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Finally, as a wise man once said, you can't borrow your way out of debt. If you were to consolidate, say, $30,000 in student loans via SoFi you would still owe $30,000. Plus, you would have a fixed term and fixed monthly payment with no ability to change your repayment plan should that become advisable. It is for these reasons that many student loan borrowers opt to restructure their federal student loans rather than consolidate them.
What many borrowers don't realize is that there are a number of repayment options besides 10-Year Standard Repayment. One of the most popular of these is Graduated Repayment. This can be a very attractive option for young people who are still low earners as the payments start low and then gradually increase every two years.
There are also several repayment programs for federal loans that are based on your income. One of these is Pay As You Earn. You may have read about this program when president Obama recently signed an executive order that made about 1.6 million more people eligible for it. The best feature of this program is that it caps your monthly payments at 10% of your discretionary income. In addition, if you make your qualifying payments and have a remaining balance after 20 years it will be forgiven. Alternately, if you work for a public service organization you might be able to earn loan forgiveness after just 10 years.
To be eligible for Pay As You Earn you must have one of the following types of loans.
- Direct Unsubsidized Loans
- Direct Subsidized Loans
- Direct Consolidation loans that were not used to repay any plus loans that were made to your parents
- Direct Plus loans made to graduate or professional students
- Subsidize Federal Stafford loans
- Unsubsidized Federal Stafford loans
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation loans that were not used to repay any PLUS loans made to parents
- Federal Perkins Loans
Do you know what types of loans you have?
If you’re typical and have multiple student loans you may not actually know which types you have. If this is the case you will need to go to the Department of Education’s student loan database (https://www.nslds.ed.gov/) where you can learn what types of loans you have, when the funds were disbursed and how much you currently owe.
Your payments under Pay As You Earn
Generally, your monthly payment amount under Pay As You Learn will be a percentage of your discretionary income, which will be different depending on the plan and when you took out your federal student loans. To determine if you're eligible you must also calculate your discretionary income as defined under this law. Without getting technical, suffice it to say that the way you determine this is by taking your gross income and then subtracting 150% times the federal poverty line.
If you are ineligible for Pay As You Earn Repayment there are two other income-driven options. The first is Income-based Repayment. This is essentially the same as Pay As You Earn except your monthly payments would be capped at 15% of your discretionary income.
Second, there is Income-contingent Repayment. It is much like Income-based Repayment except it is only available under the Federal Direct Loan Program. Like Income-based Repayment your monthly payments would be a percentage of your discretionary income.
However, its monthly payment is usually higher than those under Income-based Repayment. In fact, it can be higher than the payments you are probably now making under 10-Year Standard Repayment.
The downsides of income-driven repayment programs
While one of these income-driven repayment programs could be a good choice it’s important to understand that they do have their negatives. For one thing you will pay more total interest over the life of your loan. Second, you will be required to submit updated information on the size of your family and your income to your loan servicer every year. If you do not do this, your monthly payments will no longer be based on your income and any unpaid interest will capitalize. Third, only Direct Loans are eligible and finally if you have a portion of your debt forgiven after the 10 or 20 years, you may have to pay taxes on it.
If your objective is to get lower monthly payments through loan consolidation, SoFi could be a good choice. Of course, this assumes that you would be eligible for one of its loans. If so, you would probably end up with a lower monthly payment than what you have now and might be able to get your loan paid off quicker. Plus, you would be eligible for the “extras” offered by SoFi including unemployment protection, career support, career services and its entrepreneur program.
If you would not be eligible for a SoFi loan or if your goal is to pay off your student loans without borrowing more money, a better option would be one of the income-driven repayment programs available through the Department of Education. You could end up with a lower monthly payment and would still be eligible for loan forgiveness, cancellation, deferral and the ability to change repayment programs should the need arise.