student loans

How to pay off your loans: Debt Snowball vs Debt Avalanche

 
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Those of us who took out student loans for school or weren’t as diligent about our finances in our younger years, may have accumulated some debt. Now that we have started our careers and are trying to follow a budget, one of the things on our to-do-list is paying off debt (or at least making payments towards it). When it comes to paying down debt, there are 2 main ways to do it: the debt snowball and the debt avalanche.

Debt Snowball:  

With the debt snowball method, you organize your debt by the amount you owe on each loan and prioritize paying off the loan with the smallest amount first. One you pay off the loan with the smallest amount, you use the money you were putting towards that loan and stack it onto what you were paying on the next highest loan until you pay that one off too. You keep stacking payments and paying off loans until all of your debt is gone.

Example of the Debt Snowball:

Let’s say you owed $5,000 on a credit card, had $20,000 left on your car loan, and $40,000 in school loans. With the debt snowball method, you would prioritize paying off the credit card debt first, then the car loan, then your student loans. Specifically speaking, you would make the minimum amounts on all loans (say $100 each) and any leftover money you have (say $500) would go towards the smallest loan (in this case it would be your $5,000 credit card debt). Once you pay off the credit card debt, you would stack the money that went to that debt onto the next highest loan, which in this example is the $20,000 you still owe on your car. Once you pay off the car loan, you would take the money you were paying on that loan and add it to what you were already paying towards your $40,000 student loans. With the debt snowball, you end up stacking money on each payment as you pay off each debt (like you creating a snowball that stacks ice as it rolls).

Why the Debt Snowball works:

Paying off debt is mental. When you see yourself pay off the small loan, you may be even more encouraged to pay off the larger loans and more likely to eventually eliminate all your debt. The disadvantage of this method is that paying off loans with the smallest amounts first may cost you more money overall (since there may be other loans with higher interest rates). Despite this disadvantage, there are many advocates of the debt snowball method. Supporters of the debt snowball say that most people don’t end up paying off all of their debt because they get discouraged along the way. However, when they see themselves pay off one of their loans, they are more likely to pay off additional loans and eliminate their debt altogether. Thier point? People may pay more money overall with the debt snowball method, but they will eventually get it all paid off.

Debt Avalanche:

With the debt avalanche method, you organize your debt by the interest rate on each loan, (not by the amount you owe on each loan). You prioritize paying off the loan with the highest interest rate first (even if you have other loans of smaller amounts).  

Example of the Debt Avalanche:

If you had the same loans from the previous example: $5,000 from your credit card with a 15% interest rate, $20,000 from your car loan with an 5% interest rate, and $40,000 in student loans with an 8% interest rate, then you would organize your loans by their interest rates and prioritize paying off the loan with the largest interest rate first. In this case, you would pay off the $5,000 loan, then the $40,000 loan, and end with the $20,000 loan (as if you are an avalanche that starts at the top of mountain and increases in speed as it travels downward).

Why the Debt Avalanche works:

The advantage of this method is that you end up paying less money overall because you get rid of loans with higher interest rates first. The disadvantage of this method is that oftentimes the loans with the highest interest rates are some of our larger loans. Thus, it may take awhile to actually pay the loan off. It may be harder to feel as though you are making progress towards debt repayment since paying off that first loan could take years. Many people may lose their zeal for paying off debt and get tempted to use that money for other things. Nevertheless, many financial advisors still recommend the debt avalanche for people who are dedicated to becoming debt-free, since it saves them hundreds, if not thousands, of dollars in the long-run.

Which method is better?    

It depends. There are pros and cons to each method so you should choose the method you think you can stick to the best. If you know you are the type of person who needs to see small victories to stay encouraged along the way to becoming debt-free, then perhaps the debt snowball method is right for you. If you are the type of person who is more diligent about paying off debt, doesn’t rely on small victories, and has fully committed to paying off debt in the shortest amount of time, then perhaps you would do well with the debt avalanche method. I myself, have used each of these methods in the past and they both have worked well. For example, I used the snowball method when paying off my car note and credit card bills. I then used the debt avalanche method when paying my student loans.

Which method do you think would work best for you?

 

The Best Student Loan Repayment Plans for Medical Students and Residents

 
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If you have ever tried to learn about student loan repayment plans you might have felt overwhelmed and confused. Instead of spending days researching information like I did, I’ve created a summary of the different repayment plans in a question-and-answer format with some key takeaways for graduating med students and current residents. 

1.     What is the Standard Repayment Plan and who should choose it?  

With the standard repayment plan, you will pay off your student loans in 10 years by making “fixed” monthly payments. This means you will pay the same amount each month regardless of how much money you make. The government will determine your monthly payment by adding all of your student loans (and the projected interest that will accumulate on them), dividing that number by 10 [years], and splitting the amount into fixed monthly payments. 

