Student Loan Repayment: What To Do Now That Forgiveness Has Been Struck Down

With the recent Supreme Court decision, it seems that Student loan forgiveness won't be coming to us in 2023. Since student loan payments are scheduled to resume at the in October, I spent several years working in student loan repayment, and folks with more education tend to be less religious, I think that a quick discussion about student loans and how to handle them will probably be helpful for a decent percentage of this readership.

Before we dive in, please note that this only applies to people who got their loans from the federal government. If you got your loans from a private bank, unfortunately there's nothing that I can do for you.

To start, I want to take a moment to provide a "glossary" so that we're all on the same page.

Loan Programs:

• Direct loans: Direct loans are loans made by the U.S. Dept of Education.
• FFEL loans: FFEL loans are loans that were made by private banks, but were backed by the Dept of Ed, which allowed the Dept of Ed to regulate some of the terms. This program was ended on 7/1/2010, but there are still some people who took these loans out, and have not yet been able to pay them off.

Loan Types: 

Both the Direct and FFEL programs have (or "had" in the case of FFEL) 5 varieties of loan:

1. Subsidized Stafford: These loans are issued on the basis of financial need, and so they get some special benefits (e.g. interest doesn't accrue while you're in school, and in some other cases).
2. Unsubsidized Stafford: These loans are not based on financial need, so they get basically no special benefits. Interest starts accruing on day 1, and basically never stops.
3. Parent PLUS loans: These are unsubsidized loans that are taken out by a parent (or legal guardian) to pay for their child's education. The parent is financially responsible for paying these loans back, and there is no way to transfer the loan into the student's name.
4. Graduate PLUS loans: Unsubsidized loans offered to students going to Grad school, to help cover the increased costs of grad school.
5. Consolidation loans: Loans taken out to pay off other loans. These loans may be subsidized, unsubsidized, or partially subsidized depending on the loans that were consolidated.

Before moving on to repayment plans I also need to introduce one more term related to the loans themselves: Loan Tokens. I think the best way to explain these is by example. Say you went to college for 2 semesters (fall and spring) and took out a Subsidized Stafford and an Unsubsidized Stafford loan each semester. That means you have 4 loans, with up to 4 different interest rates, just for your first year of college alone. Each of those loans is kept separate via a "token" number, which allows your loan servicer to keep the balances and interest rates separate. Basically, you could think of it as 4 "mini-loans" that make up your total loan amount. They just call them "loan tokens" rather than "mini-loans".

(Note: I believe different loan servicer companies have different terms for "loan tokens", but they function identically regardless of the label.)

Repayment plan types:

There are three basic categories of repayment plans:

Standard Repayment plans: These are plans that do not take a borrower's individual circumstances into consideration. There are no special eligibility requirements. Borrowers can generally switch back and forth between these plans at will, though there's not really a benefit to doing so. The types of Standard Plans are:

1. Level payment plan: You pay the same amount for 10 years (120 payments) and then you're paid off. All standard plans have a minimum payment of $50, so if you have a very small balance, you may get a shorter repayment period than 10 years. (Note: If you have a consolidation loan, your repayment period may range from 10-30 years, depending on your loan balance.)
2. Graduated payment plan: You pay a reduced amount (typically just a few dollars more than the monthly interest) for the first 2 years, and then the payment amount increases every 2 years for 10 years (120 payments) and then you're paid off. This plan rests on the assumption that you're not going to be making much money right out of college, but that your financial situation will improve from there, making higher payments later affordable. (You will pay more interest on this plan than the Level plan.) (Note: If you have a consolidation loan, your repayment period may range from 10-30 years, depending on your loan balance.)
3. Extended Level payment plan: This plan is only available if you have over $30,000 in loans. You pay the same amount for 25 years (300 payments) and then you're paid off. (You will pay more interest on this plan than on either of the 10-year plans.) (Note: Consolidation loans are not eligible for this plan.)
4. Extended Graduated payment plan: This plan is only available if you have over $30,000 in loans. You pay a reduced amount (typically just a few dollars more than the monthly interest) for the first 2 years, and then the payment amount increases every 2 years for 25 years (300 payments) and then you're paid off. (You will pay more interest on this plan than on any other standard plan.) (Note: Consolidation loans are not eligible for this plan.)

