In our modern-day lives, getting a college degree is a way of life for many. Most employers prefer applicants have some kind of degree. Over the past few decades, young people have flocked to universities across the nation and taken large student loans in order to fund their studies. However, as tuition prices skyrocketed, so too did student loans. Now, many people are discussing the implications of the massive amount of debt that has built up, a sum that has reached over $1 trillion in total.
If you have a student loan, you’ll likely be paying it off for many years. Average student debt in the US is sitting around $35,000 when graduates leave school, and that figure continues to grow each year. Economists are now discussing the negative consequences of these loans, which hamper personal financial growth and spending growth in the US economy. In order to combat the swelling levels student loan debt, the Federal government passed legislation a few years ago allowing graduates to receive student loan forgiveness under certain conditions.
There are several forgiveness plans, all with their own requirements, making it necessary to understand available options.
Which plan do you qualify for?
If you haven’t applied for a specific forgiveness program, you will automatically be placed on the Standard Repayment plan. You must apply for a different program to be eligible for forgiveness. In order to qualify for any of these programs, you must have federal student loans that are in good standing, meaning you are current on payments.
Income-based Repayment
One of the most commonly used programs is called income-based repayment. Under this plan, your payments are limited to only 10 to 15 percent of your discretionary income, depending on when your loans were first taken out. After making payments over a 20-year or 25-year period, the remainder of your debt is forgiven. Currently, Direct Subsidized and Unsubsidized, Federal Stafford Loans, PLUS loans, and consolidated loans that do not include loans to parents are eligible.
Another program which is similar is known as the revised pay as you earn (REPAYE). This plan is essentially the same as income-based repayment, except it limits monthly payments to 10 percent of discretionary income. Repayment takes place over 20 years when loans are used for undergraduate education, and 25 years when loans also include graduate level education.
The most significant difference is that for married borrowers, income is calculated based on both spouses’ income, regardless of how they file taxes each year. Under the income-based repayment plan, spouses who file a married but separate return only have the borrowing spouse’s income considered, not both.
Income-contingent Repayment
Another plan is known as Income-Contingent Repayment. The structure is similar to income-based repayment but can be less beneficial. Under this plan, you must make 300 monthly payments over a 25-year period, with monthly payments capped at 20 percent of discretionary income. There is also an option that calculates payments as a 12-year fixed payment, based on income. All Direct Loan borrowers are eligible for this plan.
In each of the above plans, the remaining balance of your loans is forgiven at the end of the repayment term. However, you must recertify your income and household size each year, and remain current with your payments to qualify for forgiveness. Also, it is crucial to understand that, as it currently stands, the balance of loans forgiven under these repayment programs is taxable as income in the year it is forgiven. This can be an immense financial burden, so it is worth preparing for the tax liability well in advance of forgiveness.
If you do have a student loan and think you qualify for one of these programs, you should visit the Federal government’s student loan forgiveness web page and see how you can take steps to have some of your debt forgiven. Another 10 years may seem like a long time, but in the grand scheme of things, having your student loans forgiven eventually will set you up for financial success in the future.
