With $1.3 trillion in student debt and rising, the Department of Education over the last eight years has created a set of Income Driven Repayment programs to help borrowers reduce monthly payments, and even, depending on circumstances, have the loan forgiven in 10, 20, or 25 years.
The Department of Education (DOE) has changed its lending model for student financial aid. Instead of using the commercial banks as middle men for granting federal student loans, the loans are now originated from the DOE itself. As a direct lender the government saved millions of dollars, which it now uses to subsidize Pell Grants for low income students. This has also made the DOE’s Federal Student Aid Building, a 9-story unimpressive edifice behind the DC train station, one of the biggest banks in North America, all unnoticed by its customer base of student borrowers.
What, unfortunately, has gone equally unnoticed by many student financial aid borrowers are the new government loan programs. Primary is the Income Driven Repayment (IDR) plans composed of 4 different programs: the Income Based Repayment Plan (IBR), Income Contingent Repayment (ICR), Pay as You Earn (PAYE), and the Revised Pay as you Earn (REPAYE).
To give a sense of how the REPAYE, PAYE or IBR for a new borrower differ from the current 10-year Standard Repayment program, take a single borrower with adjusted gross income (AGI) of $40,000, who has $45,000 in federal student loan debt. Under the Standard Repayment (@6%) the monthly payment is $500. Under the REPAYE, PAYE, or IBR program, the payment is capped at 10% of discretionary income, or $186.21 monthly. For the REPAYE and IBR plan there is loan forgiveness after 20 years for undergraduate and 25 years for graduate borrowers.
Should you, however, have a hankering for public service, then it’s essential to consider the Public Service Loan Forgiveness Program (PSLF). This program includes a broad range of student loan programs (including REPAYE). Should the student borrower make 120 monthly qualifying payments while working full time (30 hours + per week) in a government or not-for-profit organization, the loan is forgiven after 10 years. Better still the amount of the forgiven loan is non-taxable. This is an important consideration since in some programs the amount of the forgiven debt is treated as ordinary income—that could produce a hefty tax bill.
Heather Jarvis, a Student Loan Expert, clearly delineates and explains the IDR programs on her website, as does the Department of Education’s IDR Q&A site. Loan options based upon loan amount and income can be found at the Department of Education’s Repayment Estimator.
Outside the advantages of the IDR to student borrowers, some voice concern over the expense of such an entitlement program. The Brookings Institute estimates the program could set back taxpayers $250 billion over the next decade. Worse, the program does not address rising tuition prices: going forward universities realizing there is a student loan program with guaranteed loan forgiveness, can now, without restraint, yank cost of attendance (COA) to ever high levels, assured that the costs will all be borne by the government. That is a discomforting reality.
Nonetheless, to date the number of borrowers enrolled in IDRs represents only 19% of students with loans. In fact another statistic notes that the number of students defaulting on loans still outnumbers IDR enrollees 3 to 1. Undoubtedly, one of the key reasons for this shortfall in enrollment rates is confusion with the range of different options, each with its own eligibility requirements, annual submission of income tax statements, interest benefits, and paperwork.
If, however, you are among the 45% of 25 year olds with student debt, pursue getting an IDR that fits your needs. It will reduce your stress by making your loan payments reasonable and the forgiveness of your loan inevitable.
Ralph Becker, founder of Ivy College Prep, LLC and a resident of Long Beach, has been counseling students for the last 10 years. A former Yale Alumni interviewer, he holds a certificate in college counseling from UCLA Extension, and has published SAT* Vocab 800. firstname.lastname@example.org.