Free Yourself from Student Loan Debt

In some ways, student loans are the cruelest form of personal debt. You took out these loans so you could get a great education and launch a lucrative career. You just wanted to take care of yourself and your family. Ironically, the cost of that education is now keeping you from the financial independence you were looking for.

The sad truth is, even before the pandemic and before inflation, student loans were already being called a crisis. Why? Because we collectively owe almost two trillion dollars on all the student loans out there. It’s one of the largest forms of debt we owe as individuals. In fact, we owe more on our student loans than we do on all the credit cards out there.

Of course, when you talk about a trillion dollars, it’s hard to even grasp the number. So how about these numbers? More than 43 million American adults owe student loans, and 9 million owe more than $50,000 on those loans.

So basically, that means almost a fifth of the country is making student loan payments – and millions of them are struggling. So you can see why people talk about a student loan crisis. It’s not just the trillion dollars we owe, it’s the millions of people who are affected.

So those scary numbers we just showed you are for ALL student loans. But student loans aren’t all the same. There are two broad categories: public and private. So what’s the difference? And why does that difference matter?

Federal student loans are just what they sound like. They’re backed by the federal government. Private student loans are like most other loans. You get them from banks and credit unions, mostly.

Thankfully, more than 9 in 10 student loans are federally backed. I say “thankfully” because the very powerful programs we’re gonna talk about only apply to federal student loans. That includes the most powerful of them all: loan forgiveness.

So let’s start with student loan forgiveness. What does it mean? Honestly, it means different things to different people. What we’d all LIKE it to mean is: No more student loan payments ever! That’s because we’re wiping your balances from the books! But of course, nothing financial is ever that simple.

There are actually two kinds of student loan forgiveness, broadly speaking. The first kind hasn’t really happened yet, but if it does, it will be sudden. It might not be a lot, though. The second kind already exists, but it takes a long time, and it’s a little complicated, but it’s quite powerful. OK, now that I’ve totally confused you, let’s break those down.

The first is the political kind. You might’ve heard about this in the news. President Biden has been talking about this for a while now — ever since he was on the campaign trail, actually. He’s even signed a couple executive orders to forgive certain, specific kinds of student loans. That’s in the Supreme Court now. So as of today, it’s hard to say exactly what will happen.

The second kind isn’t as political or as controversial. In fact, it exists right now. It’s called the Public Service Loan Forgiveness Program, but since it’s run by the government, it’s not exactly simple to figure out.

The student loan question we’re asked most often is: “Can I really get my hefty student loan balances forgiven forever?” The answer is, “Yes, but…” The Public Service Loan Forgiveness program – or PSLF, for short – offers federal student loan forgiveness if you work in a qualified profession. What are those professions? You can be a teacher, a nurse, a police officer, a librarian, a social worker, and many other things. What they all have in common is that they do some public good. So if you work for a for-profit business, you don’t qualify, even if you’re doing a lot of noble work in your community.

So if you work in one of the approved professions, you’ve cleared the first hurdle. Unfortunately, there are more. The qualification process is long, complicated and (worst of all) not guaranteed. And you need to make 120 regular qualified payments first – that’s 10 years’ worth. But if you do qualify, you could get out of student loan debt for less than you originally borrowed.

Now I know what you’re probably thinking. I need to make payments for a decade before my loans are forgiven? Is it really worth the hassle and the long timeline? Well, there’s no specific cap on how much you can save – it just depends on your situation. The average amount forgiven as of August 2022 was about $97,000, according to Forbes.

There’s just one more complicating factor I need to mention. To qualify for student loan forgiveness from the federal government, you need to enroll in one of their EXISTING student loan relief programs. Many people have heard that the federal government offers help to those struggling to make their payments, but they don’t quite grasp all the details. And no wonder, because it can get a little complicated. So let’s break it down for you.

One question we get asked a lot is, “What’s the catch? Why would the government help me pay off student loans it saddled me with?” Well, remember those scary numbers we started off with today? Remember the trillion-plus dollars in total student loan debt this country owes? Well, the federal government knows that if you can’t pay it back, they’re on the hook for those losses. And besides, if you can’t pay back your student loans, you won’t be able to buy a home and pay property taxes and be a productive member of society. Governments like when you’re productive, because it means more tax revenue.

