Tackling student loan debt is a big financial goal for many Americans. Student loan solutions vary depending on your loans as well as career aspirations. Are you curious about loan consolidation? Or maybe you are hoping to receive student loan forgiveness? If you are considering loan forgiveness or consolidation as a repayment strategy, continue reading to hear the latest news and how it works.
How to Receive Student Loan Forgiveness
Student loan forgiveness has many avenues. Here is a quick snapshot of ways you may qualify for loan forgiveness from StudentAid.gov:
- Public Service Loan Forgiveness (PSLF)
- Teacher Loan Forgiveness
- Closed School Discharge
- Perkins Loan Cancellation and Discharge
- Total and Permanent Disability Discharge
- Discharge Due to Death
- Discharge in Bankruptcy
- Borrower Defense to Repayment
- False Certification Discharge
- Unpaid Refund Discharge
Public Service Loan Forgiveness Explained
As you can see, there are many paths to loan forgiveness. However, they are very specific. Let’s focus primarily on Public Service Loan Forgiveness.
The PSLF program forgives the rest of your Direct Loans after you have made 120 qualifying monthly payments. Additionally, these student loan payments must have been made in a qualifying repayment plan. Not only that, but you must also be employed full-time for a qualifying employer.
Additional PSLF Requirements
Here are some additional requirements for the program:
- Employed by a U.S. federal, state, local, or tribal government or not-for-profit organization
- Work full-time
- Have Direct Loans (or consolidate other federal student loans into a Direct Loan)
- Repay loans under an income-driven repayment plan
- Make 120 qualifying payments
Keep in mind that loans from the Federal Family Education Loan (FFEL) Program and the Federal Perkins Loan (Perkins Loan) Program do not qualify for this program. They may become eligible if you consolidate them into a Direct Consolidation Loan. As always, loans from private lenders don’t qualify.
Latest News on PSLF Program
There are have been many ups and downs regarding this program. My peers were some of the first to experience the fall-out of this ill-organized student loan forgiveness program. Since it takes 10 years to reach the end, no one knew how awful it would be on the other side. Subsequently, when borrowers began applying for the forgiveness of their loans, 99% of applicants were rejected.
According to NPR’s “Education Dept. Unveils Fix For Student Loan Program’s ‘Bureaucratic Nightmare’:
“…71% of denials were essentially due to a paperwork technicality. According to the GAO, more than 38,000 applicants were denied relief under the expansion — known as Temporary Expanded Public Service Loan Forgiveness (TEPSLF) — simply because they hadn’t first applied for and been denied PSLF.
There were several iterations hoping to fix the problem. Still, not so great. Fortunately, things are starting to turn around for borrowers counting on student loan forgiveness. The government has simplified the process by combining some of the paperwork.
Federal Student Loan Repayment Plan Options
Whether you are hoping to receive student loan forgiveness or just need more information on managing your loans, there are several repayment options. Managing your student loans does not have to be difficult. The best way to handle them is to be knowledgeable and have a strategy from the start.
Don’t leave college without talking to your financial aid office in-depth about your loans. You can do this every year if you want! Plus, they can talk to you about scholarships and alternatives to student loan debt.
Standard Repayment Plan
This plan is open to all borrowers. It can be used for Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, Consolidation loans, and all PLUS Loans. Payments are fixed- at least $50 a month for up to 10 years. Additionally, you will pay less over time than the other options. It does not qualify for PSLF.
Graduated Repayment Plan
Graduated repayment can be used for Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, Consolidation Loans, and all PLUS Loans. Payments are lower to start and increase every two years as your earning potential hopefully increases for up to 10 years. You will pay more than the standard student loan repayment and it also does not qualify for PSLF.
Extended Repayment Plan
Next, let’s review the extended repayment which covers most federal student loans. Payments may be fixed or graduated depending on the type of loan you have and the specific payment plan you agree on with your lenders.
The monthly payment on this repayment plan is lower because it is stretched for up to 25 years, which means the interest is higher. However, it may be more practical to pay off this way.
Income Based Repayment Plans (IBR)
This payment plan can be used for all types of loans listed above. Payments are 10% or 15% of your discretionary income when you received your loans. Payments will be recalculated each year. Any outstanding balance on your loan will be forgiven after 20 years or 25 years.
Pay As You Earn Repayment Plan (PAYE)
PAYE can be used for Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. Monthly payments will be based on 10% of your discretionary income and will change as your income changes for up to 20 years. Plus, you must be a new borrower (October 1, 2007) and must have received a disbursement of a Direct loan after October 1, 2011 to be applicable.
Income-Contingent Repayment Plan (ICR)
ICR can be used for Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. Payments are based on your income, family size, and the total amount of your loans for up to 25 years. They will be less than 20% of your discretionary income. Your payment amount is recalculated each year.
Any outstanding balance will be forgiven if you haven’t repaid your loan in full after 25 years. However, you may have to pay income tax on anything that is forgiven.
Income-Sensitive Repayment Plan
Finally, this repayment plan can be used for Subsidized and Unsubsidized Federal Stafford Loans, FFEL PLUS, and FFEL Consolidation Loans. The monthly payment is based on your annual income. It will be paid in full within 15 years. It costs more than the standard repayment plan. Consequently, this plan is not eligible for PSLF.
Student Loan Consolidation
Besides student loan forgiveness, you might be considering consolidation. So how does debt consolidation work? Student loan consolidation takes all your federal student loans and creates one new loan, with a simpler repayment plan. If you have loans from multiple sources or several loans from one lender, you might consider consolidation.
Borrowers with federal student loans can apply for a Direct Consolidation Loan. Students with private loans also have options to consolidate through their loan servicer or a competitor.
Student loan consolidation may or may not reduce your interest rate. Plus, you will typically also have a longer repayment schedule. This means paying more interest over time. While one payment is nice, do the math before consolidating to make sure it’s the best option for your loans.
Should I Consolidate My Loans?
Although student debt consolidation seems like a great idea, there are disadvantages. Any benefits, like interest rate discounts, rebates, or forgiveness, will probably be lost. If you are a teacher, nurse or some other profession that qualifies for loan forgiveness, make sure you are aware of your loan situation. Compare the money you’ll be paying out if you consolidate versus if you don’t and qualify for loan forgiveness.
Once you consolidate your loans, you cannot undo it since the individual loans are considered “paid off” and no longer exist. You also cannot consolidate private and federal loans together. They must be done separately.
A fixed interest rate can be a good thing. However, you could also get locked into an interest rate that is higher than makes good financial sense. Setting the interest rate through a private lender relies on your credit. Therefore, if you don’t have good credit, your interest rate can suffer.
Conclusion on Student Loan Repayment Options
In conclusion, there will continue to be developments and news regarding Public Service Loan Forgiveness. It’s important to keep track of the changes and adjustments that may change the program. Similarly, stay in contact with your college’s financial aid department as well as contacting the federal government regarding your loans. As a result of these efforts, you can be in control of your student loan debt.
If you’re struggling to pay off debt, ACCC may be able to help. Sign up for a free credit counseling session with us today.