This is not the ideal plan for graduating med students and residents, especially those with around $200,000 in student loans. Unless you have very little money in student loans, the monthly payments required under this plan will be higher than you can afford on a resident salary. Unfortunately, you will be automatically enrolled into the standard repayment plan if you don’t select a different repayment plan.   

2.     What is the Graduated Repayment Plan and who should choose it?

With the graduated repayment plan you will also pay off your loans in 10 years, but your monthly payments are not fixed. Instead, they will start out low, and increase every 2 years, until you have fully paid off your student loans in 10 years.

This is also not an ideal plan for graduating med students and residents. The payments under this plan will still be higher than most residents can afford. Don’t get me wrong, paying off your loans in 10 years instead of dragging it out over 25 years will save you money in interest. However, if you can afford the high payments under this plan and want to pay off your loans in a few years, you could save even more money by simply refinancing your loans with an outside company since they can offer you can even lower interest rate.  

3.     What is the Extended Repayment Plan?

Through the extended repayment plan you will pay off your loans in 25 years by making fixed or graduated payments. This plan is for people who don’t qualify for an income driven plan and want to spread their loans out over 20-25 years. It is not ideal for medical students and residents since we qualify for income driven repayment plans during residency.

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4.     What are the income-driven repayment plans?

The Federal Department of Education understands that some people may have acquired a substantial amount of student loan debt that they may not be able to repay with their current salaries. Instead of handing you a monthly student loan bill that may be higher than your mortgage, these income-driven repayment plans base the size of your monthly student loan payments on your income.

Keep in mind that there are several different types of income-driven repayment plans. There is Pay-As-You-Earn (PAYE), Revised-Pay-As-You-Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

Most of these plans cap your student loan payment at 10-15% of your discretionary income. Your discretionary income is your income minus whatever the poverty line is for your family size. In other words, if your income is low, your student loan payment will be low. As your salary increases, the size of your student loan payment will increase. After 20-25 years (depending on the type of federal loans you have) your student loans will be forgiven. Keep in mind that many residents and attending physicians will qualify for public service loan forgiveness which forgives their student loans after only 10 years of payments.

5.     Should you enroll in an income-driven repayment plan like Pay-As-You-Earn (PAYE) or Revised-Pay-As-You-Earn (REPAYE)?

As graduating med students or residents, you should consider enrolling in PAYE or REPAYE, especially if you have at least tens of thousands of dollars in student loans. Under these income-driven plans, your student loan payment is never more than 10% of your discretionary income, which is ideal for residents trying to make ends meet on a $60K salary. The amount of your income-driven repayment is recalculated each year after you file your taxes.

Of note, if you file your taxes as a graduating med student with zero income, then there is a high possibility your student loan repayment your first year residency will be zero dollars. Having a student repayment of zero dollars will actually count towards one of your 10 years of required payments under the public service loan forgiveness program. If you don’t file your taxes and instead opt for a grace period (the default option) then that time will not count toward public service loan forgiveness.  

6.     What is the difference between PAYE and REPAYE?

PAYE and REPAYE are similar income-driven repayment plans but have little nuances that can make a big difference. Both plans cap your student loan payment at 10% of your discretionary income and will forgive your loans after 20-25 years. The government will pay 100% of any unpaid interest that accrues on your subsidized loans during the first 3 years of repayment but will not do so for your unsubsidized loans. (As a rule of thumb, most people take out subsidized loans in undergrad and unsubsidized loans in med school). The differences between PAYE and REPAYE are:

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-Under REPAYE, the government will pay 50% of any unpaid interest that accrues on your unsubsidized loans. I realize this may sound confusing, so let me explain. Under all of the income-driven repayment plans, the government will cover any unpaid interest on your subsidized loans (aka loans from undergrad) for the first 3 years. However, interest will still accumulate on your unsubsidized loans (loans from med school).

If you’re like me, with around $200,000 in student loans, it’s very likely that your income-driven payments in residency will not even cover the interest that is accruing on your loans. Under REPAYE, the government will pay 50% of the remaining interest to keep it from compounding so quickly. For example, if your income-driven repayment plan requires you to pay a monthly payment of $200 (which amounts to $2,400 a year) but the interest accruing on your loans is $10,000 a year, then the government will pay 50% of the interest that remains so ($10,000-$2,400)x50%= $3,800.  

-PAYE will cap your payments at the standard repayment plan level even as your income rises and will not count your spouse’s income in calculating your income-based payment, if you file your taxes separately. However, if you are enrolled in REPAYE your spouse’s income will be used to determine your monthly payment, even if you file your taxes separately.

