Federal Student Loans

As we are all aware, federal student loan debt in the United States.  According to the Washington Post, the student loan debt total is over $1.2 trillion.  That is 1.2 * 10^12. $1,200,000,000,000.  The average student loan debt is over $30,000.  I’m one of them; I currently owe almost $60,000.  If you are reading this, you are probably in the same boat as I am.  If you are in school, out of school, preparing to go to school, or a parent with a child in or out of school, this is for you.

DISCLAIMER:  This advice is for federal student loans only,  Private student loans have much fewer options and very from lender to lender.  Please check with your lender to find out your options.

When I first graduated from Carnegie Mellon, I had no idea how to handle my federal student loans.  I was dealing with three different servicers, with all of my loans in various statuses.  I didn’t keep a good record of them or pay on some them (because I couldn’t afford to).  As a result, some of my loans fell into default.  If federal student loans fall into default, the federal government has to right to garnish wages, withhold your tax refund, or even take your social security if that is your source of income.  They were taking 25% out of each and every paycheck for six months until I rehabilitated them.  Even then, I still didn’t fully understand the process until I worked for a student loan servicer.  Although I only worked there a few months, I learned how to get a handle on ALL of my federal student loans.

KNOW WHAT YOU’RE DEALING WITH

The very first thing I learned how to do was learn what I was dealing with.  If you go to the National Student Loan Data System at https://www.nslds.ed.gov, you’ll be able to see all of your federal student loans in one place.  You’ll even get to see who is servicing those loans.  In order to log in, you’ll have to remember the PIN you created when you first completed the FAFSA (Free Application for Federal Student Aid).  If you can’t remember it (because who does), they’ll help you find it.  Once you are logged, you’ll see something like this:

student loans

Clicking on one of the loans will show who is the servicer on that loan.  This would also include consolidated loans, if you have any (more on those late).  If you have just one servicer for all of them, consider yourself lucky.  If not, it’s time to figure out how to deal with each one. Subsidized and unsubsidized loans always appear separately.  In a subsidized loan, the government will pay the interest while you are in school, in grace, or on deferment whereas you are responsible for the interest on an unsubsidized loan.

SO WHAT ARE MY OPTIONS?

Now that you have an idea of what you are working with, it’s time to go to https://www.studentloans.gov.  Log on with the same information you just used for NSLDS and then click on  repayment estimator.  From here, you can see the various repayment plans.  Also, feel free to insert your annual income and family size as well.  Please note that this will take into account all of your federal student loans and not just with one servicer.

estimator

Let me touch on each of the repayment options:

Standard: This is the default payment plan that you are initially set up for.  It is set to pay off the loan in 10 years or less and you’ll pay the same amount every month (at least $50).  You’ll usually pay the least amount of interest on this plan.  If you can comfortably afford this payment every month.  This is the choice for you.   (My numbers are off because of the plan I’m on).

Graduated:  This plan is also set to pay off the loan in 10 years.  However, the monthly payments increase every two years.  The largest payment won’t be more than thrice the lowest payment.  The initial payment is low as the idea behind this plan is that you’ll earn increases in pay and promotions over the 10 year period.  I would advise against this plan as there is no such guarantee anymore.

Extended Fixed:  This plan will pay off your loan in 25 years.  Like the standard plan, you will be paying a flat amount every month.  You’ll pay more in interest in lieu of lower payments.  I would avoid this plan for reasons I will state later.

Extended Graduated:  This will pay off your loan in 25 years.  Like the graduated plan, your payments will go up every two years.  This is a bigger ripoff than the extended fixed plans.

So let’s be honest.  At this point, most of you can’t afford the numbers in some of these plans.  Either you don’t make enough or you have kids or both.  Well the Income Driven Repayment (IDR) plans are here to help.  You’ll only pay what you can afford to pay and after a set period of time, the balance of your loan will be forgiven.  When they are forgiven, whatever is forgiven will be considered as taxable income for that tax year; that’s only downside to these plans.  What you’ll pay on these plans depend on your income, family size, and federal poverty guidelines.  Almost all borrowers are eligible for something.  However, Parent PLUS loans do not qualify.

