Quarterly Report: Student Loan Repayment Plans

We’re back again with another post on money!  While we celebrate everyone graduating from college and law school, another sore topic is paying back loans.  Today our “in-house” accountant gives us some info on payment plans, and other important financial info to keep in mind before our grace period ends and we suddenly find ourselves unable to reduce or pay back our debt.

More likely than not, you’ll be graduating from law school with student loans from law school and possibly even from your undergrad program. And if you’re like most people, you’ve probably thought about what happens after graduation, but instead decide that you’ll deal with the loans when it becomes time to pay them. However, the sooner you can start reviewing and understanding your loans the better chance you have at conquering those monthly payments. My best advice is to take the time during your grace period to come up with a game plan so that you are in control your income and loans.

The best way to move forward on loan repayment is to try to determine upfront if you are eligible for various repayment plans. There are numerous websites out there that provide all kinds of information on what types of loan repayment plans are available to borrowers.  The ones I have always visited are studentaid.ed.gov and ibrinfo.org.  These websites explain the different options available for your type of debt and your current income. The main ones to consider, if you qualify, are IBR (Income-Based Repayment Plan), Pay As You Earn, and Income-Contingent. The IBR and Pay As You Earn were both created after the Recession to assist new graduates who were struggling with their high level of debt. They are excellent programs because there’s a security in knowing that your entire paycheck is not going to go to your student loans.  If your debt level is low relative to your income, these plans will most likely not apply

Income-Based Repayment Plan – this plan covers almost all loans except loans made to parents. Your maximum payment is 15% of discretionary income and will change each year because you must verify your income using information from your tax return. This number has now changed to 10% for new borrowers on or after July 1, 2014. This repayment plan lasts for 25 years and if there is any balance remaining after 25 years, the outstanding balance will be forgiven. New borrowers on or after July 1, 2014 have it even better; the repayment period is only 20 years.

Pay As You Earn – typically 10% of your discretionary income, but never more than what you would pay under a 10-year Standard Repayment Plan.  Any remaining debt is forgiven after 20 years. This plan only became available in 2012.

Income Contingent – the lessor of 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years adjusted annually according to your income.  Any remaining debt is forgiven after 25 years.

Aside from determining your payment plan, you should look into possible benefits available based on your marital status. The quantity you pay per month could vary wildly depending on whether you file separate or joint taxes with your spouse. Remember, paying off your loans isn’t just about knowing the set amount to pay, but learning ways to use the system to your benefit so that you pay a more affordable bill every month.
That’s why it’s also important to consider consolidating your loans. For Subsidized and Unsubsidized loans, a great starting point is the Dept of Ed’s studentloans.gov website. At this site, you can view all of your loans and begin considering consolidation options. It’s likely that while you were in school the Dept of Ed spliced off your loans to numerous loan servicers. If that’s the case, consider consolidating your loans into one or two loans (subsidized and unsubsidized loans are grouped similarly). This route is less time consuming because you’ll hopefully be dealing with just one servicer and one payment plan, which is much easier than trying to request a certain repayment plan from four different services.

Finally, for those of considering work in the public sector, I highly recommend the Public Sector Forgiveness Loan Plan where after 10 years or 120 payments all of your debt is forgiven, tax-free.  This is a great benefit for those interested in public service.

Even if you’ve been out of school for a while and are making payments, it may be worth it to take a look at these plans to see if you qualify because the faster you can get student debt under control the better you financial forecast will be.