Dear law school friends from the class of 2013,
This is a short article that I think you should read.
Since
the spring of 2013, the federal government added new income-based
repayment plans to help new borrowers (like you) pay less per month on
their student loans. These plans also allow borrowers to obtain loan
forgiveness after 10, 20, or 25 years of payments (depending on the
plan). These plans include the new Pay As You Earn (PAYE) repayment plan, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
You should know that all borrowers are automatically
enrolled in the Standard 10-year repayment plan when they leave school. They must take action to opt
into and apply for any of the others, provided they
meet the eligibility criteria. The borrower can do this by logging into
their account at studentloan.gov and applying for income-based
repayment. This can be done in a matter of minutes through the website's
new electronic application system. Borrowers
can opt into any plan for which they are eligible at any point during repayment
and generally can change options during repayment.
As you will see below, in order to maximize student loan forgiveness you
will generally want to enter into these plans as soon as possible.
However, based on your income and the amount of your debt, you may
decide that an income-based repayment plan is not a good idea (you will
pay more interest compared to Standard repayment, for example). Thus,
for small loans, you may prefer to stay with Standard repayment (but
what kind of law student owes only $5,000 in student loans?). So before
you start on Standard repayment and risk defaulting or losing precious months towards your forgiveness period during your first year of payments, consider the following payment plans.
Income-Based Repayment (IBR) and Pay As You Earn (PAYE) allows
borrowers to make monthly payments based on their income if they meet a
debt-to-income test. Borrowers may opt into IBR or PAYE if their
payments under that plan would be lower than payments under the Standard
(10-year) repayment plan. Let's be honest. Unless you are making a very
substantial salary your first year out of law school or college, your
IBR or PAYE payment is going to calculate to be lower than what you
would normally pay under Standard repayment. This is because those
payments only require that you pay 15% and 10% of your discretionary
income per year towards the plan, respectively. Generally, your
discretionary income is based on your most recent tax return.
New
and recent student loan borrowers qualify for the coveted PAYE plan.
For those who qualify, they need only pay 10% of their discretionary
income after a base $17,235 exemption. Also, borrowers who make 20 years
of qualifying payments receive a complete forgiveness of their federal
student loans. It is an amazing plan.
Who qualifies? To qualify, the borrower must have been a new borrower as of October 1, 2007 and must have received
a disbursement of a Direct Loan on or after October 1, 2011. What does
that mean? It means that, for example, if you were like me and started
undergrad in 2006 and took out a student loan for that year, you do not qualify for PAYE.
However, for those who began on or after the 2007-2008 school year with
no prior federal loans, you will qualify for PAYE. Congratulations.
For
those who do not qualify, you may still apply for IBR. Under IBR, you
will pay 15% of your discretionary income per year. Also, borrowers who
make at least 25 years of qualifying payments will receive complete
forgiveness of their federal student loans. As you can see, for
long-term borrowers, IBR is not as favorable as PAYE. However, it is
still preferable to Standard repayment if it helps the borrower avoid a
default and be able to pay their monthly bills.
Income-Contingent Repayment: Not everyone
qualifies for IBR or PAYE. If your income is too high to qualify for
either of these programs, you may qualify for Income-Contingent
Repayment (ICR). Under ICR, you will pay the lesser of the amount
you would pay if you repaid your entire loan in 12 years multiplied by
an income percentage factor that changes with your annual income or 20% of your monthly discretionary income.
For non-profit and public employees: If you
work for a non-profit or work in a public job for an average of 30 hours
or more per week, you may qualify for 10-year student loan forgiveness.
How do you take advantage of the 10-year forgiveness? Apply for IBR or
PAYE as soon as possible and being making your 120 qualifying payments.
While IBR and PAYE may not be good idea for everyone, it is nearly
always a good idea for non-profit and public employees to enroll if they
have a substantial amount of student loan debt.
In short, consider your options. If you owe a large
amount of student loans and you want to enter into income-based
repayment, you should act as soon as possible before your first loan
payment is due. If you would like more information about student loan
repayment plans, go to http://studentaid.ed.gov/repay-loans/understand/plans.
Sincerely,
Austin Houvener
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