What are your options for student loan repayment?
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It’s far too easy to take on student loans. Federal loans to students don’t require a credit check, and they don’t cap the amount you borrow based on your ability to repay. When it comes time to pay back Uncle Sam, there are different repayment options. Today we’ll dig into those and also consider what happens if you can’t afford to pay at all.
Student loans – the good and bad
Because you usually take on student loans when you’re young and have little financial experience, it can be some of the dodgiest debt you adopt. Plus, you can quickly get in over your head. However, it also affords you the opportunity to explore educational avenues you might not otherwise. It’s a balancing act.
Repaying student loans
Federal student loans offer a variety of repayment plans. Your options diminish if you miss student loan payments and go into delinquency or default. The best strategy is to change plans before your finances spin out of control if you can no longer afford your current repayment plan. Here’s a look at the available options.
- Standard Repayment: This is the default plan your loans will go on after you leave school unless you request another plan. The term is 10 years, and you’ll pay it off faster with less interest than other plans.
- Graduated Repayment: The term length on this plan is also 10 years, but your payment will start lower and increase every two years which can be helpful as it can keep pace with pay rate increases on the job.
- Extended Repayment: The term length for this plan is up to 25 years. You’ll pay less each month but much higher interest overall. Plus, it drags out your debt for nearly three decades, which isn’t fun for anyone.
If one of the above won’t work for you, you might need to pursue a plan based on your income. These offer discharge at the end of 20-25 years of payments and the amount forgiven is treated as taxable income. However, they can be beneficial for many troubled borrowers. You might not qualify for all these plans, so it’s important to do your homework.
- Income-Based Repayment: Under this plan, you’ll pay 10-15% of your discretionary income for 20-25 years.
- Income-Contingent Repayment: The term length of this plan is 25 years, with monthly payments pegged at 20% of discretionary monthly income. Parent PLUS borrowers can access this plan.
- Pay As You Earn: You’ll pay 10% of your monthly discretionary income for 20 years, but this plan has constraints based on when you borrowed and the type of loans.
- Revised Pay As You Earn: Lasting 20-25 years, this plan involves monthly payments of 10% of discretionary income.
- Income-Sensitive Plan: This is an alternative available to low-income borrowers on the Federal Family Education Loan Program (FFELP). Monthly payments run 4-25% of gross wages.
Lower payments sound great, but that also means you’ll accrue more interest. When the repayment plan culminates in a debt discharge, if the debt skyrocketed with compounded interest, you could face an enormous tax bill.
What if you can’t afford any payment plan?
Some payments plans listed above can see you owing as little as $0 a month. That sounds great, but the looming income tax liability can be crippling. If you can’t pay your debt because of extenuating circumstances that are ongoing, you might be able to discharge the debt in bankruptcy, which offers a much better outcome.
Debt forgiven in bankruptcy has no income tax consequence. The standard for student loan discharge is “undue hardship” meaning if you repay the debt, you can’t provide yourself and dependents a reasonable standard of living. The courts are now trending towards a more liberal interpretation of this standard, so it’s worth considering.
To find out more, read reviews from our clients then contact the Law Offices of John T. Orcutt by calling +1-919-646-2654 now to schedule a free student loan bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.