Second only to mortgage debt, student-loan debt exceeds $1.3 trillion to over 44 million borrowers. Over 11 percent of this debt is in default. 2016 saw an increase of $49 billion in new student debt. To place this number into perspective, auto loans, credit cards and personal loans are all less than student debt.
As ominous as this number is, what is even more troubling is that student debt cannot be discharged in bankruptcy. A person at 18 years of age has made a commitment that he/she is stuck with for life, despite the fact that any other debt, whether to an individual or even a sophisticated businessman, can be discharged, allowing the person a clean slate. But the student is stuck with this debt that in many cases impacts his/her ability to buy a home, find a job, rent an apartment, buy a car, get married and just live productive lives.
However, there is some good news for these debtors. The government instituted several programs aimed at helping student debtors who are having difficulty with payments. Several such programs include the income-based repayment (IBR) plan program, the pay-as you-earn (PAYE) program and the Repaye program. The basis of these plans establishes a modified monthly payment based on the borrower’s income and number of dependents. For example, a normal monthly payment on a 10-year $50,000 loan would be $547. Under IBR, where the borrower earns $50,000 annually and has three children, the payment would be $164. The programs allow for a discharge of the remaining debt after 20 to 25 years of payments, depending on the program. While 20 years may be a long time, the ability to reduce payments to a manageable level with a set end in sight can make a big difference.
We have discussed this program in previous articles. Presently, approximately only 30 percent of debtors are enrolled in one of the various repayment programs. These plans are not for everyone. If you defer payments you could be increasing your payments because deferred payments still will be due, and if your income increases such that you will not be discharging debt, you need to be careful that the benefit of reduced payments today doesn’t add unmanageable debt in the future.
A significant positive aspect of repayment is the public service forgiveness loan program (PFSL), which allows eligible debtors to discharge any remaining debt after just 10 years or 120 eligible payments. This is a tremendous benefit to eligible participants including municipal workers, teachers, police, firemen, soldiers, nurses and nonprofit workers. In the case of the borrower mentioned above, if he/she is a teacher eligible under the PSFL, the $164 monthly payment paid for the 120 months will be $19,680. If the borrower were eligible for PAYE, the monthly payment would be $109 and $13,080 for the 120 payments. The balance due will be discharged, tax free. (Discharge under PSLF is tax free. Discharge under the other programs is not currently tax free, though it is possible that by the time it is applicable legislation will have caught up). Payments will vary every year based on income and dependents. (For more information, please visit the Department of Education site at https://studentaid.ed.gov/sa/contact#loan-repay-forgiveness.
The New York Times, in a number of recent articles, highlighted the problem that despite assurances by the loan-servicing company, the information in many cases was wrong and borrowers made payments to ineligible employers. This meant that the payments made by those people did not count and the 120 required payments would have to start anew. Many in our community are teachers in the public school system, work for other schools and universities that are non-profit agencies or are nurses. These are three of the categories that would meet the requirements for the PFSL program. These people can benefit from these programs, but it’s important that borrowers be diligent in complying with the details of the repayment procedure. It’s important to understand that relying on information from the loan servicer will not protect the borrower. If you act on incorrect information from the servicer, the Department of Education will likely not be accommodative. Your payments will probably not be considered as eligible and won’t count toward the total required.
Your best bet is to contact the ombudsman for the Department of Education directly (877-557-2575) and make sure your payments count.
Here are several general points that have been questioned.
Nurses: It is my understanding that any licensed nurse is eligible, but again, make sure your status qualifies. Contact your HR and have them submit the form to certify your employment. Then contact the ombudsman to ensure it is accepted.
Nonprofit: Employees of nonprofits are eligible. However, they must be employed by entities operating under 501(c)(3). Entities operating under 501(c)(6) are not eligible and many employees thinking they were eligible have recently learned their payments were not counted.
Municipal workers: This should be a safe category and you should be eligible. Follow the same procedure as that for the nurse above.
Each year you must recertify your income with your employer or there could be significant ramifications, including your payments made to the plan could be adjusted higher and perhaps not counted at all.
You will have to decide how to file your taxes, since including your spouse’s income may eliminate the benefit of the program. The amount of the new monthly payment is determined by the income. Filing married but separate could increase your tax burden and this should be considered in your decision.
You must take this program and its requirements very seriously. Reduced monthly payments, if not followed up with, can cause an increase in your liability, and improper certification can result in payments not counting toward your required number of payments. The ombudsman is there to help. Utilize that service and don’t rely on the loan servicer because they may not have correct information.
In a recent article in the Times, the reporter indicated that as of 2016 only 139 people had made enough payments to be close to the 120 required for loan forgiveness. As a mortgage banker, I see many people who cannot purchase a home due to this overwhelming debt. I hear their stories of living with their parents because they can’t afford rent or a car or a trip. They bring student debt to a marriage, which can be a source of tension. These programs are available to us. Let’s research them and utilize them.
Helpful links:
https://studentloanhero.com/calculators/student-loan-income-based-repayment-calculator/ —a calculator to see revised payment under various plans.
https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven — income-based repayment plans
https://studentaid.ed.gov/sa/contact#loan-repay-forgiveness — loan-forgiveness information
By David Siegel
David Siegel is a home lending officer with Citibank in the Englewood and Clifton offices. He can be reached at 917-270-0593 or david.siegel@ citi.com.
