If you have federal student loans and are considering refinancing to lower your interest rate and/or shorten your term, there are a few things you should know before you proceed. We took a look at the most common federal student loan benefits and programs to help you determine if the federal student loan program is right for you.
1. Public Service Loan Forgiveness Program
If you work in the nonprofit sector or have a government job, the federal government offers a forgiveness program after 120 consecutive payments, equivalent to 10 years of on time payments. The Public Service Loan Forgiveness (PSLF) Program is relatively new — it started in 2007 — so payoffs will not begin until 2017.
To ensure all your payments count towards forgiveness, be sure to fill out the employment certification form each year and whenever you change jobs. After the 10 years, the payoff is not automatic; you will need to submit the PSLF application to receive loan forgiveness which will be available prior to October 2017.
If you have multiple types of federal loans, it’s important to note that consolidating them will result in a loss of the forgiveness program. Here is an expert from the PSLF homepage:
If you have both Direct Loans and other types of federal student loans that you want to consolidate to take advantage of PSLF, it’s important to understand that if you consolidate your existing Direct Loans with the other loans, you will lose credit for any qualifying PSLF payments you made on your Direct Loans before they were consolidated. In this situation, you may want to leave your existing Direct Loans out of the consolidation and consolidate only your other federal student loans.
Do some calculations on your existing payments. How much time would it take for you to pay off your loans? If it is less than 10 years, then consider refinancing. Remember that extending the payments doesn’t mean you will pay less over the lifetime of the loan, it means that your monthly payment will be lower. For more information on the PSLF program, review the fact sheet.
Pros: remaining debt forgiven after 10 years, manageable monthly payment.
Cons: long-term commitment to a certain industry and possibly location. If you can pay off your loans before 10 years, it may not be saving you money.
2. Income Based Repayment Plan
The Income Based Repayment Plan is a new program to help those whose income is less than the amount borrowed for their student loans or those who are having trouble keeping up with their loan payments. Fairly straightforward, this program determines your payment by your discretionary income to help you manage your student loan payment. The other plans include Pay As You Earn Repayment Plan (PAYE) and Income-Contingent Repayment Plan (ICR Plan). The plans use 10-20% of your discretionary income to determine your monthly payment. PAYE and IBR plans tend to stay between 10 – 15%. The ICR plan is either 20% of your discretionary income, or fixed payments over 12 years adjusted according your income, whichever is lower.
Not everyone will qualify for an IBR or PAYE plan. Here is how to tell if you are eligible from the Student Aid website:
In order for you to qualify, the payment that you would be required to make under the IBR or Pay As You Earn plan (based on your income and family size) must be less than what you would pay under the Standard Repayment Plan with a 10-year repayment period.
Pros: monthly payment determined by your income, which may help make payments more manageable.
Cons: not as much money towards principle, will take longer to pay off the loan. The repayment period ranges from 20 – 25 years.
3. Deferment and Forbearance
If you are at risk of going into default on your loan, then staying with the federal program is the best fit for you. Federal programs generally allow payments to be deferred while unemployed or experiencing economic hardship. For more information on deferment and forbearance, visit the student aid website to see how to request assistance. It’s important to know that forbearance will continue to accrue interest on the loan and deferment will temporarily delay the principle and the interest on your loan.
Pros: keeps you from defaulting on the loan by working with your provider to delay or lower payments for a period of time.
Cons: interest can continue to accrue and lengthens the amount of time you are in debt.
The federal student loan program is a great benefit for those who have no other means to fund their education. Remember, it’s never free money and you should always work to pay back your debt as quickly as possible to save the most money on lifetime interest costs. Make sure to carefully review all of the benefits of your current payment plan before refinancing, because you will lose some of the federal benefits after refinancing.
If you aren’t sure which is right for you, give us a call. We are happy to help you determine if refinancing or the federal program will save you the most money on your student loans.