The Student Loan Debt Crisis: Creating A Payment Plan That Works

If you’re one of the 44.7 million Americans with student loan debt, sorting through the repayment options is overwhelming. The right payment plan can make or break your finances. Here’s how to create a student loan repayment plan that works for you.

Choosing a Federal Repayment Plan

Unless you make other arrangements, you’re automatically put on the standard repayment plan when you graduate or cease enrollment. That doesn’t work for everyone because the monthly payments tend to be higher than any other option. Considering other plans—including those based on your income—can make payments more manageable.

Options include:

• Graduated Repayment: Graduated repayment begins with a low monthly amount and increases every two years over a 10-year term. This option is great if you’re in a career that starts with a low salary with the potential to grow. Advancements in your job generally come with increases in pay, which is presumably enough to cover the higher monthly payments as time progresses. But if your salary doesn’t keep up with your monthly payments, you could find yourself in a student loan debt crisis.
• Extended Repayment: With extended repayment, your repayment term stretches from 10 to 25 years. Your monthly bill becomes lower because you have more time to pay back the balance. Interest charges are higher when you pay over a longer term, but this is a good option if you need a lower payment.

Income-Driven Repayment: If you’re struggling to make payments, or are on the brink of a student loan debt crisis, your federal student loans might be eligible for an income-driven repayment (IDR) plan. With the IDR plan, your earnings determine the payment amount—which is usually 10%-20% of your discretionary income. IDR extends the loan term from 10 years to 20 or 25 years and will forgive any remaining loan balance after that time. Types of IDR plans include:

• Income-Based Repayment: The IBR plan caps your monthly payment at 10% or 15% of your discretionary income. The repayment term is 20 or 25 years and depends on how much outstanding debt you have.
• Income-Contingent Repayment: ICR distributes your student loan balance over 25 years and will not allow payments to go over 20% of your discretionary income. If you have a parent PLUS loan, this is the only IDR plan that is available.
• Pay as You Earn: PAYE has a 20-year repayment term with a monthly maximum payment of 10% of your discretionary income. There are specific qualifications, such as you must be a new borrower as of October 1, 2007 or have received a Direct Loan disbursement on or after October 1, 2011.
• Revised Pay as You Earn: With the REPAYE plan, you don’t have to show financial need and you could qualify regardless of when you received your first federal student loan. Payments are capped at 10% of your discretionary income and loan balances are forgiven after 20-25 years of repayment.

Public Service Loan Forgiveness

If you are a government or nonprofit employee, Public Service Loan Forgiveness (PSLF) might be available to you. After making 10 years of payments under an income-driven repayment plan, your remaining federal student loan debt will be discharged—circumventing any potential student loan debt crisis. You are eligible to apply after making 120 qualifying payments while working full time for a qualifying employer.

Private Student Loan Repayment Options

Private student loans are more challenging because fewer repayment options are available. What’s more, each private lender can decide whether they’ll offer student loan forbearance or other help.

Refinancing private loans might provide relief if you’re looking for a smaller or more manageable option for private student debt. For borrowers with more than one private loan, refinancing the smaller balances into one larger loan can streamline monthly payments. If you do refinance, you’ll only have one monthly bill instead of balancing multiple due dates, varying interest rates and different balances.

Though the IDR plans don’t require you to meet minimum credit qualifications, refinancing does. Approval to refinance your student loans depend on your credit score. Often, higher scores are eligible for lower interest rates, which can provide significant savings.

Making a Student Loan Payment Plan Work for You

Whether you have federal or private student loans, consider your financial situation carefully before deciding on a payment plan. For federal student loans, start by exploring the income-driven repayment options. This is a crucial first step—especially if you think your career could qualify for Public Service Loan Forgiveness. If you have private student loans, each lender is different. Contact them to understand your options.

There is no one-size-fits-all solution. Everyone is different, and your ideal plan will depend on your individual circumstances. For help finding a payment plan to manage your student loan debt crisis, locate a CERTIFIED FINANCIAL PLANNER™ in your area today.