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How to Live with Federal Student Loans you Can’t Afford to Pay Back

Sometimes student loan repayment seems impossible, but for borrowers with federal loans, it is possible to keep things manageable.

Written By: Michael P. Lux, Esq.

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Repayment of student loans can be brutal. Interest accrues daily, servicers offer little help, and large segments of the population blame borrowers for their debt even though college has never been more important or more expensive.

A growing percentage of student loan borrowers have reached the point where they realize they will never be able to repay their student loans.

As overwhelming as an unpayable mountain of student debt may be, things can be surprisingly manageable for those with federal loans.

Affordable Payments for Life

Arguably the biggest advantage to federal student loans is the existence of income-driven repayment plans or IDR plans.

With nearly all other forms of debt, borrowers make payments based upon how much they owe. If you bought an expensive car, your monthly payments would likewise be quite large.

IDR takes an entirely different approach. Borrowers make payments based upon what they can afford. Those living at or near the poverty line will not be expected to pay anything towards their student loans.

The federal borrowers who have massive amounts of student debt should still be able to make the minimum required payments on their loans. This means that federal borrowers shouldn’t ever have to decide between putting food on the table or paying their student loan bills.

Note for borrowers with Parent PLUS loans: Certain federal loans, such as Parent PLUS loans, are not immediately eligible for income-driven repayment plans. However, going through federal direct consolidation can fix this issue.

REPAYE Will Often be the Best Repayment Plan

Selecting the best repayment plan will depend upon many different circumstances, such as when the loans were first borrowed, the loan type, and the marital status of the borrower. A full breakdown of the various repayment plans and strategies is available here.

The borrowers who are overwhelmed by their federal debt should pay close attention to the REPAYE plan.

REPAYE is special for two major reasons:

  1. Like PAYE and IBR for New Borrowers, it only requires borrowers to pay 10% of their discretionary income. Other plans require 15% or even 20%.
  2. REPAYE is the only repayment plan that helps borrowers whose loans are growing out of control.

The second major benefit of REPAYE is something that should be especially appealing for borrowers with more debt than they can afford to pay back. Suppose your loans generate $1,000 in interest each month, but your monthly payment is $200. This means that your loan is actually growing by $800 per month. (Note: the money isn’t immediately added to your balance, this only happens when the interest capitalizes.)

Borrowers on REPAYE are not charged for 50% of the “extra interest” each month. Going back to our example, rather than growing by $800 per month, the loan would instead increase by just $400 per month. Even though the balance is still increasing, the rate of growth is dramatically lower for REPAYE borrowers.

The Mentality: You are in a Higher Tax Bracket

The financial consequences of dealing with an unpayable amount of student debt are only part of the problem. Emotionally, the debt can be overwhelming.

Rather than focusing on the debt as a life-sentence, focus on the bottom line. The more money you make, the higher your student loan payments will be. In other words, you are in a higher tax bracket. Instead of paying this extra tax each April, payment is due each month to your student loan servicer.

Why a higher tax bracket?

Student loan payments on income-driven repayment plans are based upon a borrower’s discretionary income. Discretionary income is usually calculated based upon last year’s tax returns. On a repayment plan like REPAYE or PAYE, borrowers must pay 10% of their discretionary income towards their student loans.

If a taxpayer is in the 25% tax bracket, it can be said that for each additional dollar they earn, they are taxed 25 cents. If a student loan borrower is in the 25% tax bracket, for each additional dollar they earn, they have to pay 35 cents (25 cents towards taxes and an extra 10 cents over towards student loans).

Rather than getting bogged down in math and formulas, those that are interested in seeing how changes in salary impact student loan payments can check out the Department of Education’s Student Loan Simulator.

The point is this: if you earn more, you pay more. It applies to taxes, and it applies to income-driven repayment for student loans. Being in a higher tax bracket may not be ideal, but it isn’t an unmanageable burden either.