Please note that the Standard plans have a "maximum repayment date". Because switching payment plans tends to allow you to skip a month in payments, the maximum repayment date prevents you from switching back and forth between payment plans forever. For instance, if you start on the Level plan and make your payments for 2 months, and then go to the Extended Graduated plan for 2 months, and then try to go back to the level plan, your payment will be calculated based on a 9 year and 8 month repayment plan (116 payments), rather than the full 10 years.

I cannot stress enough: do not try to be clever by switching back and forth between standard plans to avoid making payments. It will come back to bite you.

Income-Driven Repayment (IDR) Plans: These plans take your income and family size into consideration to create a personalized payment amount. These plans have additional features and additional eligibility requirements. Please note that Parent PLUS loans are not eligible for any of these plans. There are four different types of IDR plans:

• Income-Contingent Repayment (ICR): Dating back to 1993, this is the oldest of the IDR plans, and so it is (generally speaking) the worst.
• Your payment is set at the lesser of 1) what you would pay on a 12-year (144 payment) repayment plan or 2) 20% of your "discretionary income" per year. The ICR determines "discretionary income" by taking your Adjusted Gross Income (AGI) minus 100% of the Federal Poverty Level (FPL) for your family size. That is then multiplied by 20%, and divided by 12 to get your monthly payment.
• Example: You're a family of 3 making $65,000 per year. The FPL for your family is $24,860, your discretionary income is thus $40,140 ($65,000 - ($24,860 * 100%)). 20% of your discretionary income is $8,028 per year. Dividing by 12 gives us $669.00 per month. (Unless your loan balance is small enough that the payment on a 12-year plan would be less than that).
• This is the only IDR plan that is available for a consolidation loan that paid off a Parent PLUS loan (however, there is a work-around for this issue, which I will discuss shortly).
• Any unpaid balance is forgiven after 25 years.
• Because the payment on ICR is usually too high to be useful, the ICR will generally no longer be available once repayment begins in October. However, an exception will be made for 1) people already on the ICR, and 2) borrowers with Parent PLUS loans who consolidate their loans.

• Income-Based Repayment (IBR): This was the IDR plan to actually see widespread use. It was created in 2007 and first became available in 2009. It was substantially revised on July 1 of 2014. Notable features are:
• "Discretionary Income" was re-defined to mean "Your AGI - 150% of the FPL for your family size.
• The annual payment was reduced to 15% of your discretionary income. (This was further reduced to 10% for borrowers taking out their first loan on or after 7/1/2014.)
• Example: As above, your AGI is 65,000, with a family size of 3. $65,000 - (24,860 * 150%) = $27,710 in discretionary income. 15% of that is $4,156.50 per year, or $346.38 per month. This is only about half of your payment under ICR
• Any unpaid balance is forgiven after 25 years. (This was reduced to 20 years for borrowers taking out their first loan on or after 7/1/2014.)
• As it is possible that your payment can be less than your monthly interest, the IBR introduced an interest subsidy. If your payment does not cover the interest on your Subsidized Stafford loans, any remaining interest on the Subsidized Stafford loans will be waived for 36 months, beginning on the day that you first enter an IDR plan. Unsubsidized loans receive no subsidy.
• This is the only IDR plan that FFEL loans are eligible for. However, FFEL loans can be made eligible for any IDR plan by consolidating them into a Direct Consolidation loan.

• Pay As You Earn (PAYE): The third of the four IDR plans, PAYE was created on 2012 to offer a still less-expensive alternative to IBR. Notable features include:
• "Discretionary Income" continued to mean "Your AGI - 150% of the FPL for your family size, but the annual payment was reduced to 10% of discretionary income.
• Example: As above, your AGI is 65,000, with a family size of 3. $65,000 - (24,860 * 150%) = $27,710 in discretionary income. 10% of that is $2,771.00 per year, or $230.91 per month.
• Any unpaid balance is forgiven after 20 years.
• The same interest subsidy as exists for the IBR.
• Because the IBR was revised in 2014 and made functionally identical to the PAYE, but the PAYE provides no benefit to FFEL borrowers, the PAYE will be shuttered when student loan payment resumes in October. Borrowers currently on PAYE will be allowed to continue being on it, but no one else will be able to sign up. This will help simplify loan repayment by getting rid of a payment plan that has outlasted its usefulness.

