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Solutions for Borrowers Who are Having Trouble Repaying Education Loans

Solutions for Borrowers Who are Having Trouble Repaying Education Loans

Mark Kantrowitz

April 21, 2009

Solutions for Long-Term Income Deficits

If your financial difficulty is of a more long-term nature (more than a few months), such as a low-paying job that yields insufficient income to repay the debt (and there’s no possibility of getting a better job), consider one of the alternate repayment plans for federal loans such as extended repayment, income-contingent repayment or income-based repayment. This will be ultimately less expensive than relying on deferments and forbearances to avoid the problem. You can switch repayment plans once a year.

The income-contingent repayment and income-based repayment are also available to borrowers who have already defaulted on their loans.

Extended repayment increases the loan term based on the amount owed. If you have more than $30,000 in federal education loan debt with a single lender, you can get extended repayment of up to 25 years without consolidating your loans. If you consolidate your loans, you can get extended repayment of up to 30 years. The following table illustrates the extended loan terms for federal loans that have been consolidated.

<td colspan=2 align=center>Extended Repayment

Loan Balance Maximum Loan Term
Less than $7,500 10 years
$7,500 to $9,999 12 years
$10,000 to $19,999 15 years
$20,000 to $39,999 20 years
$40,000 to $59,999 25 years
$60,000 or more 30 years

Another alternative repayment plan for federal loans is the income-based repayment plan (available starting July 1, 2009). This caps your monthly payment at 15% of discretionary income and forgives any remaining balance after 25 years in repayment. (If your loans are in the direct loan program and you work full-time in public service, the forgiveness occurs after 10 years in repayment.) Discretionary income is defined as the amount by which income exceeds 150% of the poverty line. Income-based repayment is especially helpful for borrowers who have high debt and low income relative to that debt. The income-based repayment program is available to defaulted borrowers. (Public service loan forgiveness is not available to defaulted borrowers.)

To illustrate, suppose that you have an annual income of $35,000 and a family size of 3. The poverty line for a family of 3 was $17,600 in 2008, so 150% of the poverty line for the family size is $26,400. $35,000 in income exceeds this threshold by $8,600. 15% of this amount is $1,290. Dividing this figure by 12 yields a monthly payment cap of $107.50.

The income-contingent repayment plan is a little less generous than the income-based repayment plan. It caps your monthly payment at 20% of discretionary income and forgives any remaining balance after 25 years in repayment. As with income-based repayment, public service loan forgiveness reduces the forgiveness period to 10 years of full-time employment in public service. Discretionary income is defined as the amount by which income exceeds 100% of the poverty line. Income-contingent repayment is only available in the direct loan program. Borrowers who have defaulted on their loans can be required to repay the loans under the income-contingent repayment program.


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