Lori Meadows
Student loan debt is a significant issue in the United States, with 42.7 million borrowers owing more than $1.6 trillion in student debt. To pay off your student loans in full, it is essential to understand your options and make a plan. If you are struggling to make payments, there are several options to consider, such as income-driven repayment plans, deferment, forbearance, rehabilitation, and consolidation. It is important to act quickly to avoid default and explore strategies for reducing debt. The U.S. Department of Education provides resources and support to assist borrowers in selecting the best repayment plan and offers loan simulators to help determine the right plan for individual circumstances.
| Characteristics | Values |
|---|---|
| Defaulting on federal loans | Missing 9 or more payments |
| Consequences of defaulting | Wage and tax return garnishment, credit problems, and other consequences |
| Options after defaulting | Rehabilitation and consolidation |
| Rehabilitation | 9 months of reasonable payments to regain good standing and eligibility for federal student aid |
| Consolidation | Combining multiple federal student loans into one loan with a single monthly payment |
| Income-driven repayment (IDR) plan | Reduced monthly payments, requiring annual renewal of paperwork |
| Deferment and forbearance | Options to pause payments, with potential downsides of increased principal balance and monthly payments due to interest and capitalization |
| Loan forgiveness | Eligibility based on working in specific fields, financial or health-related issues, public service, military service, or other special circumstances |
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What You'll Learn
Income-driven repayment (IDR) plans
There are several types of IDR plans, including Income-Based Repayment (IBR), Pay As You Earn (REPAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). These plans generally offer reduced monthly payments that are calculated using your discretionary income and family size. Payments are typically around 15% of your discretionary income (10% for new borrowers), and you can pay as low as $0 per month. To qualify for an IDR plan, you must provide income documentation for yourself and your spouse, regardless of whether you file your taxes jointly or separately.
IDR plans also offer loan forgiveness after a certain number of qualifying payments. For example, the IBR plan offers loan forgiveness after 25 years of qualifying payments (20 years for new borrowers). The REPAYE plan has a similar forgiveness option, but the specifics may vary. It's important to note that any remaining balance after forgiveness may be taxable, so consulting a tax advisor or the IRS is recommended.
When you first enroll in an IDR plan, you will get approved for up to 12 months at that payment amount. Near the end of the 12 months, you'll need to recertify your income and family size to continue the plan for the next 12 months. This process must be repeated annually. If your income or household size changes during the year, you can contact your servicer to reevaluate your IDR payment.
IDR plans are a great option for those seeking PSLF (Public Service Loan Forgiveness). PSLF was established to reward those working in the public sector, and your outstanding loan balance can be forgiven after 120 qualifying payments. To get the most benefit from PSLF, switching to an IDR plan is recommended. However, in some cases, an IDR plan might result in a higher monthly payment than a traditional repayment plan, so it's important to consider all options before deciding.
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Rehabilitation and consolidation
If you have missed payments and your federal student loans have defaulted, you can get them out of default through rehabilitation or consolidation.
Rehabilitation
Student loan rehabilitation is a method to get your federal student loans out of default by making nine on-time payments in ten months. Rehabilitation removes the default note from your credit report, which is better for your credit. However, a defaulted loan can only be rehabilitated once. It is important to have a strategy to afford your payments post-rehab. If your plan doesn't work and your rehabilitated loan defaults again, your only option will be to consolidate it out of default.
Consolidation
Consolidation is much faster, which helps if you want to enrol in school soon. However, the default will stay on your credit report. Student loan consolidation involves applying for a Direct Consolidation Loan, which will pay off your defaulted debt. You can use a Direct Consolidation Loan for many purposes, not just to get out of default. Many borrowers use this loan to simplify repayment of multiple loans, even if they aren't behind on payments. You can consolidate loans multiple times. If you are using student loan consolidation to get out of default, you must meet specific requirements: either make three full on-time monthly payments consecutively and voluntarily on the defaulted loan(s) before you consolidate, or agree that you will repay your new Direct Consolidation Loan using an income-driven repayment plan.
