private student loans.
Federal Perkins Loans are actually low, fixed-interest loans offered by your college or university. They’re available to both undergraduate and graduate students displaying financial need. Also, they don’t accrue interest while you’re enrolled in school.
While Federal Perkins Loans aren’t disbursed in large quantities (if you have one, it’s not a big balance), they have a fairly generous forgiveness and cancellation options if you work in certain professions (mostly associated with low income public service jobs).
Federal Family Education Loan (FFEL)
Prior to 2010, federal student loans were issued through the Federal Family Education Loan (FFEL) program. Instead of the loans being directly issued by the federal government, private lenders issued them. And they were considered “backed” or “guaranteed” by the federal government.
The program was eliminated in 2010 because of all the confusion and problems. If you took out federal student loans prior to 2010, some of your federal student loans might be FFEL loans. If so, you might want to perform a Direct Consolidation as FFEL loans are not eligible for loan forgiveness.
Federal Parent PLUS Loans
Parent PLUS loans are student loans taken out by a parent instead of the student. So the parent is on the hook for repaying these loans, not the student. Like Graduate PLUS loans, Parent PLUS loans have a higher balance limits, a high interest rate, and offer no subsidy assistance.
In addition, these loans are not eligible for income-driven repayment plans such as Pay As You Earn (PAYE), Revised Pay As You Earn (RePAYE), or Income-Based Repayment (IBR).
These are by far the worst kind of student loans to take out. The first year of interest on these loans are higher than 11.25% (when you factor the origination cost and the interest rate).
Private Student Loans
Private Student Loans are educational loans offered by banks, credit unions, state agencies, and even schools. They’re typically used to cover shortfalls where you wouldn’t be eligible for federal financial aid.
For instance, law students may take out private student loans to cover living expenses and bar preparation courses during the post-graduation bar examination period. They’re technically no longer in school at this point so they wouldn’t qualify for federal financial aid. The same goes for residency-related expenses.
While it’s encouraged that everyone starts out with federal student loans, sometimes that’s not an option. Just keep in mind that they don’t come with the same rights and protections that federal student loans have.
Depending on your loan terms, your lender may or may not allow you to postpone payments during financial hardship. Lenders have been opting to default unpaid student loans and send them to collections, rather than modifying repayment terms. If that happens, the entire balance of the loan becomes due, and an attorney representing the lender will be calling you to collect on it.
Student Loan Status
The status of your student loans determine what your rights, responsibilities and options are. These can change if your loan status changes. For example, with federal student loans, while you’re in school you have the option to postpone payments through a deferment. Your lender wants you to focus on getting good grades and graduating. From there, you should be able to secure a good job and make payments on your loans.
Here are the 6 Student Loan Statuses:
This is exactly what it sounds like. When your student loans are in “Repayment”, you are expected to make on time monthly payments in accordance to your repayment schedule. If you’re not able to make your payments, contact your loan service and work it out.
Your loan servicer might offer you a deferment or forbearance. Just keep in mind that there is usually a lifetime cap as to how many total months you can use this option. If money is tight (and it usually is after college), try to find another repayment plan that’ll work out better. You might be able to get on an income-driven repayment plan requiring no monthly payments without using up all your deferment or forbearance time.
If you have private student loans, you’ll find them to be a lot less flexible. You’re typically only offered one or two repayment options and your monthly payment is calculated on the balance of your private student loans, not your income.
The Grace Period is a period of time after graduation where you’re not required to make payments. It’s a one-time deal. Your lender is affording you a window of time to secure a job. So don’t squander it.
- Grace periods vary from loan to loan.
- Federal Stafford Loans have a six month grace period.
- Federal Perkins loans have a nine-month grace period.
- Federal Graduate PLUS loans don’t have a grace period. Instead, loan servicers will offer a deferment and might count towards a lifetime maximum.
- Federal Parent PLUS loans have no grace period or deferment, as the it’s the parents’ responsibility to pay.
- Private student loans usually have a six month grace period.
If you decide to go to graduate school or pursue professional studies, it’s possible for you to apply some of your grace period time from your undergraduate student loan. For example, if you went to law school and took out student loans for your undergraduate studies, you likely used up some or all of your grace periods for your undergraduate student loans.
This means that the payment on your undergraduate student loans may become due sooner than payments for your law school loans. Possibly even immediately after law school graduation.
