Having Trouble Repaying Loans? The Department of Education May Be in Touch
If you are having trouble repaying your loans, you have several options. There’s the Pay As You Earn plan, which lets you adjust your federal loan payments based on your income. There’s also Income-Based Repayment, which does the same thing—except using a different formula to determine your eligibility and payments. There are also forbearance and deferment options, as well as—for those who qualify, including people with public-sector jobs—loan forgiveness.
But figuring out which options you qualify for, which of the options available is right for you, and how to sign up is no easy task. With the range of programs including Pay As You Earn, Income-Contingent Repayment, Income-Based Repayment, and Loan Forgiveness options as well as various forbearance and deferment options, choosing a plan can be complicated.
But college graduates now owe an estimated $1.1 trillion in unpaid loans, and the situation for some borrowers is dire. Approximately $85 billion in student loan debt is past due as of 2012, and only 37% of borrowers with federal student loans made payments on those loans without a delinquency between 2004 and 2009. Even so, these widely-touted debt alleviation strategies have seen few enrollees—perhaps because of the complexity of the process and options, and perhaps because the right information is still not getting to the borrowers who need it most.
In order to drive up the number of people enrolled in debt relief programs offered by the federal government, the Department of Education has recently enacted a plan to reach out to individual borrowers at risk of defaulting on their student loans. Graduates will receive emails from the government that explain the various options, based on income.
Options for borrowers behind on their student loans include:
The Pay-As-You-Earn plan
The Pay-As-You-Earn plan allows you to pay back your federal loans at a rate of 10% of your discretionary income. The payment period will last for 20 years, after which you will have your loans forgiven. This program benefits holders of direct subsidized and unsubsidized Stafford loans, PLUS loans for graduate and professional students, and consolidated federal loans that originated after October 1, 2007.
The Income-Based Repayment plan
Income-Based Repayment allows borrowers to pay back their federal loans at a rate of 15% of your discretionary income. Direct subsidized and unsubsidized loans, direct and FFEL PLUS loans, and direct and FFEL consolidated loans are all eligible. You can have your loans forgiven after 25 years of steady payments.
The Income-Contingent Repayment plan
Income-Contingent Repayment is similar to Income-Based Repayment in that you can have your loan forgiven after 25 years, and your payment rate is determined based on your monthly income. However, there are a few key differences. Direct Parent PLUS loans that are under a Federal Direct Consolidated Loan qualify for ICR, whereas they don’t qualify for IBR. Your monthly repayments will be higher under an Income-Contingent Repayment plan. Also, unlike IBR, you are responsible for paying all interest as well as a capitalization of interest that is added to your loan every year, although this is capped at 10%.
Student Loan Forgiveness
Not everyone qualifies to get their student loans forgiven. But under the College Cost Reduction and Access Act, students who enter public service and stay in their jobs for ten years or more can qualify for forgiveness of their student loans. Eligible workers may include those in law enforcement, teachers, lawyers who work in public sector jobs, military members, emergency services workers, and the employees of some nonprofits that offer welfare and public health services. Stafford, PLUS, and direct federal loans are eligible.
Get a deferment
With deferment, the government allows you to suspend your loan payments temporarily. If your loan is subsidized, interest will not accumulate during this time; if it is unsubsidized, however, you will be responsible for paying the interest. You can get your loans deferred if you were called to military duty while in school, are returning to school after active duty, returning to school on a part-time or full-time basis, or experiencing an economic hardship.
Get a forbearance
Forbearance is a temporary suspension or possible reduction of your loan. You can get a forbearance if you don’t qualify for a deferment; under forbearance, you must pay interest that accumulates whether your loan is subsidized or unsubsidized.
Your options for reducing your student loan burden from a traditional or accredited online school are complicated—and it can be difficult to decide which will really benefit you best, depending on your income, your financial situation, your family situation, the types of loans you have, and whether you are planning to go back to school. Hopefully, the Department of Education email campaign will help sort the information out—and help graduates get a handle on their student debt.
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