Income-based, income-driven, forbearance, deferment, extended payments. There are more options today than ever before for federal student loans! The benefit is that there is likely an option to fit your budget. The downside is that if you don’t know the options, you may wind up paying more than you should. That’s part of what we’re here to help you find out.
Forbearance and deferment are both options to put off payments to a future date. Thus if you took out a 10-year loan in 2010 and then put it in forbearance for a year, you will pay it off in 2021 rather than 2020. Many loans will still continue to accrue interest during the forbearance period, so your payments will be slightly higher once the forbearance ends. But what if the hardship is more than a year or two? What if you got a law degree that cost you $150,000 and you’ll likely only have a $40,000 annual income for the next 5 years until you build up your practice? With a balance that large, your payments would be almost $1600 a month if you have a standard 10-year payment plan – well more than half your after-tax pay.
Income-driven plans may be the answer for extended hardships. It can lower the payment (sometimes even as low as $0) and it starts the clock for payments. Rather than pushing out a 10-year plan until you can start payments, it begins a 20- to 25-year plan immediately. But is it cheaper in the long run? Let’s look at a couple examples…
This is a single parent with an annual household income of $15,000 and $30,000 in student loans. The variation in payments is based on figuring the earner will have a raise each year at work, so they’re earning more at the end of 20-25 years than at the outset. Of course, those upper range payments would increase if he found a new job at a much higher salary. In this case and at the current income, it’s fairly easy to see that all the income-driven plans are cheaper than either the standard or graduated plan.
Our second example is a single individual making $30,000 a year (with the same $30,000 in student loans). Her payments are significantly reduced in the income-driven plans – as low as $99 in contrast to the $318 on the standard plan. But check out the total paid. No matter which income-driven plan she chooses, the total paid is at least $5000 more than the standard plan, and in the case of the longer payment plans, over $10,000 more. All other things being equal, the income-driven plans would be more expensive in the long-run.
This is certainly a simplified comparison. Loan eligibility, the Public Service Loan Forgiveness program, payment feasibility, and added effort to renew the hardship plan can all play a role in choosing the best option for your situation.
If you have questions or want to compare options for your personal student loans, a fantastic site to get familiar with is www.studentloans.gov (where the above calculator I used lives). You can log in using your FAFSA ID to pull your exact loans and get your own estimate on the various programs before you apply. We at Apprisen are also happy to talk with you about your student loans and options you may have. It’s all about making the most of the money you have – one financial decision at a time.