I Can’t Afford My Student Loans. Are There Any Options?

I can’t afford my student loans. Are there any options?

The standard repayment plan for student loans is a ten year amortization.  This means that once you start paying, if you make all the payments on time, your student loans will be paid off in 120 months. Since you are reading this, you are probably struggling to make these payments or have already fallen behind.  Fortunately, there are other options

The first three options are not based on your income but can lower your payments.  First, you can extend the term of your loans out to 25 years.  This lowers your monthly payment but greatly increase the amount of interest you will pay.

Second, you can set up a graduated payment plan that starts out lower and increases every two years until the loan is paid.

Third, you can combine the two into an extended graduated payment plan.  This allows for smaller payments that will increase over a longer period.  None of these options takes into account your income or financial situation, so they may not be of much help. The payments are based on the amount owed, the interest rate and the length of the loan, and will not change even if your income does.

Income Based Repayment Options

There are three additional options for dealing with federal student loans that are based on your income. The first is known as the Income Based Repayment plan (IBR). The IBR is available for all federal student loans and does not depend on how much you owe. Instead, payments are based on 15% of your disposable income.  This means your monthly payment can fluctuate depending on your income, but it will never be more that the payment would be under the regular 10 year repayment plan. Best of all, if you make payments on time for 25 years, any remaining balance will be forgiven!

Income Contingent Repayment (ICR) plans are also available but they cannot be used on every federal student loan.  Some federal family education loans originated before 201 are not eligible for ICR.  ICRs are based on the amount you owe and your income.  A formula is used to determine an “affordable” payment, which may be $0.00. Like the IBR, after 25 years of on time payments, any balance will be forgiven!

PAYER- Pay as you earn repayment.  This is a new program that is very similar to the IBR except you only have to pay 10% of your disposable income and any balance is forgiven after 20 years. Initially, this program was only available to borrowers after October 1, 2007, but President Obama recently expanded the program all federal student loan borrowers starting in December 2015.

You can also get forgiveness by working in a public service job such as a teacher. If you find qualified employment, your debt make be forgiven after only ten years.

All of these programs require annual reviews to adjust your payments and make cost more in interest over time, but may make you current situation more bearable. Another issue to consider is that any debt forgiven may result in an income tax liability.  Any time a debt is forgiven, the IRS considers this “income” and will require you to include it on your tax return.