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Tuesday, October 17, 2017

Loan forgiveness and consolidation options for student debt

Loan forgiveness and consolidation options available to federal student loan borrowers bring much needed debt relief. Some consolidation programs come with a forgiveness option under special circumsta

Outstanding student debt in the US recently crossed the $1 trillion mark, making it the second largest outstanding debt in the country, next to mortgage debt. The borrowers are reeling under a mountain of debt and postponing important purchases like new homes and cars as it is beyond their affordability. Thus, the Obama administration had to take steps to resolve the issue. The government has come up with the Pay as You Earn (PAYE) program, which is the modified version of Income Based Repayment Plan. This program is expected to help more than 5 million American borrowers who are struggling to repay their student loan. Before this program, several other student loan payment relief options are available for the borrowers. These include:

  • Income Based Repayment Plan
  • Income Contingent repayment program
  • Graduated Repayment Plan
  • Standard Repayment Plan

Once borrowers start repaying through a suitable repayment plan over a specific time period, they may qualify for loan forgiveness. Other than forgiveness, they can also apply for loan deferment and forbearance. These two options allow borrowers to postpone their payments for a specific period. These are only temporary relief provisions. Since most of the student loan borrowers take multiple loans to pay for their education, loan consolidation merges multiple student loans into one. These loans can be repaid on with the help of the repayment plans mentioned above, which are offered by the Department of Education.

Loan forgiveness programs
Loan forgiveness programs are available to any borrower who consolidates their student loans through Income Based Repayment or Income Contingent Plans. Once they make 300 monthly payments, they would qualify for loan forgiveness.

Also, borrowers who are employed in full time public service enterprises may qualify for public service loan forgiveness. In order to qualify, they need to make 120 monthly payments. Public service workers include those employed by the federal, state and local government. They are nearly one-fourth of the country’s total workforce. Under the forgiveness programs, qualified borrowers can have their remaining loan balance, including interest, forgiven after making 120 monthly payments.

The most popular Loan consolidation option
The most popular loan consolidation option in the U.S has been the Income Based Repayment Plan. This plan has recently been amended by President Obama to include more borrowers to get benefits. Under the PAYE program, borrowers can cap their monthly payments at 10% of their discretionary income. The discretionary income is defined as “The difference between your adjustable gross income and 150% of the poverty guideline for your family size and state of residence”. Loan consolidation not only helps borrowers to lower their monthly payments, but it also provides a forgiveness option based on their income.

Under the Income Based Repayment Plan, your reduced monthly payments extend for a period of up to 25 years. Based on the normal loan forgiveness program, which is 300 payments , the remaining loan balance loan is forgiven by the government. Similarly, under the Pay as You Earn plan, borrowers need to make payments for 20 years. Thereafter, the loan balance will be forgiven. The PAYE program will be implemented in December 2015.



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