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Repayment plans can ease the pain of student loan debt

Education Funding

The Federal Reserve says that student loan debt in the United States totals more than $1.67 trillion. While young adults carry most of it, Americans of all ages are repaying these loans — roughly one-third of those between 18 and 29, 22% between 30 and 44, and 7% between 45 and 59, according to Pew Research.

The CARES Act suspended principal and interest payments on federally-held student loans through September 30, 2020 — later extended through October, 2023. Yet many debtors are finding it difficult to resume monthly payments. If you or a family member is struggling to keep up with payments, explore the various repayment solutions.

Federal government options

The federal government offers a variety of student loan repayment options. The terms of these repayment plans depend on several factors. These include:

  • The type of loan,
  • Whether the loan was for undergraduate or graduate education, and
  • The loan’s origination date.

For most federal student loans, the Standard Repayment Plan calls for fixed payments over 10 years (10 to 30 years for consolidation loans). Graduated payments (starting low and increasing over the repayment period) and extended payment terms may be available. Keep in mind that graduated or extended payments increase the total amount borrowers pay over time.

Reducing monthly payments

There are also programs to help reduce monthly payments. Income-driven plans generally are the most favorable — for example, the federal government’s Revised Pay As You Earn (REPAYE) plan. Under a REPAYE plan, an eligible debtor’s monthly payment is generally 10% of his or her discretionary monthly income. Discretionary income is the amount by which actual annual income exceeds 150% of the poverty guideline for the debtor’s state and family size. Generally, the repayment period is 20 years (25 years for graduate education) after which any outstanding loan amount is forgiven.

One disadvantage of a REPAYE plan is that if the debtor’s income increases substantially during the repayment period, monthly payments may grow higher than the payments that would have been made under the Standard Repayment Plan. A Pay As You Earn (PAYE) plan solves this problem by capping monthly payments at the Standard Repayment Plan amount. PAYE plans are similar to REPAYE plans, but they’re available only to “new borrowers” as of October 1, 2007, (that is, borrowers with no loans disbursed before that date). Also, PAYE-eligible borrowers must have at least one eligible federal student loan disbursed after October 1, 2011, and may need to meet other requirements.

Best plan for you

Other income-driven options to consider include Income-Based Repayment Plans and Income-Contingent Repayment Plans. And don’t overlook student loan relief for graduates who take certain public service jobs or volunteer for organizations such as the Peace Corps, AmeriCorps, or the military.

Not all of these options are accessible to or appropriate for every borrower. Your financial advisor can help you determine which ones are available and structure a repayment plan that makes sense for your or your loved one’s financial situation.