Dear Steve,
I currently have my student loans consolidated under the Fedloan Servicing, under the graduate repayment plan, with my debt being $42,000.
Recently the Student Loan Relief Center contacted me saying they can save me money by switching to them. I qualify for the income based repayment plan and they made it sound so enticing by saying I pay back $0 right now and stretch the loan over 25 years.
I know that I will end up paying back the $42,000 throughout the course of 25 years, so I don't think I will benefit from "Having it forgiven after 25 years". However, I am in financial hardship right now, and will be for the next year and a half.
Should I switch to the income-based plan or stay with the graduate plan under my current loan provider Fedloan Servicing. If I was to go with the income-based plan, and end up making more money down the road and I want to pay it off faster (say in 15 years), how will the interest accumulate between the Income-based and the graduate plan?
In the long run, which one would be more advantageous for me to enroll in? (especially since my financial situation will not change for almost another 2 years) In addition, the Fedloan servicing has the same income-based plan available. If I was to switch to that plan, should I just do it through my original loan provider or do it through the student relief center?? (both have a 6.8% rate)."
Worried
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Dear Worried,
I've been concerned about the recent crop of student loan assistance companies. In my survey and review of the companies my conclusion was buyer beware. You can read my advice, here. The National Consumer Law Center came out with a more detailed report and concers which you can read here.
The underlying trouble here is the student loan assistance companies make money by selling you something. However, I have seen little indication the sale is conditioned on best advice. For example, a lower payment is not always the best plan. I go into more detail about that here.
Since your loans are serviced by FedLoan Servicing you are eligible for all of the same Department of Education programs through them for free. There is no sense in paying anyone to assist you with what you have for free already. That is unless you want someone to hold your hand through the process. If you do, click here.
The issue at the moment is the potential for a big tax liability at the end of one of these income based repayment programs. As it stands right now if you make it through the whole program and part of the loan is forgiven the forgiven debt will probably be taxable unless you are insolvent.
However, if the issue is other debt is preventing you from making a student loan payment then a consumer bankruptcy that discharges all your other debt without a tax liability might be a better plan. People then might be able to afford the regular ten year payment plan and get this student loan pain out of the way quicker.
If you were to look at an income contingent repayment program the Pay as You Earn program might be worth looking at first. Rather than 25 years it is five years shorter and your payment is limited to 10% of your income.
Like the other adjustment programs you must have an underlying financial hardship and you have to qualify again annually. A financial hardship is when your student loan payment is more than 15% of your discretionary income.
The Department of Education has an excellent calculator that shows you your options and lets you compare monthly payments. I would advise you to take a few moments and check it out here.
As it stands right now, the graduated payment plan assumes you will be able to support growing monthly payments as the years go by. I have no idea of that is a fair or reasonable assumption for you in your situation. Only you can project what you think the future will bring.
Personally I'm much more comfortable with fixed monthly payments because it gives me something fixed to plan for. But hey, that's just my preference.
A graduated plan is more expensive than the standard repayment plan.
- Assumes that your income will grow enough to afford increasing payments.
- Initial payments mainly cover interest, not the principal balance.
- You will pay a greater amount of interest than you would on the Standard Repayment Plan.
So just on the longterm cost of a student loan repayment approach the least expensive way to do it is to eliminate the underlying problem and get back to the full standard payment.
In your specific situation it would seem a Pay as You Go or Income Contingent program would make the most sense during your period of economic hardship. A graduated payment is just going to go up.
As soon as you can thereafter, get on the ten year standard plan. While you are on the reduced payment plans the unpaid interest will be added to your loan balance and it will grow.
Before I go I wanted to leave you with three easy action items you jump on right now to address your situation. Just click here.
If you have a credit or debt question you'd like to ask, just click here and ask away.
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