Managing debt relative to income
by William G. Lako, Jr.
Columnist
May 02, 2013 11:47 PM | 1607 views | 0 0 comments | 26 26 recommendations | email to a friend | print
William G. Lako Jr.<br>Business Columnist
William G. Lako Jr.
Business Columnist
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Last week I suggested to you some of the repayment options available for consolidated student loans. However, if you have a low-salary career, such as one in public service, you may want to consider repayment options that tie your monthly payment to your income. These options are generally available for most Direct Loans. If you have Federal Family Education Loans, which are loans made by private banks but have been purchased by the government, you may need to consolidate your loans through federal Direct Loan Consolidation. Additionally, the three income-based options feature loan forgiveness after a certain period and qualify for the Public Service Loan Forgiveness Program.

The Income Contingent Repayment plan generally caps monthly payments at 20 percent of your adjusted gross income minus the poverty guidelines for your family size. This is the only income-based plan that is eligible for Parent PLUS Loans, provided they have been consolidated into a Direct Consolidation Loan. The Income Based Repayment plan is slightly different in that the annual repayment amount is 15 percent of the difference between your adjusted gross income and 150 percent of the poverty guidelines for your family size.

With both the Income-Contingent Repayment and Income-Based Repayment plans, any remaining loan amount is discharged after 25 years of repayment, provided you make 300 on-time, full, scheduled monthly payments. Lump-sum payments or payments made while your loan is in-school, grace, deferment or forbearance do not count towards the 300 payments.

The Pay As You Earn option was created in December 2012. Payments are capped at 10 percent of your income, versus 15 percent with the Income-Based Repayment plan. Typically, this option yields you the lowest monthly payment of all the repayment plans based on income. To be eligible, you must be a new borrower as of October 1, 2007, meaning you had no outstanding balances on a Direct Loan or Federal Family Education Loan Program, and you must have received a federal loan on or after October 1, 2011. The Pay As You Earn option also features loan forgiveness after 20 years of payments.

Both the Income Based Repayment plan and the Pay As You Earn Plan have a partial financial hardship eligibility requirement.

Loans in these repayment plans are also eligible for the Public Service Loan Forgiveness Program, which should discharge any remaining debt after 10 years of full-time employment in public service jobs, such as, those in emergency management, military service, public safety or law enforcement services; public health services; public interest law services; public service for individuals with disabilities and the elderly. Borrowers may qualify for forgiveness of the remaining balance due on their eligible federal student loans after they have made 120 payments on those loans under certain repayment plans, while employed full-time by certain public service employers.

Additionally, there are Teacher Loan Forgiveness programs for individuals who enter and continue in the teaching profession. You may be eligible for forgiveness of up to $17,500 if you teach full-time for five consecutive academic years in certain elementary and secondary schools or educational service agencies that serve low-income families.

Next week we’ll look at deferment, forbearance and student loan interest deductions.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional
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