7.     When should you consider Income Based Repayment (IBR) and how is that different from Income-driven repayment?

The term “income based repayment (IBR)” is a specific type of income-driven repayment plan. Under IBR your monthly payments are capped at 10-15% of your discretionary income. This plan is ideal for someone who doesn’t qualify for PAYE but still wants an income–driven repayment plan that won’t take their spouse’s income into account. Most med students and residents qualify for PAYE, so this plan isn’t applicable.

8.     What the heck is Income Contingent Repayment (ICR) and who should enroll in that one?

Income contingent repayment (ICR) is a type of income-driven repayment plan for people who are paying back student loans that their parents might have taken out on their behalf or for parents themselves who want a more affordable way to pay back the loans they took out to finance their children’s educations. My point? If you aren’t paying back loans from your kids or loans from your parents then ICR is probably not the plan for you.   

9.     Can you change from one student loan repayment plan to another?

Yes. Oftentimes people may choose one of the income-driven repayment plans after they graduate, but then change to another type of plan as their salary increases or their life circumstances change. For example, a recent graduate might choose to enroll in REPAYE for a few years to enjoy the benefits of the government interest subsidy, then change into PAYE if they get married to someone who makes a high income (so that their spouse’s income isn’t used to determine their monthly payments). Then, after a few more years, they may opt out of the income-driven plans altogether or refinance their loans with an outside company to lower their interest rate.

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Key Takeaways:

I realize this was A LOT of information. I did a ton of research, read the information on student loan repayment plans multiple times, and even called the Department of Education to clarify a few things. Thus, if you’re slightly confused or unsure of what plan is right for you, you can always call your loan servicer to ask for help, put your information into the repayment estimator, or look up information on the Federal Website FAQ page. Nevertheless, here are some general takeaways:

1.     Medical students and residents with at least tens of thousands of dollars in student loans should opt out of the standard repayment plan and enroll in an income-driven repayment plan. (this will make your payments affordable in residency). 

2.     There are 4 types of income driven repayment plans. They are Pay-As-You-Earn (PAYE), Revised-Pay-As-You-Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

3.     PAYE caps your payment at 10% of your income and WILL NOT INCLUDE your spouse’s income when calculating your repayment (if you file your taxes separately).

4.     REPAYE also caps your payment at 10% of your income AND will provide a 50% subsidy for any unpaid interest on your unsubsidized loans (aka loans med school) each year, but it WILL INCLUDE your spouse’s income when calculating your repayment (even if you file your taxes separately).

5.     IBR is for people who don’t qualify for PAYE or REPAYE (not applicable for med students).

6.     ICR is for people paying back loans that their parents took out on their behalf (hopefully not applicable for you).

7.     If you are single (or married to a spouse who doesn’t make much money) and may consider public service loan forgiveness, REPAYE may be best. (Take advantage of that interest subsidy in residency)

8.     If you are married to a spouse who makes a lot of money (i.e. near $100K) and may consider public service loan forgiveness, PAYE may be best. (This will prevent your spouse’s income from drastically increasing the amount of your student loan payment)

9.     If you are married to a spouse who makes a decent amount of money (i.e. $40-80K), it depends, you may have to run the numbers yourself.

10.  You can switch plans if you realize you are enrolled in the wrong one. This is very common as people’s life circumstances change (i.e. as they get married, switch jobs, or experience a change in income).

 

Trying to get your student loans forgiven? Consider public service loan forgiveness

Public service loan forgiveness has gotten some bad press in the news, but as a graduating medical student, I am still planning to enroll in it. When I shared this proclamation with my classmates they had mixed reactions and several questions. Just in case you’re wondering the same thing, I’ve answered them all below:                                                                                                            

1.     What is Public Service Loan Forgiveness?

Public Service Loan Forgiveness (PSLF) is a government sponsored student loan forgiveness program. If you work in public service for a non-profit organization, academic institution, or government agency and make 10 years of on-time qualifying monthly payments towards your student loans, the government will “forgive” your remaining student loan balance.

This program was designed for public servants like teachers and police officers who have lots of student loan debt but may be unable to pay it off in a reasonable time, partly because the salary they receive working in public service is less than the salary they would have received in a different profession. The goal of the program is to allow people with a passion for public service to pursue careers in that field without saddling them with an eternal burden of student loans.

The great thing about this program is that many health care professionals qualify too. Before you roll your eyes, hear me out. Many [future] doctors, such as myself, obtained an average of $200,000 in student loans during medical school. Then we enter residency where we are mandated to spend 3-7 years earning a government salary of only $60,000 while working 80 hours a week before we can make “the big bucks.” If we choose to stay working in an academic setting, which pays much less than private practice, we will qualify for public service loan forgiveness as well.

 

2.     Wait, isn’t it sketchy?

I’ll admit, there has been some bad press about public service loan forgiveness (PSLF). A couple years ago, people who thought they met the requirements were finally able to apply for loan forgiveness. Unfortunately, many people were not granted this forgiveness and hearing this news scared many people who were depending on this program.