The tax bracket mentality to student debt really starts to shine when we look at retirement planning…

Shift Focus to Other Financial Goals Like Retirement

Paying for college may not have gone as planned. The debt is brutal, and the decisions of the past have made the present more difficult.

Don’t let one big mistake lead to more mistakes.

Setting aside money for retirement is a real possibility, even for those with a mountain of student debt. One of the best strategies is to utilize retirement savings accounts like a 401(k) or an IRA. What makes these retirement tools extremely valuable to student loan borrowers is that contributions to retirement can lower monthly student loan bills.

Suppose a student loan borrower puts $100 per month in their IRA. At the end of the year, they will have saved $1,200 towards retirement. Because the government wants to incentivize saving for retirement, savers get a tax break on their IRA contributions. If the saver made $45,000 for the year, they would be taxed as though they made $43,800. From an accounting perspective, the IRA contribution means the taxpayer has a lower Adjusted Gross Income or AGI.

AGI is a significant number for student loan borrowers because it is the basis for income-driven repayment plan calculations. In our example, the saver who put an extra $1,200 in their retirement account also gets lower student loan payments because of the lower AGI.

Combining all of the benefits, someone who puts money in a tax-advantaged retirement account like an IRA gets the following benefits:

  1. Money set aside for retirement,
  2. A lower tax bill, and;
  3. Lower monthly payments on their student loans.

For the borrower facing a lifetime of student debt, this is a powerful combination. It is also a great way to make sure the decisions of the present build a better future.

Forgiveness is an Actual Possibility

No matter how large the mountain of federal student debt, all borrowers should have a glimmer of light at the end of the tunnel.

All of the federal income-driven repayment plans offer forgiveness after 20 or 25 years. Two decades is a very long period, but it isn’t forever.

Borrowers with massive federal debt may also want to explore Public Service Loan Forgiveness. Those that are working eligible jobs can have their debt forgiven after ten years worth of payments.

The borrowers who think they will never be able to pay off their student loans should study the various types of forgiveness as well as the options for income-driven repayment.

Understanding the rules takes a bit of time, but using them to your advantage could be worth a small fortune.

Final Thought: Federal Student Loan Repayment is Designed to Work for All Borrowers

The biggest danger of overwhelming student debt is concluding that it will never be paid off and giving up.

The borrowers who let their loans default often end up paying more than the borrowers who stick with IDR plans. This is because wage garnishments may charge more money than the income-driven repayment plan would.

Even if it may seem that the debt will never be paid back, there are tools available to help manage the federal loans. Like taxes, the debt may not be avoidable, but it doesn’t have to ruin your life either.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

4 thoughts on “How to Live with Federal Student Loans you Can’t Afford to Pay Back”

  1. I had been paying $462 per month for several years until Covid-19 hit, and my last payment was at the end of February. Since that time, I was granted the three-month forbearance on March 27, which lasts until June 28. But my monthly payment jumped to $582 a month. After going through the IBR process with Navient, they reduced it down to $573 per month, which doesn’t substantially help. I’ve long since exhausted other forbearances and deferments. I’m desperate. What else can I do? Please help!

  2. Our credit has taken a huge hit with Covid. From an 842 to a 640. We are desperate to get away from Sallie Mae! Their interest rates are vile and they won’t work with us. Is it possible that we could pursue finding a better and kinder lender with this credit score? Thank you, kind Sherpa.

    • Hi Bernadette,

      Your credit score has dropped into the territory where refinancing at a lower rate with a new lender will be hard, but not impossible. Definitely keep your federal loans as is, but you might try casting a wide net to refinance that private debt with a new lender. If you are able to bump your credit score up a few points, it would also be a huge help to your cause.

      I can’t give you a specific lender because they all evaluate applications differently. Instead, reach out to a bunch and see if you have any luck. I have a list of them here: https://studentloansherpa.com/student-loan-reviews/

      Best of luck to you!


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