Editor’s Note: The last in a three-part series, this article picks up right where Part II leaves off and concludes the discussion on student loan debt-borrowing and repayment. At this point, it is presumed that the reader has completed a legal education with the help of federal student loans and is ready to begin repayment. If you have not already done so, I advise you to read Part I and Part II of this series to familiarize yourself with what has been previously discussed.
Six months after graduation, all student loan borrowers should expect a gift from the lender or servicer of his/her federal student loans. This gift of course, is a monthly bill and repayment plan. For some individuals, this bill serves as a post-graduation reality wake-up call and for others it causes much stress, worry, and anxiety. No matter the emotions connected to a borrower’s student loan debt, the fact remains that the debt must be repaid.
Keeping up with student loan repayment is tough for many graduates, especially in the wake of the current economic crisis plaguing our nation. Many graduates are finding themselves unemployed, under-employed, or bouncing from one form of temporary employment to another. It comes as no surprise that many law school graduates are forced to defer or forebear repayment of their student loans, or to seek alternative repayment plans. In this article, we will focus our discussion on the repayment of student loans and the options available to borrowers of federal student loans.
Deferment allows one to temporarily postpone repayment of the principal and interest on a student loan debt. Better yet, if the debt is a subsidized federal student loan, the government will pay the interest on the loan during the periods of deferment. The four most common deferment options are: in-school, unemployment, economic hardship (including Peace Corps service), and military service deferments. Borrowers of federal student loans prior to July 1, 1993 are eligible for other forms of deferments including, but not limited to: teacher shortage, working mother, parental leave, and temporary disability.
- In-School Deferment: loans may be deferred for individuals who are attending an eligible institution at least half-time.
- Unemployment Deferment: loans may be deferred for individuals who are either seeking full-time employment OR who are working less than 30 hours per week OR who are receiving unemployment benefits. Keep in mind that the maximum duration under which students can receive this deferment benefit is 36 months.
- Economic Hardship Deferment: loans may be deferred for individuals who are either receiving state or federal benefits such as Temporary Assistance for Needy Families (TANF), Supplemental Social Security Income (SSI), Food Stamps, or state general public assistance OR a Peace Corps volunteer OR has been granted a deferment in the Direct Loan Program OR are working full-time making less than 150% of the poverty guideline or federal minimum wage. Keep in mind that, like unemployment deferment, the maximum duration under which students can receive this deferment benefit is 36 months.
- Military Service Deferment: loans may be deferred for individuals who are either serving active duty in the Armed Forces during a war or other military operation or national emergency OR performing qualifying National Guard duties during such a time.
Individuals who do not qualify for deferment or those who have exhausted the length of their varied deferment options and are having difficulty making payments can seek forbearance. Forbearance allows one to temporarily stop making payments or reduce the amount of the monthly payment for up to 12 months. Unlike in a deferment where the government would pay the accruing interest on subsidized loans, all loans (subsidized, unsubsidized and PLUS) in forbearance will continue to accrue interest for which the borrower would be responsible to repay. If the accrued interest during the forbearance period is not paid, it will be capitalized to the principal at the end of forbearance/ beginning of repayment.
One can seek a forbearance for a number of reasons including extended illness, participation in a national service or community service position (i.e.: AmeriCorps) or financial hardship (total monthly payment of all federal student loan is equal to or greater than 20% of the borrower’s total monthly gross income).
Keep in mind that deferment and forbearance are not automatic, as the lenders and servicers do not have a way to monitor each graduate’s financial situation. The borrower must make his/her request known to the lender or loan servicer. Also, bear in mind that a borrower must continue making payments on their student loans until the loan servicer informs the borrower that such a forbearance or deferment request has been granted.
One day, sooner or later, student loan borrowers will begin to repay their student loan debt. When this time approaches, borrowers have many different repayment plan options to choose from. These options are traditionally based on the borrower’s desires and/or the borrower’s financial predicament. Repayment plans can be changed during the life of the loan. Keep in mind that the longer your loan is in repayment, the more you will pay as a result of the continued accruing interest. Below is a brief discussion of the various repayment plans available to borrowers of federal student loans (Direct and FFEL, not necessarily Perkins):
- Standard Repayment Plan: Unless you are approved for an alternative repayment plan, the default plan given to borrowers is the standard 10 year repayment option. Borrowers who opt for and keep up with this repayment plan typically pay less interest during the life of the loan because the loan will be repaid in the shortest amount of time (shorter than the alternative repayment plans). In essence, a borrower under this option can expect to pay the same fixed amount every month.