Although this is less than ideal, there are several reasons why previous applicants were unable to get their loans forgiven. When the program first came out, the rules were vague. There was a lot of misinformation about how to enroll and many people who thought they qualified for the program did not actual qualify for it. Nowadays, the requirements for PSLF are much easier to understand. Now that people are more aware of how to properly enroll into the program, there is a good chance that people who have met the qualifications will get their student loans forgiven in the future.

3.     Is it wise to depend on this program?  

With recent proposals to eliminate PSLF, or potentially limit how much money can get forgiven through it, many people are worried it may change in the future and would rather pay off their student loans another way. That’s understandable. However, I am still planning to enroll in PSLF. Why? Because as it stands currently, PSLF gives me a chance to get hundreds of thousands of dollars in student loans forgiven. It is simply too good of a deal to pass up.

I could work insanely hard to pay off my student loans shortly after finishing my medical residency and fellowship, but doing so would cause me to live a less than ideal life. My student loan payment could be nearly $3,000 a month (almost double the cost of a mortgage). Pursuing PSLF allows me to enroll in an income-driven repayment plan that never charges me a payment higher than 10% of my income. With PSLF, I can use the money I would have spent on student loans to save up for a down payment on a home, replace my old car, finance my [future] kids college educations, or save for retirement.

 

4.     How do you qualify?

According to the website, you need to have direct federal student loans, work full-time in public service via a 501(c)(3) nonprofit or academic institution, and submit 10 years worth of on-time qualifying payments (i.e. Pay the full amount of your student loan repayment each month through one of the income-driven repayment plans).

 

5.     How do you actually enroll?

Go to the student loan website, fill out sections 1 and 2 on the PSLF enrollment form, and have your employer fill out Sections 3 and 4. Once that is complete, you fax the entire form to the “FedLoans” sub-department of the Federal Department of Education. Once you’ve submitted the form, “Fedloans” will verify whether you submitted the paperwork correctly and confirm whether you qualify. You must contact Fedloans annually to verify all of your payments and re-submit the employer verification enrollment form so that they know you still work in public service for a qualifying organization. If you have a different loan servicer (such as Nelnet, Navient, Great Lakes, etc), your loan servicer will be switched to Fedloans as soon as you enroll into Public Service Loan Forgiveness.  

 

6.     Are you protecting yourself if something goes wrong?

I understand that going for PSLF is a risk. There is a good chance that the government might drastically change the rules of a program that allows relatively high earning doctors to avoid paying hundreds of thousands of dollars in student loans. If you are still going for PSLF like I am, you need to protect yourself.

How am I doing this? By creating a “student loan investment side fund.” Instead of using the money I’m saving in PSLF to buy a better car, a larger home, or have a wealthy “doctor” lifestyle, I’m saving that money. Specifically speaking, I will take money from each check and put it into a high-yield savings account. I’ll use money in that account to invest in a combination of real estate deals, index mutual stock funds, and money market funds. That way, if PSLF changes in the next few years and for some reason I can’t get my loans forgiven, I will have created a nice nest egg of money that I can use to quickly pay off the rest of my student loans. If the PSLF program stays the same, then I can keep on investing that money and use it to pay for my [future] kids’ college education or my retirement. The opportunity to get hundreds of thousands of dollars in student loans forgiven is worth taking a risk. The best way to take this risk is to protect yourself just in case something happens.

Tell me, are you thinking of going for Public Service Loan Forgiveness too?

How to Choose The Student Loan Repayment Plan Best For You

 
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If you have ever tried to learn about student loan repayment plans you might have felt overwhelmed and confused. The information can seem daunting at first and even I had to spend a couple days researching the repayment plans before I finally understood the differences among them.

Instead of spending days researching information like I did, I’ve created a summary of information on the different repayment plans in a question-and-answer format with some key takeaways at the end. I hope you find it helpful:

  1. What is the Standard Repayment Plan and who should choose it?  

    With the standard repayment plan, you will pay off your student loans in 10 years by making “fixed” monthly payments. This means you will pay the same amount each month regardless of how much money you make. The government will determine your monthly payment by adding all of your student loans (and the projected interest that will accumulate on them), dividing that number by 10 [years], and splitting the amount into fixed monthly payments. 

    Choose the standard plan if you can afford the payments each month and don’t plan on pursuing any student loan forgiveness programs. Paying off your loans in 10 years, instead of dragging them out over 20-25 years, will save you thousands of dollars in interest payments. The downside to the standard plan is that the fixed monthly payments may be higher than you can actually afford, especially if you have a high amount of student loan debt (i.e. people who took out student loans for private colleges, graduate school, or some other type of professional program). Keep in mind that you will be automatically enrolled into the standard repayment plan if you don’t select a different repayment plan.   