• Revised Pay As You Earn (REPAYE): In late 2015, the final of our 4 repayment plans was introduced. Since being introduced it has typically been the best repayment option for most student loan borrowers: Features include:
• "Discretionary Income" continued to mean "Your AGI - 150% of the FPL for your family size, and the annual payment continues to be 10% of discretionary income. (Payment amount is thus the same as the example given for PAYE)
• Any unpaid balance is forgiven after 20 years for undergraduate loans, and 25 years for graduate school loans.
• The interest subsidy received a massive boost: For the first 36 months after joining an IDR plan, the government would waive 100% of unpaid interest on subsidized loans, and 50% of the unpaid interest on all other loan types. After the 36 month mark, the interest subsidy is reduced to 50% of the unpaid interest for all loans regardless of type.
• Example: Suppose you have $24,000 in subsidized loans, and $48,000 in subsidized loans. They're both at 5% interest. That means you rack up $100 of interest per month on the subsidized, and $200 per month on the unsubsidized. You sign up for REPAYE and get a $60 per month payment. $20 of that will go to your subsidized loan, and $40 will go to the unsubsidized. For the first 3 years, the government will waive the remaining $80 of interest on the subsidized loan, and will waive half of the remaining $160 (another $80) on the unsubsidized loans. After 3 years that will drop to $40 on the subsidized and $80 on the unsubsidized.
• As this is the only plan that provides an interest benefit for unsubsidized loans, it has been a huge help for borrowers who can't afford their payments, but don't want their balances to increase out of control.

• Saving on A Valuable Education (SAVE): I know that I said that there were only 4... but really, the SAVE plan is being made under the same program as the REPAYE and is being made specifically to replace the REPAYE (which will no longer be available once the SAVE takes over), so I'm kind of counting them as the same plan. Here's how SAVE revises and improves the REPAYE plan:
• "Discretionary Income" is being re-defined to mean "Your AGI - 225% of the FPL for your family size.
• The annual payment will temporarily remain at 10% of discretionary income. On July 1 2024, this will change to 5% of discretionary income for borrowers with only undergraduate loans, 10% of discretionary income for borrowers with only grad school loans, and a weighted average for borrowers with both.
• Example: One last time: AGI $65,000, family size of 3. $65,000 - ($24,860*225%) = $9,065 in discretionary income. 5% of that is $453.25 per year, or $37.77 per month. (Just over 5% of what your payment would be on ICR)
• The interest subsidy is beefed up once again to cover 100% of all unpaid interest each month. So, once you pay your $37.77 (or whatever your payment may be) the remainder of the interest is waived for all loan types (except Parent Plus, since they're not eligible for IDR plans). (Note: If you pay extra, that extra payment will be considered BEFORE the interest is waived. Meaning that you'll just be wasting the money because all it will get you is a lesser amount of interest being waived. I highly recommend AGAINST making extra payments if you're receiving an interest subsidy.)
• Any unpaid balance is forgiven after 20 years for undergraduate loans, and 25 years for graduate school loans.

The Alternative Repayment Plan: This is the least-used repayment plan out there. In fact, if you call your loan servicer, it's likely you'll speak to someone who has never heard of it. This plan predates the earliest Income Driven Plans and essentially allows borrowers to create their own repayment plan (even allowing the payment to be less than the interest for up to 12 months) provided that the payment plan has the loan paid in full within a set time frame. The Alternative Repayment Plan is approved on a case-by-case basis for borrowers with exceptional circumstances. This is almost never the best option, and with the coming of the SAVE plan, its use will only become more rare.

Deferment vs. Forbearance: I want to very briefly touch on these because they are options... but they're not long-term solutions for student loan problems, so I don't want to waste too much time on them. 