Unfortunately, these relief programs are as easy to understand as your income taxes. Which means, they can get confusing. Like all government programs, these student loan efforts all have acronyms. The three we’ll talk about now are ICR, IBR, and PAYE. Let’s tackle them one by one.

Starting in alphabetical order, let’s talk briefly about the income-based repayment program, or IBR. If you have federal loans and can demonstrate a financial hardship, you qualify. Like the name implies, an IBR matches monthly payments to your income. It’s the government’s way of acknowledging that the salary you earn after you get a degree usually doesn’t exactly match the expense you incurred to get it.

For example, the program adjusts your monthly payments to your income and family size. If you have a lower income and a larger family, it reduces your student loan payment requirement. In general, enrollees spend between 10 percent to 15 percent of their take-home income to repay student loans under an IBR. This reduces the burden of student loan repayment on your budget.

But let’s be clear about what’s happening here. The federal government isn’t forgiving your loan. You still owe what you owe. You’re just paying less each month on that total loan. But here’s the catch: You pay interest on all your loans, and student loans are no different. So your interest is still accruing, because you’re paying less each month. Even the government acknowledges that this can increase total cost over the life of your loans. Still, it helps you greatly in the short term, so for many folks, it’s worth it.

Same thing goes for another program with a very similar-sounding name. Income-contingent repayment is a little different than income-based. While both an IBC and an ICR adjust your monthly payments based on your income, the ICR has a few important differences. Let’s take a look at those differences. First of all, you don’t need to show any crushing financial problems to qualify. Remember, for an IBR, you need to show some hardship. In other words, you need to prove to the government that you simply don’t make enough or save enough to meet your obligations. ICRs don’t require this, so it saves you on paperwork and hassle.

But there’s a downside to ICRs. Unlike an IBR, an ICR doesn’t stop your monthly payments from increasing indefinitely along with your income. Also, while an IBR typically reduces your payments to 15 percent of your income but has a definite cap. ICRs have virtually no limit since the monthly payment will increase as your income increases. How do you choose? We’ll get to that in a moment, but first we have a third program to review.

Pay as You Earn is even better than an IBR at reducing monthly payments. It was updated and expanded a few years ago into yet another option called REPAYE – which stands for Revised Pay as You Earn – but the concepts are still the same. Your monthly payments are reduced to 10 percent of your discretionary income, and after 20 or 25 years, whatever balance is left is forgiven – and forgotten. You pay nothing more.

So what’s the difference between the two? They’re subtle but real. For instance, to qualify for PAYE, you must have a partial financial hardship. REPAYE? Anyone with a qualifying student loan is eligible. Your spouse’s income doesn’t count in PAYE if you file separately, but it does in REPAYE. So what does all this mean? Generally speaking, PAYE is a better option for married borrowers when both spouses have an income. REPAYE is usually better for single borrowers and people who don’t qualify for PAYE. But in both cases, just like an ICR, if you get a new high-paying job or a big fat raise, your payments jump up along with that extra income.

Obviously, we’ve just hit the highlights here. Deciding which program is right for you will take some time. We recommend you start with this website: StudentAid.gov. That’s a federal site that’s written in fairly plain English. At the end of this presentation, we’ll also give you a phone number you can call for a free consultation. But for now, let’s keep moving forward. Because there are other money-saving options for student loans, although they’re only a little less complicated.

There are two other options to ease your monthly student loan burden. Those are called forbearance and deferment. Neither of them are as complicated as the relief programs we just mentioned, but they’re also not as powerful – or as permanent. Still, they can help you through a difficult time. So let’s explain them briefly.

What’s forbearance? You’ll be familiar with the concept if you’ve ever called your credit card company and begged to get a late fee removed. Yup, sometimes just asking works. In this case, your student loan servicer wants you to keep making payments, so sometimes they’ll give you a forbearance. That means you can temporarily stop paying your student loans. Basically, it’s like a hold button for your loan payments.

Problem is, you need a darn good reason for such incredible debt relief. Without one of these reasons applying to you, you can’t get a forbearance. These come in two types: discretionary and mandatory.

A “discretionary” forbearance requires your servicer’s permission. It’s totally up to them if you get it. And all of them have specific situations that must apply to you. For instance, if you can’t make your payments due to a change in jobs, a medical expense, or other financial difficulties, your servicer can decide to give you a forbearance.

