Most college graduates do not have the
luxury of graduating debt free and were deterred from choosing jobs in teaching,
public service, or non-profits due to taking on financially limiting student
loan debt. When I chose to go to graduate school, I knew I would take on
significant debt to get my Master’s, but I knew that I wasn't going to have to pay it all back!
In 2007, Congress created the William D.
Ford Public Service Loan Forgiveness. The idea is that a graduate with federal student
loans, who makes 120 consecutive payments, will have the remaining balance of
their loans forgiven.
That might not seem like such a great
deal since the standard repayment is 10 years or 120 payments.
Whoop-de-doo.
Here’s the good part: There are programs
where you repay your loans based on your income.
Why is that relevant?
You might not have to pay back everything you borrow(ed).
A teacher, public servant, or non-profit
employee with a $30,000 salary with $30,000 in student loans would normally
have to pay about $345 per month towards their loans (assuming 6.8% interest
and repaying standard repayment) for 10 years.
Yikes!
That’s almost 14% of their gross income
BEFORE taxes! That doesn't leave much for other expenses.
Thankfully our government stepped in to
ease the burden.
Income Based Repayment (IBR), Pay As You
Earn (PAYE), and Income Contingent Repayment (ICR) are programs designed to
help students repay their loans without going broke.
IBR 15% Edition
With IBR, repayment terms are 15% of
your adjusted gross income less 150% of the HHS poverty guideline based on
family size.
Here's what you need to do:
Dig up your most recent tax return and find your AGI (Line 37 on a 1040 Form).
Here's what you need to do:
Dig up your most recent tax return and find your AGI (Line 37 on a 1040 Form).
[(AGI – HHS 150%) x 15%] / 12 months=
estimated monthly payment under IBR
For this example, let’s use $25,000 for AGI with a family size of 1 who does not live in Alaska or Hawaii.
Look up the HHS Poverty Guideline here: http://www.ibrinfo.org/poverty_level_2013.vp.html
For this example, the HHS 150% of poverty guideline
figure is $17,235 for 2013.
$25,000 - $17,235 = $7,765
$7,765 x 15% = $1,164.75 Annual amount to pay towards loans
$1,164.75 / 12 = $97.06 is your new
estimated monthly student loan payment.
This is a HUGE savings of $248 per
month! (If your family is bigger than just one, add $6,030 to the HHS 150 for
each additional family member and watch the savings grow!)
You could avoid paying back hundreds if
not thousands of dollars as long as your AGI is near or equal to 150% of the HHS poverty
guideline. This could be used by married couples who decide to file separately should
it benefit them to pay less back in loans than the tax benefit of filing
jointly.
Yes, more interest will accumulate to
your loan balance which would result in paying more over time, but because your
loan balance will be forgiven after 120 consecutive payments, you are looking
at some significant savings over the next 10 years (as long as you work for a
public, non-profit, or educational organization).
EVEN BETTER NEWS!
IBR gets better for new students and adults looking ahead into 2014. For new borrowers after July 1, 2014 the percentage of income decreases to 10%! In our above example, it would change the monthly payment to $777 per year or about $65 per month.
As long as the student loans are federal loans, and you meet the criteria, you can have the balance forgiven. If you can afford it, you might even take out a little extra to go on a vacation, put a down payment on a house, buy a car, etc. You can afford it!
Parents, if you want to help your kids pay for school or pay for all of their school, after they graduate, set up a separate checking account in their name and direct deposit whatever portion of the IBR you choose. Th
Stay tuned for other repayment programs such as PAYE and ICR, as well as ways to reduce your AGI to keep your loan payments low!
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