Deferments can pause payments temporarily due to certain life circumstances (e.g. unemployment, being enrolled in school, military deployments, etc.). Because you have to meet certain eligibility requirements, most of them come with the added benefit that interest is halted on subsidized Stafford loans. However, most deferments have a time limit (usually that they cannot be used for more than 36 months over the life of the loan). Also, generally speaking, if you're in an economic circumstance where you're eligible for a deferment, you're probably eligible for a $0 IDR plan, which has the added benefit of moving you closer to the 20- or 25-year forgiveness options. In short, while deferment is sometimes the best option, I would recommend double-checking your IDR options before going for a deferment.

Forbearance can pause payments temporarily upon borrower request. All loans come with 36 months of "discretionary forbearance" that you can apply any time that you want. However, because it's done by your request, without any other eligibility requirements, interest DOES NOT stop during a forbearance. I highly recommend treating forbearance as a last ditch effort, rather than as your first choice.

Tips and Tricks:

I think I finally have the "glossary" complete, so we can now move on to the meat and potatoes of the the post. For ease of organization, I'm going to organize this into a sort of "Frequently Asked Questions" format.

I want to IDR but my spouse makes A LOT more money than me:

First of all, does your spouse also have a large student loan balance? While IDR plans consider your spouse's income, they also consider your spouse's loan balance, so your actual payment amount on IDR may still be manageable.

If your spouse doesn't have student loans (or they have a small and manageable amount of student loans) there are still a few options to consider:

1) If you are married and are either filing separately, or are separated, there's an option to state that in your IDR application. If you do so, you will be treated as single (meaning your spouse will be excluded from your family size, and their income and student loans will be excluded when considering your payment).

2) Many people don't want to give up the tax benefits of filing jointly. While I was still working in student loan repayment, I would frequently get calls from borrowers to the effect of "I'm married filing jointly, and I want to get on IDR, but my husband absolutely refuses to help in any way with my student loans, and he even refuses to cosign my IDR application because he thinks that means that he'll have to pay them if I don't."

Now, first of all, your spouse co-signing the IDR application absolutely cannot make them responsible for the loan. The only thing that cosigning does is give permission to view your financial information for purposes of calculating the payment amount (since it's both of your tax info, they need both of your signatures). However, trying to convince the husband of this was usually a complete waste of time that was doomed to failure.

Fortunately, the online IDR application on StudentAid.gov has a question that asks "Are you able to access information about your spouse's income and able to have your spouse sign this application?" And if you are unable to convince your spouse to sign the application, well there's no choice but to treat you as single. Now, am I saying "Have a conversation with your spouse and ask them to be a bit of a jerk and stalwartly refuse to sign that application?" No... of course I'm not saying that... but I'm also not not saying that.

I want to use IDR but the payment is just slightly outside of what's affordable for me.

This is definitely a good time to look at deferments of forbearance. But also, it's a good time to note that - for IDR purposes - the definition of "dependent child" includes a pregnancy. So when filling out the application it's always good to take a moment to ask yourself if you're absolutely certain that you/your spouse aren't pregnant. To be blunt: Your student loan servicer does not have a "miscarriage police". If you suspect you may be pregnant and you mark down one additional dependent child, your loan servicer isn't sending anyone to check. They 1) don't have the time, and 2) don't have anyone on the payroll to make such checks.

My kid's school tricked me into getting Parent PLUS loans. I've looked at consolidating and using the ICR but that payment amount is still way more than I could ever afford!

I've heard this story probably 1,000 times or more: You took your new high school graduate to college orientation. The loan amount that your kid is eligible for isn't enough to cover everything, so the school advises you to take out a Parent PLUS loan, making it sound like it's an easy task to have your student take over responsibility for the loan later. Next thing you know, your getting calls from  a student loan servicer telling you that you're past due on your loan, and your credit score just took a tumble. While I like to hope that this is the the result of innocent misunderstanding... the frequency with which it seems to happen leads me to belief that it's unfortunately not accidental.

This was easily my least favorite scenario to deal with when I was working in student loans. While - 99% of the time - if there was a way of helping borrowers, we were expected to make the borrower aware of it, this was one of the rare instances where we were explicitly told "do not tell borrowers about this unless they ask about it specifically." The reason for this is that it's "not in the spirit" of the law surrounding IDR plans. However, due to a loophole in the way the law is written, it is completely legal. (Feel free to ask your loan servicer about it. If you ask directly, they should give you an honest answer.)

