This is part 1 of a 2 part series about student loans. Be sure to read my post about how student loans affect your mortgage qualification by clicking here.
Are you concerned about your student loan debt?
You are not alone. Consider these stats….
Student loans have taken over credit card loans as the #1 type of unsecured debt in the United States. According to the New York Fed, there are more than $1.48 trillion in student loans outstanding. There are currently approximately 44.2 million Americans with at least one student loan.
The average student in the class of 2016 graduated with $37,172 in student loan debt.
Due to rising college costs, student loan debt is a huge problem and will only get worse.
As a mortgage loan officer who looks at a lot of credit reports, I’ve noticed that student loans tend to be the first item that goes into default when someone is struggling to pay their bills. Currently about 11% of all student loans outstanding are 90 days or more delinquent.
I think it’s because there’s nothing to take away. They can’t take back the classes!
Student loans are one of the hardest debts to discharge in bankruptcy. You have to prove that you are unable to work now or anytime in the future to have a chance to get them discharged. Most people simply don’t meet the very high standard required.
Luckily, help is here!
Student loans are one of the easiest types of loans to negotiate. If you are falling behind on your student loan, don’t let it fall into collections and ruin your credit. Call your servicer ASAP!
Here are some ways to lower your student loan payments and potentially wipe them out altogether.
Deferment vs Forbearance
Most types of student loans allow you to apply for a deferment or a forbearance. With these types of arrangements, you have no payment due.
With a deferment, you are delaying payment and there’s no interest accruing on the balance. Most people are aware of the standard deferment, which is the one that happens while you are still a student.
There’s a second type that you can get as well, during periods of extreme financial hardship, like unemployment.
Not all types of student loans qualify for a hardship based deferment, so if you need to get one, ask your provider if you qualify.
Forbearance is similar to deferment. With a forbearance, you don’t have a payment due during the forbearance period but interest will accrue on the loan. However, there’s no qualifying. You just contact your provider and ask to be placed on a forbearance.
With both hardship based deferment and with forbearance, there is a limit of 3 years of usage, so use these options wisely!
Term Extension
If you don’t want to do a deferment or forbearance or don’t qualify, another way to lower your payments is through a term extension.
The standard student loan term is 10 years, with even payments every year.
If you are expecting a large raise over the next 10 years, you may want to opt for a graduated repayment plan. With this type of plan, your payment goes up every 2 years until the loan is paid off.
You can also extend the payment term to 25 years. This type of student loan repayment schedule is called extended repayment. All you have to do is call your provider and request the change.
Student Loan Refinancing
Sometimes, refinancing your student loan debt can make sense. According to Bankrate.com’s Guide To Student Loans, refinancing your student loans may be worth considering if you are employed, have a debt ratio under 36% and have a credit score above 650.
Income Driven Repayment
Are you in a lot of student loan debt relative to your income? You may qualify for an income driven repayment plan.
There are 4 types of income driven repayment plans available. They are:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
There are slight differences in qualification rules, but all the plans work the same way. Your student loan balance is completely irrelevant when using income driven repayment. It’s all based on income. If you have a high student loan balance relevant to your income, the monthly cash flow savings can be enormous.
You will need to submit your tax returns to qualify for the program and then will need to resubmit them every year to stay on it.
If you don’t renew the income driven repayment request in time, the payment will revert back to your original payment amount.
How Income Driven Repayments Are Calculated
To determine if you qualify for income driven repayment and how much you qualify for, you need to know your discretionary income and the type of loan you have. Luckily, your provider will make this calculation for you, but here’s the formula.
First, determine your discretionary income, by using 150% of the federal poverty guideline for your family size.
|
Family Size |
150% of Federal Poverty |
|---|---|
|
1 |
$18,210 |
|
2 |
$24,690 |
|
3 |
$31,170 |
|
4 |
$37,650 |
Next, subtract your current income as filed on your most recent tax return as the adjusted gross income from the 150% figure above.