  2. What is the Graduated Repayment Plan and who should choose it?

    The graduated repayment plan is similar to the standard repayment plan. In both plans, you pay off your loans in 10 years. However, with the graduated repayment plan, your monthly payments are not fixed. Your monthly payments will instead start out low, and increase every 2 years, until you have fully paid off your student loans in 10 years.

    This plan might be good for someone who knows his or her income will increase within the next few years. However, the monthly payments in the later years might be much higher than you can afford. Plus, if you are going to pay off your student loans in 10 years then you might want to consider refinancing them with a company outside of the federal government since they may be able to offer you a lower interest rate.

  3. What is the Extended Repayment Plan?

    Through the extended repayment plan you will pay off your loans in 25 years. You can either make “fixed” payments for 25 years or you can make “graduated” payments (in which the payments start small and then increase in amount each year). Usually, people choose this plan when they are not eligible for one of the income-driven repayment plans but cannot afford the high monthly payments that would require them to pay off their loans in 10 years. If you are eligible for one of the income-driven repayment plans then that is probably your best bet.   

  4. What are the income-driven repayment plans?

    The Federal Department of Education understands that some people may have acquired a substantial amount of student loan debt that they may not be able to repay with their current salaries. Instead of handing you a monthly student loan bill that may be higher than your mortgage, these income-driven repayment plans base the size of your monthly student loan payments on your income.

    Most of these plans cap your student loan payment at 10-15% of your discretionary income. Your discretionary income is your income minus whatever the poverty line is for your family size. In other words, if your income is low, your student loan payment will be low. As your salary increases, the size of your student loan payment will increase. After 20-25 years (depending on the type of federal loans you have) your student loans will be forgiven.

    The good thing about these income-driven repayment plans is that they allow you to make student loans payments you can actually afford. The bad thing about these income-driven repayment plans is that you will pay more money in interest than you would have paid on the standard or graduated plan and you have to pay taxes on the amount of student loans that are forgiven. For example, if you get $50,000 forgiven then you have to pay taxes on that $50,000 the year your loans are forgiven. (Note: if you opt for public service loan forgiveness, you don’t have to pay taxes on loans that are forgiven through that program, but that is the exception).

    Keep in mind that there are several different types of income-driven repayment plans. There is Pay-As-You-Earn (PAYE), Revised-Pay-As-You-Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

  5. Should you enroll in an income-driven repayment plan like Pay-As-You-Earn (PAYE) or Revised-Pay-As-You-Earn (REPAYE)?

    Consider enrolling in PAYE and REPAYE if you cannot afford payments under the standard repayment plan and/or if you might be pursuing a loan forgiveness program. These income-driven repayment plans are for people like new doctors entering residency and college graduates entering the workforce who may not be able to afford payments under the standard plan. Under these income-driven plans, your student loan payment is never more than 10% of your discretionary income.

    With these plans, you send in a payment each month and your loans are forgiven after the 20-25 years. Your income-driven repayment is recalculated each year after you file your taxes. If your income goes up, the amount of your student loan repayment goes up. If you decide that you want to pay off your loans before 20-25 year mark, there is no penalty for paying more than the amount due.

  6. What is the difference between PAYE and REPAYE?

    PAYE and REPAYE are similar income-driven repayment plans but have little nuances that can make a big difference. Both plans cap your student loan payment at 10% of your discretionary income and will forgive your loans after 20-25 years. The government will pay 100% of any unpaid interest that accrues on your subsidized loans during the first 3 years of repayment but will not do so for your unsubsidized loans. (As a rule of thumb, most people take out subsidized loans in undergrad and unsubsidized loans in graduate school or professional school). The differences between PAYE and REPAYE are:

    -You have to qualify for PAYE. It is only available to people with certain types of loans and who can demonstrate financial hardship with a high debt burden relative to their income (check with your loan servicer to see if you qualify).

    -Unlike PAYE, REPAYE will also pay 50% of any unpaid interest that accrues on your unsubsidized loans. I realize this may sound confusing, so let me explain. Under all of the income-driven repayment plans, the government will cover any unpaid interest on your subsidized loans (aka loans from undergrad) for the first 3 years. However, interest will still accumulate on your unsubsidized loans (loans from graduate school).

    • Under the REPAYE plan, if your income is so low and/or your debt burden is so high that your income-driven payments do not even cover the interest that is accruing on the loans, then under REPAYE the government will pay 50% of the remaining interest to keep it from compounding so quickly. For example, if your income-driven repayment plan requires you to pay a monthly payment of $200 (which amounts to $2,400 a year) but the interest accruing on your loans is $10,000 a year, then the government will pay 50% of the interest that remains so ($10,000-$2,400)x50%= $3,800.  