First of all: You'll want to check your Parent PLUS loan and make sure that you have at least 2 loan tokens. If you have only one, or you've already consolidated them all together, then unfortunately there's no further help that I can provide.

So, you have your 2 loan tokens. What you want to do is go on to StudentAid.gov, and consolidate ONE of them. This is usually where I lose people. They ask "How can you consolidate one thing? That doesn't even make sense!" And I agree with you. Grammatically, it makes no sense. Grammatically, consolidating means putting 2+ things together. However, for student loan purposes, it works. You are absolutely allowed to take out a consolidation loan to pay off one loan token.

(Note: If you have more than 2 loan tokens, just make sure that you leave at least one of them out of the consolidation loan.)

So you've consolidated your one loan token. You now have a Consolidation loan, and a Parent PLUS loan. Go ahead and put both in forbearance for 6 months. You are only allowed to take out a consolidation loan once every 180 days. If you do not wait the full 6 months and file a second consolidation application early, the other loan token will just be added into the first consolidation loan and this will not work.

Once you've waited at least the full 180 days, take out another Consolidation loan to pay off the other Parent PLUS loan token (DO NOT include the first Consolidation loan in this). You should now have two Consolidation loans.

Again, wait at least a full 180 days (feel free to put both Consolidation loans into forbearance during this time. Finally, Consolidate the two Consolidation loans into one Consolidation loan.

I think the natural question here is "Great... what did I just accomplish aside from wasting a year and doing a lot of paperwork?"

As previously mentioned, a Consolidation loan that paid off a Parent PLUS loan is ONLY eligible for ICR. However, by following the process that I've just outlined, you do not have a Consolidation loan that paid off a Parent PLUS loan: You have a Consolidation loan that paid off two Consolidation loans (the fact that those previous Consolidation loans paid off Parent PLUS loans is irrelevant). That means that this newest Consolidation Loan is eligible for the IBR and the REPAYE/SAVE plans, which should make your payment much more affordable.  

I heard that you get taxed on loan forgiveness?

For the 20- or 25- year forgiveness under the various IDR plans, you do have to include the amount forgiven as "taxable income" on your next years taxes. While that may lead to a fairly large tax burden, over all it is still far superior to paying back the loans in most circumstances.

For instance: Say you have $50,000 in loans, at 5% interest. On a 10-year level plan, you'll pay $530.33 per month for 10 years, meaning you'll pay $63,639.22 in total.

Meanwhile, on a SAVE plan (assuming an AGI of $65,000, and family size of 3)

you'll pay $37.77 per month for 20 years ($9,064,80), and then you'll pay income tax on the $50,000 (assuming it's taxed at 27% that comes to $13,500) meaning you get out from under a $50,000 loan, paying a total of $22,564.80.

Obviously the exact amount you end up paying is determined by your particular financial circumstances, but the fact remains that - even with the tax payment - many people can easily get out from under their loans paying back less than half of the original amount borrowed.

I was reading about all of Biden's changes and saw something about Interest Capitalization. What is that? Is it important?

Student loans are "simple interest" so the principal balance earns interest, but the accrued interest doesn't earn interest on itself. Interest Capitalization is when the accrued interest is added to the principal balance, and thus starts earning interest on itself. Historically that happens when you leave your grace period after leaving school, when you change payment plans, when you fail to renew an income driven plan, when you leave a deferment or forbearance, and when you consolidate, among other occasions. Biden is changing it so that capitalization only happens when it's required by law (e.g., the law governing the IBR plan requires interest to be capitalized when you leave the plan or don't renew it, but most other instances where interest capitalizes is done by Dept of Ed policy, not by statute.)

When I worked in student loans, I once spoke to a man who had taken out just over $100,000 in Parent PLUS loans for his children, and - thanks in large part to capitalized interest causing interest to accrue at an increase rate every time it capitalized - by the time I spoke to him he had a balance of over $1,000,000. He owed more than 10x his original balance in interest. Slashing the number of instances where interest is able to be capitalized will substantially cut back on cases like this.

I will leave this post here for now, but I may come back to it as the student loan situation continues developing.