For example, a single person making $30,000 a year would have a discretionary income of $30,000 – $18,210 which comes to $11,790.
Next, you have to multiply it by a certain figure, typically either 10% or 15%. If you took out your student loan prior to July 2014, you are at 15% in most cases. New legislation was passed in 2010 that lowered this rate to 10% for all student loans that were issued after July 2014.
So, for the example above, for a borrower who took out the student loan in 2017, the annual payments would be $1179. Divide those payments by 12 and you have an IBR payment of $98.25 per month.
Luckily, there are a lot of calculators out there to help you figure all of this stuff out,
Here’s a calculator that I really like (opens in a new screen)
If you are ready to get started with an income driven repayment program, click here to go to the application form. (opens in new window)
Student Loan Forgiveness Programs
With most income driven repayment plans, interest will still accrue on the loan when you are using income driven repayment. Since the payment is based on your income and not the loan amount, in many cases, the balance will be going up, also known as negative amortization.
So, what happens next? That’s where student loan forgiveness comes into play.
If you are employed for a qualifying nonprofit or government agency, you may qualify for Public Service Loan Forgiveness (PSLF).
To qualify for this program, you need to know a few things:
- Only direct loans qualify for the program. This means that your student loan was issued directly by the Department of Education. All loans issued after 2010 are direct loans. If your loan is older than that, you may have indirect if you went through a bank to get your student loan.
- You need to be working at a qualifying nonprofit or government agency for 10 years on a full time basis, which is defined as 30 or more hours. If you have multiple part time jobs at nonprofits and it adds up to 30 hours, that also qualifies.
- If you went into the for profit sector for a while, only the years you worked at a non profit count toward the 10 years. They do not need to be consecutive.
- Non all nonprofits qualify. Labor unions, partisan political organizations, 501c4, and foreign nonprofits not operating in the US are not qualified employers.
- During the period of employment at a qualifying nonprofit or government agency, you need to make the entire payment that was due, for 120 payments.
- Job title does not matter on the PLSF program. All jobs for qualifying employers qualify.
- Only payments made while you had a payment due and paid on time (defined as less than 15 days late) count. Only one payment per month counts. Payments made while a loan is in deferment or forbearance don’t count either.
- Forgiveness is not automatic. You need to apply for it. Here’s a link to the form(opens in a new window)
If you are not an employee of a qualifying nonprofit, there is still hope, especially if you work as a doctor or nurse. Click here to see a list of programs available.
For everyone else, you can qualify for loan forgiveness under the standard Student Loan Forgiveness program. For income driven repayment plans, if you have made on time payments for 20 years (sometimes 25 depending on the program and when you borrowed), you can have your student loans forgiven.
Finally, unlike other loans, student loans do not transfer when you pass away. They will be forgiven! Hopefully, your family won’t need this option but it’s there.
Be Careful And Avoid Scams
Sadly, because student loans have become such a major problem for people, there are a lot of scams out there that will make huge promises that just aren’t legit. How do you know what’s real and what’s not?
Luckily, this post from LendEDU will show you how to spot a student loan scammer.
Is The Trump Administration Taking Away Student Loan Forgiveness?
The PSLF program was launched in 2007. Now we are a little over 10 years into it, so the first qualifying borrowers are applying to have their student loans forgiven. There are still some court cases regarding who actually qualifies, but for now the program is still in place.
The Trump administration is not in favor of taking away student loan forgiveness altogether, but there are proposals floating around to change the terms and put everyone on a 15 year forgiveness period. We shall see.
As a mortgage loan officer, I see a lot of people with high student loan debt. Taking away forgiveness would be a political disaster that will not happen. There are way too many people that would be impacted.
Conclusion
I hope you enjoyed this post about student loans. You may be wondering why a mortgage guy is writing about this topic. It’s because it affects so many people as they go through the mortgage process and I’ve been involved with helping people renegotiate their student debts to help them get qualified.
This is part 1 of a 2 part series about student loans. Be sure to read my post about how student loans affect your mortgage qualification by clicking here.
