First and foremost – talk to your student loan servicer. This is the company sending you monthly statements and taking your payments. They are the first port of call for any of these alternatives. Call and explain your circumstance (financial/professional/etc.) – they should be able to detail the types of options available to you based on the types of loans you have. Fingers crossed you get a very friendly customer service representative… because that will make your life a lot easier (you can always call back).
There are a few different federal payment plans and programs that eventually lead to loan forgiveness (i.e., you don’t have to pay your loans back in full – awesome-sauce). These are all specific to US federal student loans.
Loan Forgiveness through federal payment plans
- Public Service Loan Forgiveness
This option requires your employment with a qualified employer – most of the time this is a government organization or a tax-exempt non-profit organization. While employed, you must make 120 qualifying payments (which means you paid the amount required and the payments were on time). 120 payments means 10 years of minimum payments – and you have to be employed with a qualified employer for those ten years… so it isn’t the easiest option but if you have excessive amounts of debt and are working/planning to work in a qualifying organization, this could be an option.
- Income-based repayment plans
Income-based repayment plans calculate your repayment based on your discretionary income (i.e., what is left of your money after you pay for food, shelter, basic necessities) – your monthly payments will not be higher than 15% of your discretionary income. After 25 years of making payments on an income-based repayment plan, you may be eligible for loan forgiveness. The real advantage of this plan isn’t necessarily the loan forgiveness after 25 years, but rather the maintenance of your monthly payments at 15% of your discretionary income. And if you are stuck paying for 25 years, the loan forgiveness at the end of that wouldn’t hurt either (especially as the interest will continue to accrue over that time).
- Income-contingent repayment plans
Income-contingent repayment plans calculate your monthly repayment amount on an annual basis – every year, your payment is re-evaluated based on your gross income (income before tax), family size and outstanding balance of student loans (federal only). The amount you pay per month usually ends up being 20% of your discretionary income or less. As with income-based repayment plans, you become eligible for loan forgiveness after 25 years of qualifying payments.
- Pay as you earn (PAYE)
PAYE is a program similar to the income-based repayment plan. Monthly payments will be 10% of your discretionary income and you may be eligible for loan forgiveness after 20 years of payment. So how are they different? There are different eligibility criteria for each (type of federal student loan, the date on which the loan was taken and whether the borrower was a new borrower).
Important tidbit – any amount of student loan debt that is forgiven by the US government is taxable as income! So even if you have leftover debt after 10/20/25 years, that amount will be taxable as income you have received and you may be liable for tax on that outstanding balance that is forgiven!
There are other vocation-specific forgiveness plans (nurses, lawyers and teachers) available as well, so if you work in any of those professions – click on the vocation above for more details on those programs. Your loan servicer should also have this information available for you when you call. Keep in mind that a lot of these vocation-specific forgiveness plans require you to work in under-funded, under-privileged organizations (i.e., under paid) for a certain amount of time… which is why they offer such programs.
The lesson here is to call your student loan servicer to talk through your options. The loan servicer may also have specific ways to help lower your interest – for example, many loan servicers will lower your interest rate if you enroll in their automatic or direct debit payments. Similarly, if you have made a certain number of payments on time, they may reduce your interest rate. It is definitely worth seeing what kind of gesture they will make if you take the time to call.
Sincerely yours in harmonious fun and fiscal responsibility,