Student Loans? Here Are a Few Things to Know About Repayment Plans Available
Having a large sum of student loan debt can be daunting. The good news is, you have a number of different options out there that can help you effectively manage your student loan debt. The bad news is, it can be complicated deciding what to do. But perhaps here is some information that can help you wrap your head around some of your options.
First thing to consider is what type of student loan debt do you have? Federal or Private?
Was it issued by the federal government or issued by a private lender or bank? If your student loans were issued by a private lender, there can be a number of different ways that it was structured, as the terms of the loan(s) are determined by the bank that issued them. However, if the loans are Federal, there are a number of different repayment options that are often available to consider, and the one you choose to pursue can have a big impact on the overall cost of your loans and financial situation as a whole:
Types of Plans:
Income Based Repayment (IBR):
This calculates your payments based off of 15% of your discretionary income if you are NOT a “new borrower” or a borrower on or after July 1st 2014. If you ARE a new borrower on or after July 1st 2014 your payments are generally 10% of your discretionary income. IBR is a 20 or 25 year repayment plan depending on whether or not you are considered a “new borrower” and at the end of your repayment period, “the remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period.” Do keep in mind that the forgiven balance of your loan may be considered taxable income the year that it is forgiven, which is something that needs to be planned for.
Pay As You Earn (PAYE):
This plan calculates your payments based off of 10% of your discretionary income if you are a new borrower on or after July 1st 2014. Or 15% if you are not a new borrower. Pay as you earn is a 20 year repayment plan, meaning the remaining balance of your loan is forgiven at the end of the repayment period. This could also be considered taxable income in the year that it is forgiven. (Do keep in mind to be eligible for PAYE you need cannot have had any outstanding loans prior to October 1st 2007, and you must have received a disbursement of a Direct Loan on or after October 1st 2011).
Revised Pay as you Earn (REPAY):
This plan calculates your payments based off of 10% of your discretionary income, with a 20 year repayment period for your undergraduate loans, and 25 year repayment period for all of your graduate loans. The remaining balance of your loan is forgiven at the end of the repayment period. This could also be considered taxable income in the year that it is forgiven.
Standard 10 year repayment
This one is pretty simple. Pay your loans off in 10 years. Not always affordable, and surprisingly not always the least expensive overtime, but simple none the less.
Public Service Loan Forgiveness (PSLF):
This program forgives the remaining balance on your Direct Loans after you have made 120 “qualifying monthly payments” under “qualifying repayment plan” while working full time for a “qualifying employer.”
Let’s break that down:
1) Government organizations at any level (federal, state, local, or tribal)
2) Not for profit organizations that are tax exempt under section 501(c)(3) of the internal revenue code
Qualifying Monthly Payment:
a payment that you make: after October 1st 2007, under a “qualified repayment plan” (see below), for the full amount due as shown on your bill, no later than 15 days after your due date, and while you are employed full time by a qualifying employer.
Qualifying Repayment Plan:
5) Standard 10 year repayment
Great news about this repayment plan is that the remaining balance of your loan is forgiven by the federal government, and is not considered taxable income!
Ok, so what do I do?
Great question, and the answer, like most answers when addressing this stuff is: It depends. Sorry! But it’s true. It depends on how much debt you have, what your income is, what the interest rates are, what your income will be, what your family size is, and most importantly what are your financial goals and objectives are. Contrary to what most people believe, dealing with financial matters is more art than science.
Although it may not feel this way, student loans are only one piece to the puzzle, and your repayment plan should be one that supports the entire picture, not just the one that “feels” the best at the time.
This may come as a shock to you, but I would recommend consulting a trusted and competent financial planner to assist in navigating these types of decisions. Dealing with this can be stressful, complicated, and emotional. Having another party to consult on this and other financial matters can be invaluable, and can potentially save you a lot of money in the long run.
Luke is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services, Inc.
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