    -PAYE will cap your payments at the standard repayment plan level even as your income rises. As you start to earn more money your income-based repayment plan will increase. If you are enrolled in PAYE, the payment will never be higher than it would have been if you had enrolled in the standard 10 year plan. In contrast, if you enrolled in REPAYE, then it can be higher (but of course will never be higher than 10% of your discretionary income).

    -If you are enrolled in PAYE, your spouse’s income is not used to calculate the income-driven repayment amount if you file your taxes separately. However, if you are enrolled in REPAYE your spouse’s income will count, even if you file your taxes separately.

  7. When should you consider Income Based Repayment (IBR) and how is that different from Income-driven repayment?

    ”Income-driven repayment plans” is the umbrella term used by the federal government to classify all the types of repayment plans that base your monthly payment on your income. PAYE, REPAYE, IBR, and ICR are all considered different types of “income-driven repayment plans.”

    Unfortunately, not everyone can qualify for PAYE. If someone doesn’t qualify for PAYE and doesn’t want his or her spouse’s income to be used in calculating the income-driven payment, he or she might want to consider the income based repayment plan (IBR).

    The IBR plan is ideal for people who: cannot afford payments under the standard repayment plan, plan to go for some sort of loan forgiveness program, do not qualify for PAYE, AND do not want their spouse’s income used to determine their monthly payments.

  8. What the heck is Income-contingent repayment (ICR) and who should enroll in that one?

    Income contingent repayment (ICR) is a plan for people who want to enroll into an income-driven repayment plan but have loans that don’t qualify for PAYE, REPAYE, or IBR. Most federal loans that you took out as a student will qualify for PAYE, REPAYE, or IBR. However, loans that your parents may have taken out will not. Thus, ICR is a good income-driven repayment plan for students who are paying back student loans that their parents might have taken out on their behalf or for parents themselves who want a more affordable way to pay back the loans they took out to finance their children’s educations. My point? If you aren’t paying back loans from your kids or loans from your parents then ICR is probably not the plan for you.   

  9. Can I change from one student loan repayment plan to another?

    Yes. Oftentimes people may choose one of the income-driven repayment plans after they graduate, but then change to another type of plan as their salary increases or their life circumstances change. For example, a recent graduate might choose to enroll in REPAYE for a few years to enjoy the benefits of the government interest subsidy, then change into PAYE or IBR if they get married to someone who makes a high income (so that their spouse’s income isn’t used to determine their monthly payments). Then after a few more years, they may opt out of the income-driven plans altogether or even refinance their loans with an outside company to lower their interest rate.

    There is a caveat to switching plans though: If you initially enroll into the IBR plan and want to switch plans, you must first enroll in the standard plan and pay one payment under that plan before you switch into another type of plan. (From my knowledge, this is the only repayment plan with that caveat).


Key Takeaways:

I realize this was A LOT of information. I consider myself a fairly intelligent individual (who is about to graduate with a doctorate degree) and even I had to read the information on student loan repayment plans multiple times. I did a ton of research and even called the Department of Education to clarify a few things. Thus, if you’re slightly confused or unsure of what plan is right for you, you are not alone. You can always call your loan servicer to ask for help, put your information into the repayment estimator, or look up information on the Federal Website FAQ page. Nevertheless, here are some general takeaways:

  • If you can afford the payments under the standard 10 year plan and don’t plan on getting your loans forgiven through any government program enroll in the standard repayment plan.

  • If you plan on participating in the public service loan forgiveness program then enroll into an income-driven repayment plan (that way you will have smaller monthly payments and get more money forgiven).

  • ”Income-driven repayment” is the umbrella term for student loan repayment plans that base your monthly payment on your income. Pay-as-you-earn (PAYE), revised-pay-as-you-earn (REPAYE), income-based repayment (IBR), and income contingent repayment (ICR) are different types of income-driven repayment plans.

  • REPAYE and PAYE are both types of income-driven repayment plans and are very similar. Both will cap your payments at 10% of your discretionary income. The differences among them are:

    • You have to specifically qualify for PAYE but REPAYE is open to almost everyone.

    • REPAYE will continue to subsidize 50% of unpaid interest that accrues on your unsubsidized loans (aka some of your loans from grad school).

    • PAYE will not include your spouse’s income when calculating your payments if you file your taxes separately, REPAYE will include your spouse’s income even if you file your taxes separately.

  • If you are single (or have a spouse who does not make much money), cannot afford payments on the standard plan (or plan to pursue public service loan forgiveness), and do not think your monthly payments will fully cover the cost of interest that is accruing on your loans, then enrolling in REPAYE may be best.

  • If you are married to a spouse who makes a decent amount of money, but cannot afford the standard repayment plan, and may choose to pursue public service loan forgiveness in the future then do PAYE. If you do not qualify for PAYE, then enroll in IBR.

  • You can always switch from one repayment plan to another. This is very common as people’s life circumstances change (i.e. as they get married, switch jobs, or experience a change in income).

