There are many payment plans, but only one that might be right for you

Unless you’re one of the small percentage of student loan borrowers who is repaying on the so-called “standard” 10-year plan, you’re probably familiar with some of the different repayment plan options. Most of them are known by acronyms, a confusing cornucopia of letters describing plans based on percentages of your income, you can caught up in the “whozits and whatzits” of all this jargon. Among the income-driven repayment (IDR) plans there are: Pay As You Earn (PAYE), Revised PAYE (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Although some of them differ by a single letter, their terms are quite different, and are more nuanced than the brief stock descriptions provided on the Student Aid website.

Repayment plans beyond the basic that could spell danger

There are even more repayment plans than those you’ll see on studentaid.gov, and they’re best avoided, if possible. Have you ever wondered what happens if you forget to recertify your income every year? The answer: you get bumped to a non-IDR plan. Some of these plans are capped at the amount you’d pay under the standard 10-year plan, but others are not, which could land you with a potentially much higher payment and that could seriously disrupt your financial plans, especially if you’re pursuing Public Service Loan Forgiveness (PSLF).

To qualify for PSLF, you have to work full-time for a public service organization such as a non-profit, the government, etc., and you also have to be on one of a certain few repayment plans. These include the standard 10-year plan and the four IDR plans. For the latter, you need to recertify your income every year when prompted by your loan servicer, which allows them to calculate your monthly payments in accordance with your most recent tax return or a paystub. When you fail to submit the paperwork, they eject you from your IDR plan and get put on an “alternative.” These plans aren’t based on your income, and sometimes don’t qualify for PSLF, meaning that you could end up spending a lot more each month and waste time in the forgiveness process. This can be especially painful if you’re on direct debit and don’t notice that there’s been a change.

Don’t navigate the murky waters of payment plans alone

One of our clients recently discovered just how easy it is to “get lost at sea” when you’re trying to understand payment plans on your own, and the loan servicers do little to help steer you in the right direction.

Dr. Elliot is 8 years into repayment and has 8 years worth of qualifying payments towards PSLF (just 2 more to go, way to go Dr. Elliot!). For most of that time, he was on PAYE, but—due to a servicer error—was recently told that his household income of $450,000 was too high for that plan (Once a borrower is on an IDR they never have to leave it.). He asked to be placed on another plan that qualified for PSLF and was moved to REPAYE. What his servicer didn’t tell him, however, is that REPAYE  has no cap on how much you pay each month.

With his higher salary, his new $3,170 payments would exceed those of his original standard 10-year plan amount, $2,960. His servicer also didn’t tell him that there was an option for a plan called the “PAYE Uncertified Payment,” which allows him to continue to qualify for PSLF, but his payments revert to the standard 10-year plan amount. He continues to make payments for these last 2 years before PSLF, and because of the cap, they’re less than he would pay on REPAYE. Dr. Elliot gave us a call after he had gone on REPAYE, just to double check his work. We told him about the alternative option, and after much back and forth with the loan servicer, (watch for part 2 of the Dr. Elliot story in an upcoming post) now, he’s making PAYE Uncertified Payments.

Too often, clients give us a call after they’ve made a change with their repayment strategy and they’ve already had a pitfall. Dr. Elliot is a smart guy: he’s read the literature on studentaid.gov, he’s tried to work with his loan servicer. He’s finding out he also just doesn’t know that there’s a whole lot more to the student loan world than what you can read online and your loan servicer isn’t always going to help you.

In fact, loan servicers have been repeatedly found to give uninformed and false information to their customers, costing borrowers both time and money. By calling Navigate, he was able to save nearly $10,000 over just his last two years of repayment. If you have a question, feel free to give us a call. We’ll help you navigate the uncertain waters of repayment plans and all your student loan needs.