Seeking Student-Loan Relief? Here Are 6 Options to Consider.

Higher education | College | Student loan | Personal finance | May 8, 2024

This Week's Quote:

“How wonderful it is that nobody need wait a single moment before starting to improve the world”
                                  - Anne Frank

For the 43.2 million student-loan borrowers owing a collective $1.6 trillion, holding out for broad-based forgiveness from the government may not be the wisest strategy. It has already been shot down by the courts and even smaller-scale efforts to resurrect the plan are ripe for challenge. 

So what is a cash-strapped borrower to do? Fortunately, there are several avenues that may garner some relief—from government-backed programs to employer support to outside lenders.

“Now, more than ever, there are new programs coming to help people to reduce the payment burden, to make student loans affordable, to help people achieve forgiveness if they qualify for it, and to assist those in the most extreme circumstances,” says Amy Lins, vice president of customer success at Money Management International, a Stafford, Texas, nonprofit financial counseling company. 

Here are six options for relief:

1. Pick an income-driven repayment plan  

Federal Direct Loan borrowers can change repayment plans at any time, and many borrowers can benefit by choosing an income-driven repayment plan instead of the standard 10-year repayment plan. An income-driven plan is based on your income and family size, and, depending on these factors, you may not have to make any monthly payments. The amount you pay is subject to change annually; borrowers are required to recertify their income and family size once a year. The months in which borrowers make zero payments under an income-driven plan still count for loan-forgiveness purposes.

The Biden administration recently introduced a new income-driven plan called Save, which can significantly decrease a borrower’s monthly payment amount compared with other income-driven repayment plans. Among enrollees in Save, 3.9 million have a zero-dollar monthly payment, while borrowers who owe a payment are saving an estimated $117 a month compared with what they would have paid under the predecessor plan known as Repaye, according to federal data. 

The Save plan is available to many loan holders, but some borrowers will need to take extra steps to take advantage of it. Parents who have Parent Plus loans, for example, need to go through a special process known as double consolidation, an option that won’t be available after July 1, 2025. The rules for this can be complicated and borrowers can read more about how to do it on the website of the Institute of Student Loan Advisors. 

Another reason to consider Save: the potential for quicker forgiveness of the balance of the loan. Starting in February, the plan will give borrowers who originally borrowed $12,000 or less forgiveness after as little as 10 years, instead of 20 years. And for every additional $1,000 borrowed, a borrower can achieve forgiveness after an additional year of payments. 

In July, most borrowers on the Save plan will see additional benefits. At that point, payments on undergraduate loans will be cut in half, meaning a borrower with only undergraduate loans would have a monthly payment that is 5% of his or her income above 225% of the federal poverty level.

Borrowers who have undergraduate and graduate loans will pay a weighted average of between 5% and 10% based on the original principal balances of their loans, according to Federal Student Aid. Borrowers must recertify their income and family size on an annual basis so their servicer can recalculate the payment.

Borrowers can use the federal government’s loan simulator tool to determine the right repayment option for them and whether a different one could be beneficial.

2. See if an employer can help

A number of employers offer student-loan repayment options to help employees lighten their student-loan burden. These government-sanctioned programs can offer employees tax-free benefits up to $5,250 through 2025. Even if Congress doesn’t extend the tax benefit, industry professionals believe companies are likely to continue offering repayment help. 

As of January, some borrowers may have more incentive to pay down their loans through an employer benefit that is now more broadly available for companies to offer. This option allows employees who are paying down student loans to have their 401(k) retirement account funded by their employer, even if they aren’t contributing to it on their own. Because it only became broadly available to companies in January, many employers are still considering offering the program, so it can’t hurt to ask about its availability. 

3. Check for public-service or other forgiveness options

Public Service Loan Forgiveness, or PSLF, is a program for people who work for a qualifying employer in the federal, state, tribal or local government, or for a nonprofit organization. Under this program, student-loan debt can be forgiven after a borrower has made the equivalent of 120 qualifying monthly payments under an accepted repayment plan. Borrowers can use the federal government’s PSLF tool to help them determine whether they qualify.

Also keep in mind that more than 3.6 million Direct loan borrowers will receive at least three years of credit toward loan forgiveness, and many will see their loans forgiven automatically thanks to a government effort designed to make up for past program failures. To qualify, federal loans that aren’t Direct loans must be consolidated into the Direct loan program by April 30.

Borrowers should visit studentaid.gov to see if they might qualify for one of the many types of loan-forgiveness options the government offers.

4. Take advantage of a limited-time forbearance option 

The federal government is helping to protect borrowers who can’t make their monthly payments following the 3½-year payment pause during the pandemic. The so-called on-ramp period ends Sept. 30, but until then financially vulnerable borrowers who miss monthly payments won’t be deemed delinquent, reported to credit-rating firms, placed in default or referred to debt collectors. 

However, interest will continue to accrue, and only loans that were eligible for the payment pause are eligible for the on-ramp, according to Federal Student Aid. 

Though the cushion exists, borrowers are still better off getting on an income-driven repayment plan, says Sim Terwilliger, a certified financial planner with Durham, N.C.-based SLP Wealth who advises clients on student loan-related matters. Typically, forbearance doesn’t count toward loan forgiveness, whereas an income-driven repayment plan does, even if your payment amount is zero, she says. 

After the grace period ends, borrowers can apply to temporarily suspend their payments, but Terwilliger says an income-driven repayment plan is a better option, if available. 

5. Refinance with a private lender 

There are few circumstances, given interest rates typically in the 4% to 12% range, when it would make sense to refinance to a private loan, Terwilliger says. 

However, she adds, it could be advantageous in some situations where the following criteria are met: if you have more income than debt; if you aren’t pursuing loan forgiveness; if you would save at least 1% on your current rate; if you’re taking a fixed-rate loan; and if you’re willing to forfeit the various federal protections—including loan-forgiveness and debt-cancellations options—that aren’t available to private loans. 

Once you refinance federal loans with a private lender, it can’t be reversed, so be sure to consider all your options before going this route. There are several online marketplaces that allow borrowers to compare loan options from private lenders. Be sure to take into account the rate and other repayment particulars before deciding on a provider.

6. Declare bankruptcy

In 2022, the Biden administration made it easier for borrowers to have their student loans discharged in bankruptcy. This should be a last resort since there are implications to bankruptcy that can include a stain on your credit history and reluctance among creditors to lend to you in the future. 

However, for some borrowers who are in over their head in debt, it may be the only option. If you have reached a point where bankruptcy is a consideration, it is advisable to meet with an attorney to determine the best course of action. “It’s still not easy, but the process is set up to be more streamlined, consistent and equitable,” says Money Management International’s Lins.
 

Credit goes to Cheryl Winokur Munk, published February 4, 2024 in the Wall Street Journal.

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This Week’s Author, Belinda Stickle