With over 44 million student loan borrowers now collectively owing $1.5 trillion dollars, America’s student debt crisis is putting a massive money strain on households nationwide. To help you make smart decisions regarding your student debt, this guide covers some of the best student loan consolidation options.
What Happens if I Just Stop Paying?
As appealing as this may seem, ignoring your student debt will likely make things worse. If you stop making payments, you run the risk of going into default.
Unlike bankruptcy, a default does not discharge or make the debt go away. In fact, having your loans listed in a default status may actually increase the amount you owe. In addition, interest and late fees may be added. A default could also crush your credit and may eventually lead to wage garnishments.
Currently, 1 million borrowers default on their student loans each year. 40% of all borrowers are expected to default by 2023. This is why a student loan consolidation may be the best solution to stay on track.
So What’s the Solution?
Know your options! The Department of Education offers a variety of repayment plans to fit different budgets and lifestyles. Which may help federal student loan borrowers avoid future default.
Those who qualify could experience payments as low as $0 per month. Some may even be eligible for loan forgiveness. Below is an overview of some of the most common repayment options offered by the DOE.
Student Loan Forgiveness
Obviously, the best form of payment relief is to have your student loan debt forgiven altogether. Below are the requirements for each plan.
- Teacher loan forgiveness: You need to work at least 30 hours per week for five consecutive academic years. I addition, the school or educational facility you work for must be listed in the DOE’s Low-Income School Directory. Furthermore, you must be enrolled in an income-driven repayment plan with no history of interrupted payments.
- Public service loan forgiveness (PSLF): Working in the public service sector could qualify you for forgiveness. Firefighters, police officers, and employees in the non-profit sector may qualify forPSLF. Under PSLF, qualified borrowers could have the remainder of their debt forgiven after making 10 years of successful payments.
- Student loan forgiveness: If your job doesn’t quite get you to the forgiveness finish line, qualifying and enrolling into an income-driven repayment plan potentially could. Borrowers in an IDR may have their debt forgiven after 20 to 25 years of qualifying payments.
Depending on your unique qualifying factors, additional forgiveness plans may be available. Any forgiven debt outside of PSLF may be treated as taxable income by the IRS.
Consolidate Federal Student Loans
Borrowers with more than one federal student loan may consolidate their loans into one lump sum – with one monthly payment. Or, for one loan only, but with a student loan default history, you could still qualify.
A student loan consolidation could help you ease the burden of stressful payments. On the other hand, it may lead to a longer-term and added interest over time. Terms and conditions may vary depending on the plan you choose to enroll in.
When you consolidate your student loans, you’re issued a Direct Consolidation Loan with a fixed interest rate. Which then gives you the option to enroll into one the DOE’s repayments plans listed below.
Federal Student Loan Repayment Plans
Outside of forgiveness, enrolling into an affordable repayment plan is your next best option to achieve payment relief. The DOE offers several repayment plans to fit a variety of needs and income levels. Whether you’re looking to reduce your monthly payments, or are interested in a faster pay off date, here are a few plans to consider:
Standard Repayment Plan
The standard plan is great if you aim to pay off your debt as soon as possible. Larger payments over a shorter period of time give you a 10-year pay off term.
Graduated Repayment Plan
You have a 10-year repayment plan for unconsolidated loans. Consolidated loans, on the other hand, have a pay off periods between 10-30 years depending on the total amount of student loan debt you carry. The graduated repayment plan starts with low monthly payments that increase every two years.
Income-Driven Repayment (IDR) Plans
A lot of borrowers struggle to keep up with bills and experience financial hardship throughout their life. That’s why a student loan consolidation may help. Enrolling into an IDR could be helpful as it may lead to lower payments. Depending on the plan, some qualified borrowers could drop their payments down to as little as $0 per month.
- Pay As You Earn (PAYE): Your monthly payment is based on 10% of your discretionary income. You could qualify for this plan if you took out your loans after October 1, 2007, and meet all requirements set by the DOE.
- Revised Pay As You Earn (REPAYE): In the same way as the PAYE plan, your monthly payment is based on 10% of your discretionary income. However, in a REPAYE plan, the date in which you took out your loans is irrelevant.
- Income-Contingent Repayment (ICR): Borrowers who can’t prove any type of financial hardship may still qualify for this repayment plan. Your monthly payment is calculated based on 20% your discretionary income for a 25-year term.
- Income-Based Repayment (IBR): Even here, your monthly payment is based on 10% of your discretionary income if you’re a new borrower on or after July 1, 2014, for a 20-year term. Otherwise, your payments are based on 15% of your discretionary income for 25 years.
For additional federal student loan repayment options, click here.
When to Consider Deferment or Forbearance
Life happens. If a job loss, medical emergency, or an unexpected event occurs, it may affect your ability to pay your bills on time. Instead of falling into a student loan default, federal borrowers could put a temporary hold on payments by applying for deferment or forbearance. Here’s the difference between the two.
- Forbearance: Regardless of the circumstance, anyone can qualify for forbearance. However, you can’t currently be in default or used up the allotted 36 months. Although a forbearance puts a temporary hold on your payments, interest continues to accrue.
- Deferment: A deferment also places a temporary hold on your payments. Although, interest accrues only on the unsubsidized portion of your loan – not the subsidized. In most cases, deferment is automatic for borrowers who go back to school either full or part-time.
Keep in mind that forbearance and deferment only provide short-term relief. If you’re unable to make your payments on a regular basis, it might be wise to look into an IDR.
How Do I Apply?
The specific requirements to qualify for any of the forgiveness or federal repayment programs listed above are set by the DOE. Borrowers can apply on their own or by contacting the DOE direct.
For further assistance regarding your student loan consolidation, Docupop is happy to help. To find out which options you may qualify for, and for assistance with the filing process – click below for a free consultation.
Private Student Loans
Unfortunately, private student loans won’t qualify for the federal plans mentioned above. However, private lenders may offer repayment options of their own. Here are a few examples:
- Standard plan: The amount you’re expected to pay is divided up equally over a 10 year repayment period.
- Graduated repayment: This is also a 10-year repayment plan. The difference here is that the amount you’re expected to pay increases over the years.
- Forbearance: Not all private lenders offer forbearance options to borrowers. However, if your lender does, a forbearance puts a temporarily pause on your payments. Keep in mind that you’re still expected to pay the interest that accrues over time.
- Refinancing: This is not a repayment plan. Refinancing your private student loans often means taking out a new loan with lower interest rates. Which could help you pay off your debt more efficiently. Refinancing is similar to student loan consolidation in regards to the act of merging loans into one lump sum. The biggest perks of refinancing are to potentially achieve lower interest rates.
For more information regarding private loans, check with your loan servicer to find out what refinancing options and repayment terms they may offer. If your current lender does not have what you’re looking for – shop around! Perhaps there are better loan terms and lower interest rates elsewhere.
Choose Your Repayment Plan Wisely
Student loan debt can feel overwhelming. But hopefully, this student loan consolidation guide gives you a solid start. Please note that the options above only skim the surface of the potential possibilities regarding student loan debt. Always do your own research and speak to your personal financial adviser before making any major money moves.
Disclaimer: Docupop is not affiliated or endorsed by the DOE. This site is for informational purposes only, is general in nature, and is not intended to and should not be relied upon to provide financial, legal, or tax advice. If you have further questions regarding your federal student debt pr student loan consolidation, you can reach out direct to DOE – or Docupop.