Among the many complex paths of financial aid procedures, perhaps no other rivals the multitude of repayment options for student loans. New federal legislation seems to appear almost weekly, which makes keeping abreast of the rules challenging for many borrowers. Compounding the changes is the unfortunate and frustrating fact that Congress has decided to select winners and losers in the process. The difference between falling into a “good” vs “bad” federal category can be staggering.
Federal student loan repayment regulations greatly favor those who go into public service employment and non-profit employment vs. those in a regular private sector position. Consider two students, Amanda and Sam, who both graduate with a $50,000 federal student loan debt. Amanda decides to become a public school teacher with a starting salary of $40,000. She qualifies for Public Service Loan Forgiveness, which will allow her to pay off her loan by making 10 years of loan repayments based on 15% of her discretionary income.
Since Amanda did not work during her last year in college and therefore had no income, her loan repayment per month for her first year will actually be $0. For the second, it will only be about $27 per month as her second year will be based on the September-December (approximately $13,333) portion of her first year of teaching. In years 3-10, she will repay $360 per month. Over the ten years, she will repay a total of $34,884.
Sam accepts a job a manager in a retail store. For his repayment, in contrast, he has several options, all of which pale in comparison to the bargain which Amanda receives. The standard 10-year repayment term for him is a loan of 6.8%, which results in a $575 per month repayment for a total repayment amount of $69,000, just about twice of that for Amanda. He can lower his monthly payments by repaying over 25 rather than 10 years, but the total repaid will be even larger. Moreover, depending on this plan, he may have to pay taxes on any amount not repaid at the end of 25 years. Amanda’s Public Service plan does not have a similar requirement.
Unfair…you betcha!…but those are the rules. Take advantage of them if you can.
See you next time.