Income Based Repayment (IBR):  This is split into two tiers:  those with loan debt before 7/1/2014 and those with loans disbursed only after 7/1/2014.  For older borrowers, you’ll pay no more than 15% of your monthly income.  For newer borrowers, it’s down to 10% of your monthly income.  This plan lasts for 25 years (300 payments).

Pay As You Earn (Pay-E):   If you don’t have any loans prior to 7/1/2008, this is a more reasonable option for you.  Your loans will be forgiven after 20 years (240 payments) instead of 25 years paying no more than 10% of your income.  Certain restrictions do apply though.

Income Contingent Repayment (ICR):  These repayment plans are for 25 years where the amount is the lesser of 20% of your monthly income or a standard payment on a 12 year repayment plan times an income factor.  These are the worst option of the three and should only be used if you don’t qualify for the first two.

With all of these plans, you’ll need to re-certify your income and family size every year.  If you don’t, you automatically jump to the standard repayment plan.  If you want to switch from one of these plans, you’ll have to make at least one payment on the standard repayment plan.  The best part about these plans is that if any of these percentages leads to a payment of less than $50, you could end up with a $0 monthly payment.  That’s right.  $0!  This is why the extended fixed and extended graduated plans are horrible ideas!  The IDR plans almost always have a lower payment.

While we’re on the subject of loan forgiveness, I want to mention the Public Service Loan Forgiveness (PSLF).  You can read more about it here.  However, if you work full-time (minimum 30 hours per week) for the government at any level (not including elected officials), non-exempt non-profit organizations, or any non-profit with provides some form of a public service (religious duties do not count), you could have your loans forgiven after making 120 qualifying payments while working for any organizations or positions that qualify.  However, in order to qualify, you must be on either the standard repayment plan or one of the IDR plans.  I would always recommend IDR in this case because with the standard repayment plan, nothing is forgiven (you already paid it off).

In addition, if you have multiple loan servicers and you plan on doing an IDR plan, a consolidation would be helpful.  Therefore you would only have one monthly payment with one servicer.

STILL CAN’T AFFORD THESE?

So you look through all of your options and you can’t afford any of these.  Or you used to be able to make payments and something happened which caused you to not able to make a payment.  I’ll go over different deferment and forbearance options.  Deferments are almost always preferable because on the subsidized loans, the government will pay the interest.  During a deferment or forbearance, you are not responsible for making payments.  There are some very unique options that are listed here, but I’ll go over the most common ones.

Deferments:

Unemployment:  If you don’t have a job or work less than full time and are actively seeking work, you can take this deferment for up to 6 months at a time a grand total of three years.

Economic Hardship: If you are on public assistance, work for the Peace Corps or if you work full time and make less than 150% of the poverty line for your family size, you qualify for this deferment.  You can take this for up to 12 months at a time for a grand total of three years.

Military:  If you are on active duty during a war, military operation, or national emergency, you can get this one.  There is no limit (because we love the military).

In-school:  If you are in school at least half time (as defined by the school) and you already used up your six month grace period, this deferment applies.  There is no limit, so theoretically, you can be in school forever if you don’t want to pay.

Forbearances:

Student Loan Debt Burden:  If your payments are more than 20% of your gross monthly income.  You can use this for up to 12 months at a time for a grand total of 36 months.

General/Hardship Forbearance:  If you looked through ALL of the options and you don’t qualify for anything else, you can use this forbearance for 12 months at a time for a grand total of 36 months.  This will also be used if you are passed due on your payments to bring you current as long as you have time eligible.

Deferments and forbearances should be used carefully because once the limit is reached for each one, you can’t get it back.  At some point, either the government will get their money or you will die.

SUMMARY

Most federal student loan services want to help you out and all of these options are available to you regardless of who your servicer is.   So please, don’t hang up the phone when they call; they only want to get you back on the right track again.  With these helpful hints, you can eventually get this:

If you have any questions, please let me know in the comments below or on any of the social media pages!

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