Know Your Student Loan Repayment Options

Posted on February 24, 2016 at 12:00pm by
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Student loans have hit crisis-level proportions of $1.3 trillion, affecting millions of borrowers across the country. Many of these borrowers use student loan servicers, some of whom do not mention or discuss more lenient repayment options. Some loan servicers ensure that borrowers are unaware of what options are available to reduce monthly payments.

Most borrowers with federal loans will be enrolled in a 10-year repayment plan. For some former students and graduates, the monthly payments can be unaffordable under a 10-year plan. Borrowers with private loans may have similar issues, but will have fewer options for helpful repayment plans.

Let’s use a hypothetical scenario to show why it is important to know your student loan repayment options.

John is a recent college graduate who has $28,500 in federal Stafford loans at an interest rate of 4.29 percent. His six-month grace period has finally come to a close. One month prior, he had received a bill in the mail from his loan servicer for $293, which he will owe for the next 120 months. John only makes $11 an hour as a staffer for a state legislator, and his other expenses eat into most of his paycheck. Can John afford $293 per month? Probably not, because John also pays $900 a month for rent, $240 for car payments, $214 for health insurance, $100 for electricity and $250 for food. Lucky for John, there are options that could help ease the burden caused by his student loans.

Federal Student Loan Repayment Options that Help Borrowers

Federal borrowers (and some lucky private borrowers) can take advantage of income-based repayment options, which adjust monthly payments to annual income. Under the REPAYE plan, federal borrowers can cap monthly payments to 10 percent of their income. For borrowers like John, this can reduce the monthly payments considerably, possible by hundreds of dollars in his case. After 20 years of payments, remaining loans are forgiven (10 years for those working in public sector jobs).

Be aware that forgiven student loans count as income, and can thus be taxed. Although, people will have many, many years to prepare for such a tax burden. Future legislation will also very likely change this downside to income-based repayment options.

As recent reports and criticisms from US lawmakers suggest, loan servicers are not required to tell borrowers about helpful repayment plans. This causes borrowers to struggle needlessly, and that is wrong. We won’t stand for it. Continue following our blog for more information on student loan repayment options that can make your life much easier.


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