For many members of the class of 2014 who borrowed money to attend college, the clock is ticking on what is likely to be their biggest expense after graduation.
They’ll have to start paying back their federal student loans in November or December—as the six-month grace period that lenders give new grads comes to an end. But depending on their income—or lack of income, if they’re still looking for work—some borrowers may be eligible for much lower payments than they’d anticipated.
And eventually they could have their federal loans forgiven altogether.
“If total student debt exceeds one’s annual income, then you will likely qualify for some sort of payment plan and receive a financial benefit from participation” in an income-driven repayment plan, said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a website that provides information, advice and tools for helping families plan and pay for college.
The Consumer Financial Protection Bureau estimates that 1 out of 4 American workers may be eligible for public service loan-forgiveness programs, but many graduates still are not aware of their options.
The “Pay As You Earn” plan introduced by the Obama administration caps a federal student loan borrower’s payments at 10 percent of their income, and the balance will be forgiven after 20 years of on-time payments.
Borrowers who opt for careers in the nonprofit or public sector could have loans forgiven in 10 years. However, this payment plan is only available to borrowers whose loans were disbursed on or after Oct. 1, 2007.
Borrowers with older loans may be eligible for an income-based repayment plan, which caps monthly payments at 15 percent of your income. Payments change as your income changes, but may be forgiven after 25 years. Or they may qualify for income-contingent repayment plans, where payments are calculated each year based on your adjusted gross income, family size and the total amount of your federal loans.
More details about these plans are available on the Department of Education’s website.
The U.S. Treasury Department is also taking a closer look at the future impact of student loan debt on the economy.
“One thing we want to make sure we do right is that we give students and their families the opportunity to compare so that they can compare different education options and compare schools and compare levels of debt,” said Sarah Bloom Raskin, deputy Treasury secretary. “Do standardized comparisons across schools, across colleges so that students are well-informed before they go into a debt situation … to understand the ramifications of what these debt levels will mean.”
A potential unintended consequence: Income-driven repayment and loan forgiveness programs could weakness the financial footing of some young adults even further, some financial aid experts say. Though loans may eventually be forgiven, being indebted for 20 to 25 years will significantly reduce the ability for young adults to make big purchases, save for retirement and their children’s education, Kantrowitz says.
Yet, as they become more widely publicized, income-driven repayment plans are growing in popularity. As a result, the government’s potential tab for loan forgiveness could grow significantly as well.
Earlier this year, the Obama administration proposed capping how much debt is eventually forgiven for those entering the public sector at $57,500 per borrower. After that the borrower would have to make payments for 25 years.
Financial aid experts say this move also appears designed to address concerns that debt forgiveness, under existing terms, may remove incentives for students to be cost-conscious and for schools to keep tuition prices elevated.