If you can take one thing away here, don’t wait for your loan servicer to send you a bill. Contact them immediately after graduation to find out when your first payment is due. Entire student loan balances have been sent to collections because a student didn’t see a bill. When this happens, the loan defaults and the entire balance becomes due immediately. And when that happens, you won’t be talking to your loan servicer. You’ll be speaking to their attorney and scheduling a more aggressive payment arrangement.
Deferments and Forbearances
Deferments and forbearances are very similar. They allow the borrower the option to postpone making payments for a period of time. Sometimes they temporarily reduce your monthly payment. They are designed to help borrowers avoid a default in periods of economic hardship.
The biggest difference between the two is in how interest is calculated during these periods. With a deferment, subsidized federal student loans usually will not accrue interest. With a forbearance, interest accrues regardless if the loan is subsidized or unsubsidized. That interest gets tacked onto the balance and interest accrues on that larger balance.
Private student loans aren’t as flexible. However, newer private student loans are starting to allow deferments for periods of unemployment. In either case, you will need to contact your loan servicer to apply for the deferment or forbearance. They’ll let you know if you qualify or not.
Delinquency means that you’ve fallen behind on your student loan payments. This is a pretty dangerous road to be walking on. You might be assessed with late fees, and the delinquency might be reported to the credit bureaus, seriously damaging your credit score. A poor credit score (especially if you are just building a credit history) can prevent you in securing a car loan, renting an apartment, buying a home, and even landing a good job.
Delinquencies happen for a number of reasons, often because nobody knew a payment was due. A bill went to an old address on file, or it was sent to the parents who didn’t pay it, either. The good news is a delinquency is fixable. The loan service can grant a retroactive deferment or forbearance so you can make the past-due payments.
If your student loans are in default, you’ve failed to make your payments. With federal student loans, that’s usually nine months (or 270 days) of delinquency. With private student loans, that time frame can vary from loan to loan. It’s usually just a couple months.
Defaulting on your student loans is a mess and very difficult to recover from. When you default on student loans, your entire student loan balance becomes due immediately. You will also no longer be dealing with your loan servicer; you’ll be working with their attorney. If you cannot make the entire balance, the attorney may offer you a more aggressive payment schedule that’s based on the balance of the loan, not your income.
If you don’t come to a resolution with the attorney, you can be sued. If that happens the case goes to court. If a judgment is awarded, you can have a percentage of your wages garnished for payment.
Student Loan Repayment Plans
Unfortunately, student loan repayment plans aren’t exactly straight forward, and your loan servicer isn’t properly equipped to compare which plan is best for you. It’s a lot of work.
Depending on what kind of student loans you have, how you file taxes, who you work for, how much income you make, and whether you are pursuing some form of federal student loan forgiveness or a discharge, one repayment plan will be more beneficial over another.
To put this in another way: the repayment plan you choose may cause you to pay more or less each month. It may also make you eligible or ineligible for student loan forgiveness. It’s the difference of being paid off in full in ten or thirty years.
Let’s review the various federal student loan repayment plans. Remember, with private student loans, there’s typically very limited options you have. They usually only have one option.
Standard Repayment Plans
Standard repayment plans are based on the total balance of your student loans, and your interest rate. Your monthly payments will be level and spread across the term of your loan. You can choose to repay your loans over a term of 10 to 30 years. Different types of loans have different term options.
It’s very tempting to take your payment and stretch it over a 30 year time frame. While that does lessen your monthly payment amount, just understand that it can double or triple the total amount you pay for your student loans.
Graduated Repayment Plans
Graduated repayment plans are work similarly to the Standard Repayment Plan in that they’re also based on the balance of your student loans and the interest rate.
But instead of having level payments over the term of the loan, Graduated plans start out with relatively low payments (usually only covers interest), and those payments gradually ramp up over time to compensate for the lower initial payments.
The problem with this plan is that it assumes you’ll have much more income 10 or 25 years from now, but that might not be the case. Additionally, there’s a good chance you’ll pay a lot more on this plan compared to other plans.
Income-Based Repayment (IBR):
The Income-Based Repayment (IBR) plan is the most popular income-driven repayment plan option. Instead of basing your monthly payments on the balance and interest rate of your loan, it uses a formula based on your discretionary income.
This is a highly sought out option for those with high student loan balances comparative to their income. It almost always results in a lower monthly payment and may help you qualify you for student loan forgiveness when paired with a Direct Loan.
Where this gets complicated is when you marry.
If you’re married and file your taxes jointly with your spouse, your loan servicer will look at both you and your spouse’s joint income. If you file taxes separately from your spouse, they’ll only consider your individual income.