Of course, the opposite of discretionary is mandatory. This means your servicer can’t deny you the forbearance if you qualify. What’s it take? If you’re on a medical internship or residency program, or if you’re in the National Guard and got activated by the governor, or if your payment is more than 20 percent of your monthly income before taxes – then you can get a mandatory forbearance. You’ll have to prove that to your servicer, but a little paperwork can save you thousands of dollars.

Whatever forbearance you qualify for, you can get up 12 months of making NO payments. In total, you can get three rounds of 12-month forbearances before you max out. That gives you plenty of time to get your financial life in order– but remember, you still owe the loan amount.

In fact, under a forbearance, your interest charges continue to accrue. And because you’re not making payments, that means your overall loan debt increases. So you get some relief now, but later on, you’ll pay for it. But there’s another option that avoids some of this.

Now let’s talk about deferments. Which is a lot like it sounds. You simply defer making payments for a spell. In this instance, a forbearance and a deferment are more similar than different. In fact, the only major difference is that with a deferment, you might not owe that accrual of interest we just talked about. Like a forbearance, you must have some pretty serious circumstances that prevent you from making those monthly payments – like, say, cancer treatment or a job layoff.

Now, this is just a rough overview of forbearances and deferments. You want to know how detailed it can get? Here’s a quote from the federal Student Aid website…

You may be eligible for a deferment on your federal student loan if you are a parent who received a Direct PLUS Loan or a FFEL PLUS Loan, while the student for whom you obtained the loan is enrolled at least half-time at an eligible college or career school, and for an additional six months after the student ceases to be enrolled at least half-time

Simple, right? Just kidding. That’s not easy to grasp. But don’t worry, by the time we’re done, we’ll show you a path out of this wilderness. But first, we still have two more options to review.

If you’ve ever used a debt consolidation loan to take care of credit card debt problems, you might think you understand how a Federal Direct Consolidation Loan works for student loan debt. But you’d be wrong. You use a Federal Direct Consolidation to consolidate your federal student loan debt into one easy payment. But the loan structure, interest rate, and how you qualify varies A LOT from other types of consolidation loans.

The hoops you need to jump through can be a lot, but there’s an extra benefit if you qualify. Not only do all your student loans get rolled into one easy payment, you can make defaulted federal student loan debt current. It’s an amazing benefit, and one worthy of a few minutes of your research. It can save you a heck of a lot.

If you think all these programs are too complicated, you can refinance your student loans on your own. While not nearly as complex as the other options we’ve discussed here, it’s not a walk in the park, either. There are the three first steps you need to take. Start by figuring out how much you want to refinance. Then you need to record the balance and APR on those loans, so you can shop for a better deal.

When you find the best deal, apply. But remember, when you apply for any new loan, that results in a “hard inquiry” on your credit report. That can temporarily drop your credit score. It’s not a huge deal, but it’s worth mentioning – because if you apply for too many loans in too short a time, you could end up paying more. So for instance, you don’t want to refinance your student loans at the same time you apply for a new credit card and secure a new auto loan. All those inquiries, not to mention the new credit, could drop your score and raise your rates.

So we’ve talked about a lot in a little bit of time, haven’t we? And we just barely brushed the surface of all these options. So pursuing any one of them will take more time. Is it worth it? Most definitely yes. Anything is better than defaulting on your student loans, which is what happens when you don’t make payments for 270 days or more. That means your wages can be garnished, your credit score is trashed, and any future tax refunds and other federal benefits payments can be withheld. You don’t want to go down that road.

Here’s a depressing statistic: According to the Government Accountability Office, 51 percent of all federal borrowers were eligible for the IBR plan we mentioned earlier – yet, only 13 percent are actually participating in it. And the Department of Education even admits that their efforts to increase awareness about these federal relief programs is “incomplete” and “inconsistent.” That’s why you might consider hiring a professional.

Think of it like your taxes. If your income taxes become too complex, you can hire a CPA or tax preparer who not only saves you the time and aggravation, but can also find ways to save you money – hopefully more than enough to cover the cost of hiring them in the first place. That’s been happening more and more in the student loan world.

Thanks for joining us, we’ll see you again next time