Repayment of Student Loans

Restructuring Loans:

Many private loan borrowers want to repay their loans but require alternative repayment plans when their income is insufficient to meet minimum required repayments. In 2008, 10% of private student loan borrowers devoted more that 25% of their income to meet their repayment obligations. There are several options for borrowers attempting to repay their loans. Borrowers can extend the repayment period on certain federal loans from 10 to 25 years. Additionally, many borrowers may be eligible for a graduated repayment schedule. The payments during this type of repayment schedule start low and gradually increase throughout the life of the loan. Borrowers can also cap their monthly payment on certain federal loans based on a percentage of their income. These payment options will increase the total interest paid but reduce the individual debt payments for borrowers.

In the event of a default, borrowers have a rehabilitation option to help mitigate the consequences of such a default. Under this option, the borrowers must make nine out of ten consecutive, reasonable and affordable, on-time monthly payments. Upon successful completion of these payment, the Department of Education will request that the default notation from the borrower’s credit report be removed.

Consumer Financial Protection Bureau’s Suggestions for Loan Repayment:

The CFPB suggest that consumers enroll in auto-debt payments that automatically withdraw money from their bank accounts and make missed payments less likely. Additionally, many private loan providers will offer an interest rate reduction for setting up auto-debit payments. This reduction has the potential to save consumers hundreds or even thousands of dollars over the life of the loan. If a consumer’s budget allows, the CFBP also suggests making payment for more than what is required to pay off the loan fast and with less interest. Consumers with private loans could consider consolidating these loans at a lower interest rate.

For federal loans, the Public Service Loan Forgiveness program is available to consumers with certain qualifying William D. Ford Federal Direct (Direct Loan) Program loans. To become eligible for this program, a consumer must make 120 qualifying payments. Qualifying for this program takes approximately ten years. To participate in this program the consumer must be employed by a government organization at any level, a not-for-profit that are tax exempt under Section 501(c)(3) or the Internal Revenue Code, or other types of not-for-profit organizations. The consumer must work full time as defined by his or her employer or at least 30 hours per week. A consumer may also qualify if they work in more than one qualifying part-time job for at least 30 hours per week. Additionally, a qualifying monthly payment is a payment made:

  • After October 1, 2007;
  • Under a qualifying payment plan, including all income driven repayment plans and the 10-year Standard Repayment Plan;
  • For the full amount due as shown on the consumer’s bill;
  • No later than 15 days after the consumer’s due date; and
  • While the consumer is employed full time by a qualifying employer.

Upon completion of this program, a consumer’s remaining loan balance after the 120 qualifying monthly payments will be forgiven.

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