The Student Loan Plan: Sally

Michael Lux Blog, Student Loan Plan, Student Loans 0 Comments

This week we will be starting a new feature, The Student Loan Plan.  We will take real reader emails, and based upon the information they share, come up with a few suggestions to make life with student debt a little easier.  If you want tips for dealing with your student loans, contact us.

Today’s email comes from “Sally in NY”:

“I have a consolidation loan total of about $63000 and another loan around $16000.  Both federal.  The small one is unsubsidized I think.

I am a teacher with the state of NY.  I want to pursue the Public Service Forgiveness program and want to know if the REPAYE plan is the best for me.  I want the lowest payment that qualifies me for this program.

They currently have me on the extended graduated for the large one.  What should I do?  My husband and I together make about $75000/year.  He is smart…he has no loans.”

The Plan

Sally is already off to a great start with her student debt.  Having only federal loans is ideal because of the various payment plan options as well as the forgiveness options.  Based on these numbers, it looks like Sally may be able to take advantage of both.

Going with REPAYE (Revised Pay As You Earn) and chasing Public Service Student Loan forgiveness is definitely a good idea.  Changing Sally’s repayment plan should be done as soon as possible.  The extended graduated repayment plan used to be on best options, but with the creation of income driven plans, it is now a bit of a useless relic.  Worst of all, the graduated repayment plan does not count towards the public service program.  That means that all of Sally’s payments up to this point do not count towards the 120 required payments… even though she is currently teaching.

Repayment Options

REPAYE is definitely a viable option, however it may not be the best choice of the available income driven plans.  The problem with REPAYE is that spousal income is factored into payments, regardless of how taxes are filed.  If Sally’s income alone was used to determine the payment, her monthly obligation could be much lower.

Two plans that provide the lower payment option are IBR (Income Based Repayment) and PAYE (Pay As You Earn).  However, both of these options also have issues.  PAYE would be the best choice, unfortunately if Sally took out her first student loan before October of 2007, she won’t be eligible.  Like REPAYE, PAYE only requires payments of 10% of discretionary income.  The difference is that Sally and her spouse can file taxes separately and then use Sally’s income alone in the payment math.  The downside is higher taxes each April.

IBR requires a 15% of discretionary income.  Even though the 15% figure is higher than the 10% for REPAYE, the option of filing taxes separately could change the math.  Supposing that Sally is not eligible for PAYE, she could opt for IBR, file taxes separately, and come out ahead.

Ultimately, the best option comes down to the math.  Anyone in this situation should first determine PAYE eligibility.  After that, they should compare the student loan savings from filing separately with the cost of the higher taxes.  Whatever option saves the most money is the way to go.

Final Thought

Public Service Forgiveness is a great route, but hardly a sure thing.  Submitting yearly payment certifications can help ensure that full credit is given for all eligible payments.  Many borrowers fail to do so and learn the hard way that years of payments will not count.

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