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Direct Consolidation? Best program?
January 3, 2018
1:06 am
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January 3, 2018
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My husband and I have been making $0 payments under IBR for about 10 years. He works for the State and we thought his loans would qualify for the PSLF program, but just learned that they are FFELP consolidation loans which do not qualify. (We have called Nelnet and UHEAA several times over the years and were told we just needed to wait for the forms to come out in 2017, very frustrating.) If he consolidates into a direct loan, does he lose the 10 years of IBR payments (toward the 25 year forgiveness) if he does not continue to work for the government for the next 10 years? (Most likely, he will stay with his government job.) On this blog I read that he will not, but this section from the fine print direct loan consolidation application worries me:

I. Any payments I made on the loans I am consolidating before the date of
consolidation will not count toward:
• The number of years of qualifying repayment required for loan
forgiveness under the IBR Plan, the Pay As You Earn Plan, or the ICR
Plan (see Item 11 of the Borrower’s Rights and Responsibilities
Statement ), or
• The 120 qualifying payments required for Public Service Loan
Forgiveness (see Item 18 of the Borrower’s Rights and Responsibilities
Statement ).

Is IBR still the best option or is the new REPAYE better for him if he consolidates? Can he do REPAYE and I do IBR? We have an AGI of about 75K (married filing jointly) and I stay home with kids. We have 10 kids at home, several adopted with special needs. With our family size and AGI, I assume we will stay at $0 or small payments for the next 15 years until we reach the 25 year forgiveness point unless laws change. Our loans are $9050 @ 4.125% (him) and $9614 @ 4.375 % (me), so the balances are not huge.

Thank you for your help! All the different options are a bit overwhelming!

January 3, 2018
9:12 pm
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Indiana
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Forum Posts: 321
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May 3, 2014
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So this one is tricky.

Generally REPAYE is preferable for people who are making $0 payments because of the treatment of excess interest. (suppose your balance generates $50 of interest per month, REPAYE will forgive $25 immediately). In your case, it essentially drops your interest rate in half.

The problem with switching to REPAYE is that your loan interest will be capitalized (more on that here: https://studentloansherpa.com/federal-student-loans-capitalized-interest/ ). The problem with consolidation is the restarting of the forgiveness clock for IBR.

The other issue at play that we haven’t discussed is the tax on the forgiven debt. Debt forgiven via PSLF is not taxed, however, if your debt is forgiven after 25 years of IBR, it is treated as income. This means your 75k AGI will jump up to 85k if you have 10k in loans forgiven.

I’d suggest you do the math for the various options, calculating how much each route would potentially cost. Double checking your figures by sending an email to your servicer asking them if you are correct or if there are any issues that they can see.

The good news in all of this is that both your balances are relatively small compared to the debt most others have and the interest rates are also quite low.

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