The following post is from guest author Jesse Johnson
As higher education becomes increasingly important to job prospects, more and more people are racking up student loan debt. In the U.S., 44 million borrowers owe more than 1.4 trillion in student loans with an average graduate in their 20s walking away with more than $22,000 in debt. The average student loan payment for borrowers in their 20s is $351, which is a significant burden. With the tough economy today, it’s no wonder so many people struggle to make their minimum monthly payments.
If you’re having difficulty making your monthly payments, you should consider enrolling in a student loan repayment program. A variety of plans allow borrowers the chance to extend their repayment period, lower their monthly payments, and in some cases qualify for loan forgiveness after a certain amount of time. Here are the several of the most common student loan repayment programs.
Income-Driven Repayment Options
These plans are designed to help federal student loan borrowers lower their payments based on how much they earn.
This program can be applied to most federal student loans and caps monthly payments at 10 percent of a borrower’s income. Under this plan, undergraduate loans are forgiven after 20 years of making consistent payments and 25 years for graduate loans. One thing to note about REPAYE is that there is no limit to how high payments can go. This means, depending on your income, you could actually pay more per month than the standard repayment plan.
Pay As You Earn (PAYE)
Similar to REPAYE, Pay As You Earn caps monthly payments at 10 percent of your income, and loans are forgiven after 20 years of repayment. However, this plan is more exclusive than REPAYE in that your outstanding debt must be greater than your annual salary.
Income-Based Repayment (IBR)
Under this plan, payments are capped at 10 to 15 percent of your income and may be forgiven after 20 to 25 years. Using an IBR, it’s possible for your payments to be as low as $0 per month. As with PAYE, the amount you owe must be greater than your annual salary.
Income-Contingent Repayment (ICR)
This plan is available to most borrowers and either cap payments at 20 percent of your income or an adjusted rate for a 12-year payment plan based on your income. These loans may be forgiven after 25 years of repayment. This is the only option that can be applied to Parent PLUS loans.
With each of these programs, you will have to pay taxes on any loans that are forgiven. Also, extending your repayment period will often result in paying much more in interest than you would on a standard repayment plan. It’s worth noting that being in debt for an extended period can affect your credit score, making it more difficult to qualify for loans you might use to purchase a car or a house.
Graduated Repayment Plan
Under a Graduated Repayment Plan, student loans are lowered initially and increase over time, typically every two years. This program usually takes place over 10 years and is a great option for recent graduates who are confident their income will increase over time.
Because this plan maintains a shorter repayment schedule, you will accrue less interest than income-based plans and can result in a lower total paid amount. However, this typically results in a higher total cost than a standard repayment program.
Extended Repayment Plan
This program allows you to reduce your monthly payments by lengthening the amount of time you have to pay back your loans. Federal student loan borrowers can make payments for up to 25 years, and these payments can be either fixed or graduated. As with the other long-term repayment plans, this program will result in additional interest and a higher total amount. You will not qualify for loan forgiveness under an Extended Repayment Plan, and you must have more than $30,000 in student loan debt.
Consolidate Your Loans
This process involves combining multiple loans in order to get a lower, fixed interest rate, lowering your regular payments. This has the added benefit of allowing you to make just one payment each month to cover all your debts, and consolidation programs can extend your repayment period up to 30 years. It’s important to note that federal student loans cannot usually be consolidated with private loans or other debts. Also, by consolidating, you will lose benefits like loan forgiveness and the potential for interest rate reductions.
Refinance Your Loans
This is especially useful for private loan borrowers as most of the programs above apply to federal student loans. This allows you to consolidate your private and federal loans into one monthly payment which could be lower if you qualify for a lower interest rate. By refinancing federal loans, you will no longer be able to apply for income-driven plans or loan forgiveness. Refinancing can offer a repayment period of up to 20 years.
Though these programs are not widespread, they are gradually becoming more common. As a benefit, some employers offer programs that pay a certain amount or percentage toward an employee’s student loan debt. Any amount your employer pays typically qualifies as taxable income.
One example of this is Aetna, a healthcare company that offers full-time employees up to $2000 in matching student loan payments with a maximum of $10,000. Part time employees can receive $1000 with a maximum of $5000. You must have earned a graduate or undergraduate degree within three years of applying for this benefit in order to qualify.
The terms of these programs vary greatly from company to company. For another example, the technology company Nvidia offers full- and part-time employees up to $6000 per year with a maximum of $30,000 and applies to both federal and private student loans. Employees must have worked at the company for at least three months and have graduated within three years.
It’s easy to see how taking advantage of these benefits could significantly reduce your monthly payments and total repayment amount.
Move to Another State
Some states are offering assistance with student loan payments as a strategy for attracting new talent. For example, Kansas will offer up to $15,000 paid over five years to borrowers who are willing to move to 77 counties designated as Rural Opportunity Zones (ROZ). This program is not income-driven. To qualify, you must not have lived in Kansas for the past five years, you must prove your residency in an ROZ, and you must hold an associate’s, bachelor’s, or graduate degree. These contributions are considered taxable income.
New York and Michigan also offer similar programs with different requirements. Before you make a decision to take part in a state assistance program, consider things like unemployment rates, cost of living, social scenes, taxes, and housing in the area in order to determine if the benefits are worth the move.
Many loan servicers offer interest reductions for borrowers who sign up for automatic payments. This could be as much as 0.25%, which may lower your monthly payment slightly as well as reducing the overall amount you’ll have to pay. It also ensures you will never miss a payment and face penalties.
Whether you have private or federal loans, it’s important to understand the options available when repayment becomes too difficult. As you incorporate student debt into your budget, you can use a loan calculator to get an estimate of what your payments might be under a new repayment plan. While choosing to extend the repayment period of your loans will result in a higher total cost, the benefit of having more money to spend on immediate expenses like food, rent, and transportation is worth it to many people.