Tell me, was this helpful? What additional information about student loan repayment plans would you still like to know?


 

How To Tackle Student Loan Debt

 
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If you’re like me, or one of the millions of Americans who have student loan debt, I understand your plight. Learning about the different servicers, figuring out the repayment plans, and familiarizing yourself with terms like “refinance” and “consolidation” can be a bit daunting. Although many young professionals may have already come up with a plan to tackle their student loans, there can be a bit of a learning curve for new graduates. Here are some simple steps to help you tackle your student loan debt:

Step 1 = Figure out how much student loan debt you have. If you filled out a FAFSA form and received student loans from the federal government, then you can go to https://studentaid.ed.gov/sa/ to see your total student loan debt balance. You will need to input your FSA username and password in order to login (this is the same username and password you used to fill out your FAFSA form). Keep in mind, the total amount of student loan debt you have will include the principal (how much you actually borrowed) and the interest (the amount the government charges you each year until you pay the money back). If you took out private loans from outside banks, foundations, or corporations you will need to contact them directly (if they haven’t already started contacting you first) to determine how much you owe.


Step 2 = Find out the interest rates and the servicers of each loan you have. When you took out a student loan from the government, it was issued by the Federal Department of Education. However, there are different sub-departments within the Department of Education that handle your loan repayment. These “sub-departments” are called loan servicers and they are who you actually contact when you repay your student loans.

For example, I took out loans through the Federal Department of Education, but my loan servicer is Nelnet. Thus, Nelnet is who I pay when my loan is due. You might have taken out a loan through the Department of Education just like me, but have a different servicer (such as Great Lakes, FedLoans, Navient formerly known as Sallie Mae, etc). You must pay back your particular loan servicer directly. Once you login into the website and find out the servicer each of your student loans, you need to look at the interest rates on these loans. Chances are that you have different interest rates on each loan since the interest rate may have fluctuated as you took out loans from year to year. Your goal is to determine the range of interest rates you have on your student loans.

I know this may sound complicated, but it’s quite easy. I’ll walk you through what it was like for me. As soon as I logged into the website I had to accept a waiver. Then, I was able to see the total amount of student debt I owed (which was pretty high given my status as a medical student, but I digress). Anyway, I could also see the number of loans I had taken out and the fact that all of my loans had the same servicer (Nelnet). You may have different servicers for different loans, so be careful. Once I saw this listing of my student loans, I could then expand the tab (by clicking an arrow) and see the amount of each loan, the interest rate on each loan, and the date on which my next payment on that loan was due. If I click “view details” I can see the date on which I took out the loan and the interest that has accrued on it up to this point, among other things.

Step 3 = Understand the pros and cons of student loan debt consolidation. Debt consolidation is when you combine all of your loans into one giant loan with one interest rate. Consolidating your loans has advantages and disadvantages. The advantages of consolidating your loans (through the federal government) is that you combine all of your loans into one giant loan. Your new interest rate will be the weighted average of the interest rate on all of your loans. If you do not consolidate then you will have a different loan for each semester in which you took out money, each with different interest rates and potentially different loan servicers. This can get confusing.

By consolidating (through the federal government) you are able to combine all of these loans into one loan and focus on paying that one loan only. Having one giant loan, instead of many different smaller loans, tends to look better on your credit report. Another advantage of federal consolidation is that any loan that may not have counted towards loan forgiveness programs can now count towards those programs after you consolidate your loans (through the federal government).

The disadvantage of consolidating your loans is that any interest that has accrued on your loans will be added to the principal amount. Let me explain. If you took out unsubsidized loans, then interest accrued on those loans while you were still in school. Once you consolidate your loans, all of the interest that has accrued on your loans to that point will be added to the principal amount of the loan. For example, if you have taken out a total of $50,000 in student loans and $3,000 in interest has accumulated on the loans during that time, then if you consolidate your loans you will have a new loan with a new principal amount of $53,000 (that includes the $50,000 you borrowed plus the $3,000 that had already accumulated in interest).

I should mention that you have the option to consolidate your loans through the federal government or through a private company or bank. Although a private company may be able to offer incentives to get you to consolidate through them, I would advise you to consider consolidating through the federal government instead, if you choose to consolidate in the first place. The advantage of consolidating your student loans through the federal government is that you are still eligible for many of the benefits that come with federal student loans.

The federal government is much more understanding when you go through life changing situations. If you lose your job, become disabled, or have some life altering event that prevents you from making your student loan payment you can ask the government to put your loans into deferment or forbearance. Although they are slightly different, both of these options will grant you temporary relief from having to pay back your loans for a few months up to a few years. Most private companies will not give you this option.

