Federal debt reduction opportunities explained

In my April 1 op-ed for the Bangor Daily News, I (and Prof. Rob Glover) mention three federal opportunities to reduce student debt impact that are explained on the Federal Student Aid’s website: Loan Consolidation, Income-Based Plan and Public Service Loan Forgiveness. Although the U.S. Dept. of Education does a thorough job explaining these options, I’m going to attempt to “dumb them down” even more while adding an example situation connected to Maine for this week’s blog assignment. These programs are vital to keeping youth exit rates down because Maine college grads aren’t thinking about quality of living after their senior years, they’re trying to find the most effective and quickest ways to pay their loans off.

Loan Consolidation

Loan Consolidation is a costless way to consolidate all of your loans into one, which (for those who have trouble keeping track of several things at one time) can make things easier. Essentially, all of your loans (except for Parent PLUS, private loans) are paid off by the US. Dept. of Education who then creates a new loan with an interest based on the average of the preexisting loans. Simplification is the major pro for this reduction opportunity. The costs per month are greatly reduced, however, this is due to an extension of the loan period which tags on more interest in the long run. If you’re a student that can’t afford to fork out a large payment each month now but expects things to get easier in the future, this can help you. The only thing to keep in mind is that you will be paying more overall.

Example: This is going to be basic and probably very wrong in terms of actual numbers, but let’s say you go to college and you graduate with a $10,000 Perkins loan with 2% interest and a $20,000 Stafford loan with 4% interest. By using Loan Consolidation, the U.S. Dept. of Education would pay off both loans and issue you one loan of $30,000 with 3% interest and your loan repayment period would be extended.

Income-Based Plan

This Income-Based Plan is true gift for those stuck in a situation after school that puts them in a position where loan repayment is virtually impossible. Based on the size of your family and income, the Income-Based Repayment (IBR) lowers payments within a 25-year period. Past the 25-year period, loans are, in most cases, forgiven although taxes can still be issued. The same cons associated with Loan Consolidation appear when looking at the Income-Based Plan: With a longer period, more interest can accumulate plus the same loans (Parent PLUS, private) are not recognized. This plan is great for those who really need it. The Dept. of Education is very strict with this plan (as the should be), frequently checking in for documentation on changes of income and family so that those who truly need the assistance aren’t forgotten.

Example: Again, forgive my bad examples, but let’s say you’re a recent college grad with your own family and a low income. You qualify for this program so you apply and you’re accepted. You pay less per month than what you usually would be paying, and this helps you out by freeing up more space in your budget for necessities to survive. After five years, you acquire a new job that pays better. However, you continue submitting documentation and remain enrolled in the program. This is okay according to the program rules, but your monthly payment increases due to your change in income. After 25 years, you haven’t paid off the full amount of loans but you’ve kept good documentation of income the entire way. You may qualify to get the last bit of your loans forgiven.

Public Service Loan Forgiveness

If you’re working full-time for a public service organization and you make 120 on-time payments, any extra loans could be forgiven in as little as 10 years through the Public Service Loan Forgiveness (PSLF) Program. Out of the three opportunities, this is perhaps the most enticing to students because of the short payment period and its possibility for forgiveness at the end. Also, its the only real incentive program out of the three. The other two give options to rework payment plans or capitalize on your poor economic situation, not the opportunity to work toward relief (while doing a good deed at the same time). Eligibility for the program is rigorous, and the program is very strict once you are accepted, but this is all because the pros related to a successful completion of the program could potentially save you thousands. Here’s perhaps the worst part of this program: Only William D. Ford Federal Direct Loans (Direct Loans) are accepted. That means Federal Family Education Loans (FFEL), Perkins and all the other ones can’t be used. Also, the company you work for has to be a federal, state or local government agency, entity or organization or a not-for-profit Section 501(c)(3), which can include a private employer who does not meet Section 501(c)(3) standard but can provide certain proof of public service standards.

Example: You have $10,000 in Direct Loans. You qualify for the PSLF Program so you apply and you’re accepted because you work for the government. After 10 years of working for the government, working a full-time (over 30 hours a week in most cases) and submitting 120 payments on-time, the rest of your loans are forgiven.

Overall, all three need some work to encompass more students and better ease the student debt problem this country currently has, but it’s at least a start. For the state of Maine, many college grads could take advantage of these programs, but there needs to be an increase in publicity so awareness of options is amplified.


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