We’ve all been reading about the growing student loan debt.  As widely reported in the media, student loan debt recently topped $1.2 trillion dollars.  According to the Department of Education, the real problem isn’t the amount of debt outstanding, but the 13.6 percent of borrowers1 who defaulted or are in danger of defaulting on their loans.  These borrowers are often confused on their options for repaying their loans.

Several years ago, I met Nate.  He was struggling after graduation repaying his student loans.   His challenge was that he was under-employed and working a retail job making $8.50/hr. rather than beginning a career in his degree field and earning a starting salary of $36,500.

Nate called because he was drowning in student loan debt.  He’d had borrowed $35,000 and by the time I talked to him, the debt had ballooned to just under $50,000.  It was immediately apparent he had never pursued any of the income-driven student loan repayment options that are available, and further discussion revealed that this was because he was confused about which plan was the best for his situation.


He’s Not Alone

The Department of the Treasury estimates that 51 percent of federal student loan borrowers are eligible to use one of the repayment plans.  Unfortunately, less than 20 percent of eligible borrowers are enrolled in one of the plans.

If you’re behind on your student loan debt (or are concerned that you soon will be), and are confused about your repayment options, consider taking the following steps:

1.  Communicate
Everyone who is struggling with student loan debt needs to get and stay in touch with their lender.  If you haven’t been talking with your lender, pick up the phone and call them.   Find out your current status on all your federal loans.  Are you in default or repayment?  Only borrowers who are not in default can take advantage of the income-driven repayment options.

If you, like Nate, are unsure about the amount and the number of loans you took out for your education, the federal government has created the National Student Loan Data System (NSLDS) where you can find out about all of your federal loans.  Once on the site you can learn:

  • Your student loan amounts and balances
  • Your loan servicer(s) and their contact information
  • Your interest rates
  • Your current loan status (in repayment, in default, etc.)2

2.  Contact your loan servicer
Ask for what you need.  When Nate and I called his servicer, he told the representative that he was struggling to pay his loans back.  The rep immediately offered to put his student loans in forbearance.  However, the interest on his loans would still accrue which meant at the end of the forbearance period, Nate would owe more than he had before the forbearance started.  Not the ideal solution.

With assistance, Nate asked whether he’d be able to take advantage of the income driven repayment options.  These plans are tied to income and have timelines for the forgiveness of any remaining loan balances.

Nate worked with his loan servicer to reduce his monthly payments by $220 a month based on his current income using the income based repayment plan.

3.  Learn about your eligibility for Income-Driven Repayment Plans
There are four income-driven repayment plans.  They are:

  • Income-Contingent Repayment (ICR)– Allows federal borrowers to pay the lessor of 20 percent of their discretionary income or what they would pay using fixed payment over 12 years. Student loan balances remaining after 25 years will be discharged.
  • Income-Based Repayment (IBR)- Allows federal borrowers who took out their first loan on or after July 1, 2014 to pay 10 percent of their discretionary income for up to 10 years.  Student loans remaining after 25 years will be discharged. Borrowers who took out a loan prior to July 1, 2014, pay 15 percent of their discretionary income.
  • Pay As You Earn (PAYER)– Allows federal borrowers to pay 10 percent of their discretionary income up to 10 years. Student loan balances will be discharged after 20 years.
  • Revised Pay As You Earn (REPAYER)– Allows federal borrowers to pay 10 percent of their discretionary income up to 10 years. Undergraduate student loan balances remaining after 20 years will be discharged. Graduate loans will be discharged after 25 years.


4. Research which plan is best for you

To help you make your decision, visit the U.S. Department of Education's Repayment Estimator to estimate your monthly payments and eligibility for these income-based plans.   There you can compare plan costs and estimate your total interest paid under the various plans.  Visit: http://StudentLoans.gov

Now armed with this information, join the 20 percent of borrowers who are taking advantage of the student loan repayment plans. And take a big breath of relief.

If you are still confused, consider reviewing your student loan repayment options with a CERTIFIED FINANCIAL PLANNER™ professional to determine the best plan that meets your objectives.

  1. U.S. Department of Education:  Default Rates Continue to Rise
  2. Ready Set Pay
  3. Washington Post:  Student Loan Repayment Gets Even More Complicated and Confusing