There are many situations where a spouse’s income can hurt a borrower’s repayment strategy. Even with an Income-Based Repayment plan selected, it can cause your payments to match the 10-year standard repayment payment schedule. Ouch!
Pay As You Earn (PAYE)
Pay-As-You-Earn or PAYE is a newer repayment plan option created by the Obama Administration. It works similarly to the Income-Based Repayment (IBR) plan, but has a couple differences.
- It has lower monthly payments. It uses 10 percent of your discretionary income, whereas IBR uses 15 percent.
- It has a shorter repayment term of 20 years, instead of 25 years.
In short, PAYE is a better option for a lot of people than IBR. The only problem is being eligible for the program.
Eligibility for Pay-As-You-Earn (PAYE)
- Only Federal Direct Loans are eligible (Direct Stafford Loans, Direct Graduate PLUS Loans. FFEL loans, Perkins Loans, and Parent PLUS loans aren’t eligible).
- Must not have never taking out a federal student loan prior to October 1, 2007. If you had, it must have been paid off in full.
- Your Direct Loans must have been disbursed (issued) after October 1, 2011. A Direct Consolidation of your loans doesn’t count as a new disbursement.
Revised Pay As You Earn (RePAYE)
The federal government doesn’t like eliminating old, outdated repayment plans. They know the news would portray it as eliminating a benefit. So instead, they just keep adding new repayment plan options which increases complexity.
As you can tell, Pay-As-You-Earn is a great program designed to deal with the rising cost of college. Unfortunately, there are strict eligibility requirements that prevent a lot of people from using it.
The Revised-Pay-As-You-Earn (RePAYE) plan eliminates the “new borrower” restriction that makes PAYE inaccessible. But it also adds a few caveats that make it significantly different than other income-driven plans.
- For undergraduate loans, the repayment term for RePAYE is 20 years. Any remaining balance after that term will be forgiven.
- For graduate loans, the repayment term for RePAYE is 25 years. Any remaining balance after that term will be forgiven.
- The downside: Loan servicers will look at married couples income jointly, regardless if they file jointly or separately from your spouse.
Overall, the Revised-Pay-As-You-Earn program is amazing… but it’s a scary one. In many cases that I’ve worked on, the borrower’s scheduled payment does not cover the interest due. This creates negative amortization within your student loans, causing your loan balance to increase despite making the scheduled payment.
Unfortunately, the plan falls apart should you fall in love and get married.
If you are married under the Revised-Pay-As-You-Earn (RePAYE) plan, your payments could soar out of control. You’ll be forced to change plans. And because of the negative amortization while on the RePAYE plan, you’ll find yourself with a much higher balance.
Income Contingent Repayment (ICR)
The Income-Contingent Repayment (ICR) plan was the original income-driven repayment plan. It’s an old plan that was never eliminated and nobody should be on this plan except for those with Parent PLUS loans.
Parent PLUS loans does not come with income-driven repayment plan options like Income-Based Repayment (IBR). But Parent PLUS borrowers do have access to this plan. It’s the only income-driven option for parents. And it’s the only way parents can earn forgiveness on Parent PLUS loans (as long as they have Direct Parent PLUS loans).
With Income-Contingent Repayment (ICR) plan, the repayment period is up to 25 years. Any remaining balance after that may be forgiven.
Recertifying Your Annual Income
If you’re on an income-driven repayment plan (IBR, ICR, PAYE, or RePAYE), you’ll need to “recertify” your income annually. Your loan servicer will typically attempt to reach out to you within 90 days of when your income certification expires (12 months).
This is almost always done online through the federal government’s website. If you fail to recertify, you’ll be kicked out of your current repayment plan and placed on the 10-year Standard repayment plan.
Tip #1: Loan servicers have been known to forget sending that 90-day notification. Because of this, I would contact them to know when you need to recertify and put that on your calendar. Always be proactive with your student loans.
Tip #2: If you recently married, do yourself a favor. Hire us for advice on your student loans. Most arguments around money and student loans can be avoided by having a financial plan.
If you owe more in student loans than you make annually, there’s a good chance you’re going to need some help in managing your student debt. Far too many people work far too hard for far too long only to see very little change in their student loan balances.
Making payments on your student loans until your fifties is not an ideal scenario. But it’s a path that many parents set their kids on.
If you’d like us to take a peek at your student loans, schedule a complimentary web meeting with us.