Today, I will be focusing on the options available to borrowers when it comes to repaying federal student loans.
Two federal loans are available to students:
Direct Subsidized Loans, Unsubsidized and Direct Subsidized for Undergraduates and Graduate Students
Direct Plus Loans available to professional and graduate students.
Federal student loan borrowers have two repayment options.
Time-based repayment. This option allows for a 10-year or 25-year repayment and a fixed interest rate over the life of your loan. The minimum amount of repayment is typically the 10 year payment. This is the best option for those borrowers who have the financial ability to pay it off.
Income-based repayment. These plans are based on the family size and a percentage the individual's discretionary income. These factors will affect the annual payment. For the program to work, borrowers will need to recertify their income each year. If income or family size of an individual changes before the annual certification date (e.g., loss of a job), borrowers can update their information and request that their federal loan servicer recalculate their payment amount. All balances remaining after the income-based repayment period, which can be between 20 and 25 years depending on your plan, will be forgiven. However, taxes will apply to the forgiven amount.
There are four federal repayment programs, but the latest two offer the best terms.
Pay as You Earn (PAYE)
Revised Pay as You Earn (REPAYE)
These plans have a monthly cap of 10% of the individual's discretionary income. Higher income caps are available for older options.
The Tool to Choose the Right Plan
It can be difficult to choose the right repayment option. The factors that can impact your choice include marital status, income, and debt levels. These variables are subject to change over time. You should inform your clients about federal Loan Simulator, which can help them find the best repayment plan for their situation.
The simulator allows users to upload their federal loan data in order to do the following:
Based on your goals and needs, estimate the amount of the monthly repayments for all eligible plans.
Calculate the effect of changes on income, marital status (tax filing status), and household size.
Show how to pay student loans off faster
Consider switching to a new repayment program instead of suspending payments during a difficult financial period.
Your clients and their adult children may be faced with the dilemma of which repayment plan married couples should choose. While repayment plans will include any federal college debt a spouse may have, spousal income is also considered when couples file taxes together.
There is a way to exclude spousal income in the repayment calculation. The borrower would need to select the PAYE repayment plan, and file separate tax returns. This is not an easy choice because married couples who file separate tax returns often owe more taxes.
Public Service Loan Forgiveness
I stated earlier that the standard 10-year repayment plan is the best option for people who are able to pay their federal loans on time. This statement does not apply to those who might be eligible for the Public Service Forgiveness loan program.
By offering loan balance forgiveness, the PSFL program encourages borrowers to seek out lower-paying public service jobs. If a borrower is eligible, they can have any remaining debt forgiven if they make 120 consecutive payments. These payments don't have to be consecutive. The amount of forgiven debt is exempt from taxes under this plan.
The borrower must be employed by a federal or state, local, tribal, or military government. The eligible borrowers represent a larger range of workers than you might imagine, as qualifying employers include colleges and nonprofit hospitals. This means that many people in higher-paying positions, such as physicians, may be eligible.
Since its inception in 2007, the PSFL has been plagued by controversy. Until recently, very few borrowers had their loans forgiven. This failure could have been caused by a number of factors, including consumers misunderstanding requirements, problems with loan servicers and the fact that borrowers were paying down loans that were not eligible.
The federal government addressed this issue by announcing in October that it would temporarily ease the lives of hundreds of thousands of PSLF borrowers to get rid of their debts through a temporary waiver. This temporary waiver will end on October 31, 2022.