Know Your Student Loan Repayment Options

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The space for obtaining a student loan can often be daunting and unnecessarily complicated. The purpose of this article is to clarify the various repayment options for federal student loans and government service loan forgiveness programs.

Pay as you earn (PAYE)

This plan is usually best for clients looking to forgive their loans as it will likely be the cheapest payment option if a spouse is involved. The reason is that this program allows you to file taxes separately from your spouse and isolate only your income; therefore, payment is only based on your income and is not grouped with your spouse’s income. There is also a limit on the amount of the payment that cannot exceed the standard 10-year repayment.

The monthly payment will be 10% of your discretionary income, but unfortunately not everyone is eligible for this program. To qualify, you must demonstrate “partial financial difficulty” and you were unable to borrow until October 1, 2007. In addition, if you make payments under this program within 20 years, they will forgive your loans, but the forgiven amount will count as taxable income in the year of forgiveness.

Income Based Redemption (IBR)

This program is usually for those who want to benefit from the Pay as You Earn program but are not eligible. This program allows you to file taxes separately from your spouse to isolate your income for your payment and the same payment restrictions as in PAYE. As with the PAYE program, this limit can be helpful for those seeking PSLF forgiveness but have a high income job.

There is both a “new” IBR and an “old” IBR. If you borrowed before July 1, 2014, you only qualify for the old IBR plan, and if you only borrowed after July 1, 2014, you only qualify for the new IBR plan. In the old IBR, payments are based on 15% discretionary income, while in the new IBR program it is only 10%. The long-term taxable exemption is 20 years for the new IBR and 25 years for the old IBR.

The only major difference between the new IBR program and PAYE is that there is no cap on the amount of interest that can be capitalized if you leave or change the program. With that said, if you are eligible for PAYE, this is probably a better option than IBR in most cases.

Revised Pay As You Received (COMPLETE)

This program is the default repayment option based on income. This program is usually best suited for singles and / or planning to refinance their loans in the future. This program will always group your spouse’s income when calculating the payment, regardless of the status of your tax return. This program offers several large interest grants and can forgive you some of the unpaid interest that would normally accrue on payments below the accrued interest. They will forgive 50% of the unpaid interest on all direct loans and 100% of the unpaid interest on any subsidized loans during the first 3 years. This helps to reduce the total amount owed.

This program is based on 10% of your discretionary income, but there is no limit on the amount of payment in the future, unlike other options. There is no need to show partial financial distress, so almost everyone should be eligible for this program. If you have graduate loans, you will have to pay for 25 years before taxable forgiveness occurs.

Consolidation of student loans

Many people are forced to combine their loans under the pretext of “necessity” or “for the sake of simplicity.” In most cases this is not necessary and in most cases not recommended. There are some significant implications for consolidating your loans if you are not aware of it, and so be sure to research yourself or talk to a finance professional who is trained in student loans before doing so.

The advantages of consolidation are that some of your loans that do not qualify for the PSLF program (e.g. FFEL loans, Perkins loans, etc.) may be grouped into direct consolidation loans that meet the criteria for eligible repayment. income criteria. Consolidation can also allow repayments to be extended for up to 30 years, which can be a good option for those planning to repay their loans but cannot refinance their large amount at a lower interest rate at a private bank and / or wants to keep the government protecting their loans. in the event of their death. If you are in arrears or defaulted on your loan, it may also be a good option for you to get that payment and not write it down.

The biggest disadvantage of consolidation is that it resets the clock for any potential forgiveness on this loan. This means that if you have 5 out of 10 years of PSLF forgiveness behind you and then decide to consolidate your loans, it will erase your record and force you to restart your 10 years. This also applies to long-term taxable forgiveness options for various income-based repayment options. When you combine your loans, all loans are combined into one with a weighted average of the different interest rates. This limits your ability to target certain high-interest loans if you are trying to repay them effectively in the future by supporting them with the federal government.

Government Service Loan Forgiveness Program

The infamous government service loan forgiveness program is in high demand but is replete with challenges that must be overcome in order to qualify. Done right, this is one of the most effective ways to pay off your loans, but we must move towards PSLF forgiveness with care and have a backup plan if that doesn’t work out.

There are three main steps to follow to make sure you are properly enrolled in the PSLF program. The first step is to make sure Fed Loans is your loan provider. If they are not your service personnel, then you are not enrolled in the PSLF program. Second, you must make sure that all of your loans are “direct”. Any of your loans without the word “direct” written in front of it will not qualify for the program. If so, you can combine them to make them part of the program, or just move on knowing that you will have to pay for them separately.

The third step is to make sure you are properly participating in one of the income based repayment programs (IBR, REPAYE, PAYE, ICR). We often see residents in their first year of life have a mandatory payment of $ 0, but if they are properly enrolled in one of these repayment programs, those months will count towards the PSLF. Never pay more than required, as this could result in your account being upgraded to pay up front status and those months will be excluded from the PSLF program.

Finally, you need to make sure that you are working full time at the appropriate educational institution. We usually want our clients to complete an employer confirmation form every 10-12 months to make sure everything is in order. This form will prompt Fed Loans to update your PSLF Eligible Months on your DOE file. A proper financial professional will be able to review your official records annually to make sure you are on track and check the loan officer’s work. Loan servicing professionals are known for making mistakes, so it is very important that their work is reviewed by a professional.

After you complete all the above steps and your official record shows that you have 120 eligible payments (optional in a row), you can apply for a tax-free forgiveness of your loans.

Caveats and Conclusion

The volume of federal student loans can be overwhelming, but it is very important that you get an education and consider seeking the help of professionals to help you with the process. Watch out for private consolidation firms that may contact you during training or leave scary messages about your loans. There have been many lawsuits against these companies, which tried to defraud students. No matter which professional you work with, never share your FSA login details with anyone. If you choose to work with a professional financial professional, you should consider their experience, education, experience, and other relevant factors. You might consider looking for someone who has special training or education in student loans.

This article originally appeared on the Medical Economics® website.

Michael Foley, CFP, CSLP, is a comprehensive financial advisor to the North Star Resource Group. For any other questions regarding your personal situation, please contact him at Michael.foley@northstarfinancial.com and 480-993-9491.

North Star Consultants, Inc. – Insurance products and services. CRI Securities, LLC – Securities and Investments. Securian Financial Services, Inc. – Variable products and securities. Securities and investment advisory services offered by CRI Securities, LLC and Securian Financial Services, Inc. are members of FINRA / SIPC. CRI Securities, LLC is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Consultants, Inc. operates as the North Star Resource Group and is independently owned and operated. Michael is a registered representative and representative of investment advisor CRI Securities, LLC and Securian Financial Services, Inc. 3594513 / DOFU 5-2021Ð_

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