Monday Morning Quarter-Buck
“Often in life, the most important question we can ask ourselves is: do we really have the problem we think we have?” ― Sheri Fink
In Part four of the College Education series, we explore loan repayment options, how does one apply for the Public Student Loan Forgiveness (PSLF) and is loan forgiveness taxable?
Recall in the May 22nd Blog that I mentioned that not all loans are equal! The following information applies only to Federal Loans (Subsidized, Unsubsidized, Direct PLUS, Perkins, and Direct Consolidated loans), and not to private loans. Unfortunately, you have very little wiggle room with the private loans and you should read the terms of your agreement to determine if a grace period even exists. This information is general in nature too - it would be impossible to explore all the “nooks and crannies” of the student loan repayment programs in this simple blog.
Stafford Loans: Students generally need to start repaying their student loans after a six-month “grace period,” as long as they haven’t used the grace period already (i.e. if someone goes back to school, they need to start paying the loans that were in repayment immediately after their full-time status is complete). However, there are exceptions for those in active military status.
Recall that unsubsidized loans accrue interest while in college and during the grace period. I often recommend that the parents or students commit to making interest payments during this time, just to keep the loans to the principal level only.
PLUS Loans: Students generally need to start repaying within sixty-days. If the loans are for graduate or professional education, the payments can be deferred up to six months, but the interest continues to accrue (like unsubsidized). If the parent is the borrower, they may also defer payments while the student is in college at least half-time, up to six-months.
Perkins Loans: Students generally need to start repaying within nine-months. These loans are subsidized, so interest does not accrue while in grace period.
Direct Consolidation Loans: Once you consolidate, the grace period ends. If you will be eligible for a Public Student Loan Forgiveness program, you may want to do this ASAP to make sure the services and payments count.
Repayment Options: According to the Federal Student Aid website, the chart below shows maximum repayment periods. Understand, if you don’t choose a specific repayment plan, the default is the 10 year repayment plan.
To demonstrate the payment options, let’s explore what happens if the student borrows the maximum amount of both subsidized and unsubsidized student loans? That would be approximately $46,000, and let’s assume they walk out of college making the same amount in income in their first year ($46,000), with a household of 1 and 5% interest rates on the subsidized and 5.5% on the unsubsidized.
Standard Repayment: 120 payments (10 years) for a total paid = $59,343, monthly payment = $495 (almost 13% of gross income)
Graduated Repayment: 120 payments (10 years) for a total paid = $62,823, monthly payments start at $281 and increases every two years ending with monthly payment = $842
Extended Fixed Repayment: 300 payments (25 years) total paid = $83,051, monthly payment = $277 (almost 7.25% of gross income)
Income Driven Plans
Revised Pay As You Earn Repayment (REPAYE Plan) - 10% of your discretionary income: 190 payments (almost 16 years) for a total paid = $72,658, monthly payments start at $233 and assuming increased income, the last payment would equal $582
Pay As You Earn Repayment Plan (PAYE Plan) - 10% of your discretionary income: 194 payments (16 years) for a total paid = $72,745, monthly payments start at $233 and assuming increased income, the last payment would equal $495
Income-Based Repayment Plan (IBR Plan) - 15% of your discretionary income: 140 payments (almost 11¾ years) for a total paid = $62,844, monthly payments start at $349 and assuming increased income, the last payment would equal $495
Income-Based Repayment Plan (IBR Plan) for New Borrower - 10% of your discretionary income: 194 payments (almost 16¼ years) for a total paid = $72,745, monthly payments start at $233 and assuming increased income, the last payment would equal $495
Income-Contingent Repayment Plan (ICR Plan) - 20% of your discretionary income, or the lesser of what you would pay on a 12-year standard repayment plan: 153 payments (almost 12¾ years) for a total paid = $63,777, monthly payments start at $390 and assuming increased income, the last payment would equal $432
In addition to the above scenarios, students should investigate loan forgiveness plans that they might be eligible for, but beware, some of the forgiveness plans will create a taxable event. FinAid.Org has a great article on the Taxability of Student Loan Forgiveness: The SmartStudent Guide
As the article states, “public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable.”
If you qualify for the Public Service Loan Forgiveness Program (click here for details), although your initial monthly payments are the same as listed above, after 120 on-time payments, the remainder of the loan is forgiven. For example on the REPAYE program, the last monthly payment would be $408, and the total paid would be $37,715, with $29,774 forgiven.
For my teachers out there - check out this article on Teacher Loan Forgiveness.
Once again, I encourage parents and students to walk through these numbers before deciding what college they hire, so that it’s not a surprise when the joyful graduation event occurs. Everyone's situation is different, so to estimate the payments you can go to the student loans repayment estimator at www.studentloans.gov