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Loan forgiveness
Firstly, if you are employed by the government or a non-profit organisation, you may be eligible for Public Service Loan Forgiveness (PSLF). This applies to those who work in the military, government, or non-profit sectors. You can use the PSLF Help Tool to apply for this type of loan forgiveness.
Secondly, if you are a teacher, there are specific loan forgiveness programs for you. You may be eligible for Teacher Loan Forgiveness, which offers up to $17,500 in loan forgiveness if you teach full time for five consecutive academic years in specific educational institutions serving low-income families. Additionally, there is the Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligation program.
Thirdly, if you have a disability that severely limits your ability to work, you may qualify for a Total and Permanent Disability (TPD) discharge. This applies to both physical and mental disabilities, and if approved, you won't have to repay your federal student loans.
Lastly, an Income-Driven Repayment (IDR) plan can help reduce your monthly payments and potentially lead to loan forgiveness. Your monthly payment is based on your income and family size, and after 20 or 25 years of payments, the remaining balance may be forgiven.
Remember, there is never a need to pay for help with your student loans, and it is important to explore your options and choose the right plan for your specific circumstances.
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Deferment and forbearance
Deferment allows you to temporarily postpone your loan payments. In some cases, the government may even cover the interest that accrues during the deferment period. For example, Grad PLUS borrowers whose loans were disbursed after July 1, 2006, will automatically be placed in deferment once their loans are fully disbursed.
Forbearance is a similar option, where your lender may agree to postpone or reduce your monthly payments for a specified period, usually up to 12 months at a time for a maximum of six years. Interest on all loan types will continue to accrue during forbearance.
To request deferment or forbearance, you will need to contact your loan servicer, such as FedLoan Servicing, and complete the appropriate application. It's important to understand the eligibility requirements and potential impact on your overall loan balance before making a decision.
As an alternative to deferment and forbearance, you may want to consider income-driven repayment (IDR) plans, which can adjust your monthly payments based on your income and family size. Loan consolidation or refinancing are also options to explore, as they may provide more sustainable and affordable payment options.
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Direct Consolidation Loans
If you are unable to pay off your federal student loan immediately, you have two options: rehabilitation and consolidation. While rehabilitation is better for your credit, consolidation is much faster and helps if you want to enrol in school soon.
You can use the Direct Consolidation Loan Application to calculate your weighted interest rate. First, each loan amount is multiplied by its interest rate to calculate the "per loan weight factor". Then, the "per loan weight factor" for each loan is added together. Finally, the total "per loan weight factor" is divided by the total loan amount and multiplied by 100 to calculate the weighted average. This number is then rounded up to the nearest one-eighth of one per cent.
If you are on an income-driven repayment (IDR) plan or seeking Public Service Loan Forgiveness (PSLF), consolidating your loans would normally cause you to lose credit for qualifying payments you have already made. However, if you apply to consolidate by June 30, 2024, any IDR or PSLF payments you made before consolidating will still count toward forgiveness. Additionally, you can choose not to include certain loans in your Direct Consolidation Loan if you have benefits on those loans that you would otherwise lose by consolidating.
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Frequently asked questions
Defaulting on a federal loan can lead to wage and tax return garnishment, credit problems, and other consequences. It is best to act quickly and consider your options, such as rehabilitation or consolidation.
Rehabilitation involves making reasonable payments for nine months, after which your loan will be in good standing, and you will regain eligibility for federal student aid. Rehabilitation also removes the default note from your credit report.
Consolidation is a faster process than rehabilitation, which can help if you want to enrol in school soon. However, the default will remain on your credit report.
You can consider an income-driven repayment (IDR) plan, which can reduce your monthly payments to as low as $0. Use the Education Department's Loan Simulator to choose the right plan for your income and household size.