- Graduated Repayment Plan: Under this repayment plan, monthly payments begin moderately low and increase gradually, usually every two years, with the expectation that the loan will be repaid in 10 years. This option is best for borrowers who anticipate a gradual increase in their income over time.
- Extended Repayment Plan: Borrowers who meet the requirements (have more than $30,000 in outstanding student loans borrowed after October 7, 1998) can opt for this plan. Under this plan, borrowers have the choice of two payment options (fixed or graduated, as discussed above) with repayment extended to 25 years. As a result of the extended repayment period, monthly payment amounts will be smaller than would be under the graduated or standard repayment plans. Keep in mind, however, that by extending the life of the loan, you are likewise increasing the amount of money that would be paid as a consequence of the continued accruing interest.
- Income-Based Repayment Plan: Borrowers with a partial financial hardship may opt for this repayment plan which can extend the life of their loans to 25 years. Under this repayment option, monthly payments will be 15 percent of the borrower’s discretionary income (the difference between the borrower’s adjusted gross income and 150% of the poverty guideline for the borrower’s state of residence). If the borrower is unable to pay the debt in full in 25 years, the remaining debt would be forgiven, but only if the equivalent of 25 years of qualifying monthly payments is made.
- Income-Contingent Repayment Plan: Repayment under this plan is calculated each year with the monthly payment amount based on the borrower’s adjusted gross income and the total amount of the borrower’s Direct Loans. This calculation is computed annually and the goal is that the loan will be paid in full in 25 years (or forgiven thereafter if the equivalent of 25 years of qualifying monthly payments is made).
- Income-Sensitive Repayment Plan: Monthly payment under this repayment option will be based on the borrower’s annual income. The formula for repayment differs from lender to lender so borrowers should inquire of their loan servicer about this repayment plan.
- Pay As You Earn Repayment Plan: This repayment option is new (as of December 21, 2012). More information about this payment plan can be found at http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn.
Cancellation or Discharge of Student Loan Debt
It has been said countless times that student loan debt cannot be erased and must be repaid. To a large extent and for a majority of borrowers, this saying holds true. However, there are rare circumstances under which debt will be cancelled or discharged, releasing the debtor from any and all future repayment obligations. Among these are death of the borrower (if there are no co-signers), a total and permanent disability (TDP), closed school (school closed while you were enrolled and you did not complete), false certification of your eligibility by your school or an identity thief, or an unauthorized signature on your student loan application or promissory note. Additionally, student loan debt may be discharged in a Chapter 7 or Chapter 13 bankruptcy proceeding if certain difficult to prove conditions are met. A borrower seeking to file bankruptcy should inquire of this option at the appropriate time.
Borrowers who are dedicated to pursuing a career in public interest or public service should inquire into the availability of student loan forgiveness programs. There are several loan forgiveness programs under which a borrower’s student loan debt can be forgiven in full or in part, provided that the program’s requirements are satisfied. Among these are the Teachers Loan Forgiveness Program, AmeriCorps, the Armed Forces (including the Judge Advocate General’s Corps of some branches), and several state sponsored (and/or law school funded) programs. Begin your inquiry into loan forgiveness options by examining your state’s board of higher education website and contacting your law school’s public interest career advisors. Furthermore, all individuals interviewing for career opportunities should inquire about the company, firm or agency’s recruitment incentives, including student loan repayment or tuition reimbursement options.
In 2007, the United States Congress created the Public Service Loan Forgiveness (PSLF) Program with the aim of encouraging college graduates to pursue full-time public service endeavors. Under this program, borrowers may qualify for forgiveness of the remaining balance on their eligible federal student loans after having made 120 payments on those loans under certain repayment plans while employed full-time by certain public service employers. Keep in mind, however, that payments made prior to October 1, 2007 and payments made on non-Direct Loans do not count toward the 120-payment requirement. Because this provision applies to Direct Loans only, borrowers of FFEL or Perkins loans may consolidate such loans into a Direct Consolidation Loan to secure the benefits of PSLF.
Consequence of Failure to Pay
On a final note, it is important to mention that the failure to timely repay student loan debt obligations carries with it severe and long-term financial consequences. Among these are wage garnishment, the withholding of your state and federal taxes, the ruining of your credit report/credit score, as well as on-going calls and letters from collection agency representatives. With that said, I bid you good luck in your efforts to become student loan debt-free.