Plus, many federal loans can usually be “forgiven” after a certain length of time. In fact, many federal income-driven repayment plans and programs will forgive your loans after 10-25 years. So unless you are secure in your job and are making a lot of money, I’d suggest consolidating your loans into one giant loan with the federal government if you feel you need to consolidate at all. Doing so, allows you to keep the protections that come with federal loans and makes your student loans easier to manage in the process.  

What am I doing? Consolidating. Even though my loans are already with the same loan servicer (Nelnet) with fixed interest rates, I need to consolidate in order to waive my grace period and start making payments under Public Service Loan Forgiveness as soon as I can. Graduates have a 6 month grace period before they have to start paying back their loans. While most graduates appreciate this grace period, I plan to opt for Public Service Loan Forgiveness (PSLF). Under PSLF, I'll be enrolled in an income-driven repayment plan that caps my repayment at 10% of my income until my loans are forgiven. However, PSLF doesn't kick in until after the grace periods ends. If I wait 6 months for the grace period to end, I will miss out on 6 months of low payments that could count towards PSLF. In order to waive the grace period, I must consolidate.

My point? If you have multiple loan servicers, variable rate loans, loans that don’t automatically qualify you for a loan forgiveness programs, or plans to pursue PSLF specifically, then consolidating through the federal government may be beneficial for you as well. 

Step 4 = Think twice before you refinance your loans. Although refinancing can be similar to consolidating, the terms are different. Consolidating your loans is when you combine all of your loans into one giant loan and the interest rate you pay is the average of the interest rate you had on each individual loan. Refinancing is different. Refinancing is when you combine all of your loans into one giant loan and pay a LOWER interest rate than what would have been the average on all the loans. Refinancing can only be done outside of the federal government through a commercial bank, credit union, or some outside company.

The advantage of refinancing is that you pay a lower interest rate than you would have otherwise which can save you thousands of dollars. The disadvantage of refinancing is that you lose the protections and benefits that come with having federal loans. After you refinance, you are no longer eligible for federal deferment or forbearance if life takes a turn. Most importantly, you are no longer eligible for federal student loan forgiveness programs. Unless you are certain that you will not be pursuing any student loan forgiveness programs and have enough job security that needing deferment or forbearance is unlikely, then you may want to wait to refinance.

What am I doing? Choosing not to refinance right now and revisiting the subject in a few years. As a graduating medical student who will start residency training as a physician, I am in a unique situation. My plan is to enroll into an income driven repayment plan through the federal government. I will pay my student loans on time each month until I finish residency training and fellowship. Afterwards, I will decide to work in academics or private practice. If I choose academics I will keep my loans with the federal government and opt for public service loan forgiveness (which forgives my loans within 10 years). If I do not choose to work in academics, I will refinance my loans with a private company and plan to pay them off in 5 years.


Step 5 = Enroll into a repayment plan that is best for you. There are many different repayment plans. You need to check with your loan servicer to see which repayment plan options you qualify for or use the repayment estimator to get a general idea. If you don’t choose a plan, you will be automatically enrolled in the standard repayment plan which puts you on track to pay off your loans within 10 years. Although this plan will save you money in interest payments, the monthly payment required may be higher than you can afford.

If this is the case, enroll in one of the income-driven repayment plans. These plans never require you to pay more than 10% of your income in students loans and will forgive your loans after 20-25 years, if you haven’t already paid them off. (If you opt for public service loan forgiveness, then your loans will be forgiven in 10 years).  Income driven repayment plans are ideal for anyone who plans to get their loans forgiven via public service loan forgiveness or some other type of loan forgiveness program.


Step 6 = Look into loan forgiveness programs and submit the necessary paperwork. I alluded to this above, but as you think about your student loans it’s important to consider whether or not you are considering some sort of loan forgiveness program, most notably public service loan forgiveness. Although this program will forgive your loans after making 10 years of payments, you need to ensure that you have properly enrolled into it.

You can refer to the student loan website but essentially you need to have direct loans through the federal government, work at some sort of academic institution or non profit organization, and make 10 years of on-time qualifying payments. If you know you want to enroll in this program, then you can fill out the form on the student loan website. You complete sections 1 and 2, have your employer fill out sections 3 and 4, then fax the completed form to the “Fedloans”  sub-department of the federal government to officially enroll.

To summarize: there are 6 steps you need to take to start tackling your student loans. First, go to the student loan website and figure out how much money you owe. Then, determine your loan servicer and the interest rate on each of your loans so you can figure out who to contact to start repaying them. Next, you need to understand the pros and cons of federal debt consolidation so you can figure out if you should combine your loans into one giant loan or not. Remember to think twice before you refinance your loans since doing so will make you ineligible for federal loan forgiveness programs. After that, enroll into an income-driven repayment plan, if your monthly payments under the standard plan are higher than you can afford. Lastly, look into government loan forgiveness programs and submit the necessary paperwork to enroll.

Tell me, was this helpful? Do you feel more like you have a game plan on how to tackle your student loans?