Education Center

Federal Student Loan Relief: Most Borrowers Overpay

There’s a better than 50/50 chance that you’re overpaying your federal student loans… If you like money and hate your debt, you should probably stop that.

Federal student loan relief keeps cash in your hand
Something is clearly wrong when it comes to federal student loan relief efforts. In August 2015, the Government Accountability Office (GAO) issued a report to Congress about federal student loan payment programs. The report found that 51% of all Federal Direct Loan borrowers were eligible for Income Based Repayment. Yet, only 13% of eligible borrowers actually participated in it. This means millions of student loan borrowers could pay less, but they either don’t know about the program or don’t know how to use it.

The Department of Education even admits that their efforts to increase awareness about these programs is incomplete and inconsistent. The information is available they say, but it’s up to borrowers to hunt it down or ask their loan servicer. Luckily, Debt.com is here with the details…

What is Income Based Repayment?

Income Based Repayment (IBR) is one of three federal student loan relief programs that matches monthly payments to your income. It’s basically the government’s way of acknowledging that the salary you earn after you get a degree usually doesn’t exactly match the expense you incur to get it. The program adjusts the monthly payments on your Federal Direct student loan debt to your income and family size. If you have lower income and a larger family, it reduces your student loan payment requirement.

In general, enrollees spend between 10% to 15% of their take-home income to repay student loans under an IBR. This reduces the burden of student loan repayment on your budget. The GAO report acknowledges that this can increase total cost over the life of your loans. However, in many cases other federal relief programs, such as Public Service Loan Forgiveness, can offset that added cost.

Exactly how much savings are we talking?

The GAO report created a few different borrowers to run test examples. These compare IBR repayment to loan repayment under a Standard 10-year repayment plan. Standard plan enrollment is automatic if you don’t choose a different plan, like an IBR.

For one sample borrower making less than $15,000 annually, an IBR reduced the monthly payment amount AND total cost. The IBR guarantees that this borrow pays less than the $230 payment on a Standard plan; in some cases, the payment requirement can be $0 because of such a low income. Total cost savings would be $4,742.

Savings can be even greater under other income driven repayment plans. For example, the PayE (Pay as You Earn) program is even better than an IBR at reducing monthly payments. In PayE, the same borrow would only pay between $0 and $96 per month. Over the life of their loan repayment, they would pay just $7,414.

Remember, this sample borrower took out $20,000 in loans. Under the PayE this borrower only has to repay less than 40% of what they borrowed. The remaining balance gets forgiven without penalties at the end of the PayE term, which is 20 years. That may seem like a long time to repay a loan, but it’s definitely worth it for the cost benefit.

The federal government offers a free repayment estimator that helps you see how much you, specifically, can save under each program. However, be warned that both the GAO and other borrowers have complained the calculator is a bit complicated to use.

The potential to save is even greater for public servants

IBR and PayE also allow a borrower who works in public service to qualify for Public Service Loan Forgiveness (PSLF). PSLF is, without question, the most advantageous student debt relief program available – if you can qualify for it.

To be eligible, you must have qualifying Federal Direct Student Loans and be employed in an approved public service profession. You don’t have to enroll a program like IBR or PayE, but you don’t really get a benefit unless you do. That’s because student debt gets repaid in-full in 10 years under almost all Standard repayment plans. Since PSLF forgives your remaining balances after 120 payments, it only provides a benefit if you would pay longer.

Again the GAO report gave examples. This time, the sample borrower had higher income ($25,000 annually) but also had higher debt ($60,000).

  • On an IBR, the monthly payment with PSLF is between $94 and $221; without PSLF it could be up to $689.
    • Total cost is $18,383 versus the $92,845 cost on an IBR without PSLF
    • Instead of making 300 payments (25 years), it would be 120 (10 years)
  • On a PayE, the monthly payment is between $63 to $147, with a term of 120 months instead of 240
    • Total cost is $12,256 versus the $39,461 cost without PSLF

Again, remember that this borrower took out $60,000 in loans. Only on an IBR without PSLF would they actually pay back what they borrowed with interest. In every other circumstance, they pay less.

Given such an insane potential for savings, you’d think people would be jumping on this. However, less than 150,000 borrowers have requested PSLF certification. As of September 2014, at least 643,000 should be able to get certified, and that was 3 years ago.

These programs also make you less likely to default

The GAO report shows that IBR and PayE borrowers are:

  • More likely to have higher debt levels
  • Typically experience at least partial financial hardship, like living paycheck to paycheck

And yet they are less likely to default that borrowers who don’t enroll in these programs. Looking at student loan borrowers who entered repayment between 2010 and 2014:

  • Only 0.5% of borrowers enrolled in an IBR were in default
  • Only 0.1% of PayE borrowers were in default
  • But 14% of borrowers on Standard repayment had defaulted

What’s more, only 56% of Standard users were actively repaying their loans (15% had deferment and another 15% had forbearance). By contrast, 81% of IBR users and 87% of PayE participants were active in repayment. So, not only do these programs keep you out of default, they avoid using limited opportunities for deferment and forbearance.

Why aren’t more people using this?

The GAO specifically calls out the Department of Education and the 11 lenders authorized to service Federal Direct Loans. Communication is inconsistent and often only available upon request. Some loan servicers think it’s enough to print a message on the back of your monthly statement; others don’t even do that – they’ll give you information if you go out of your way to ask for it.

The GAO report also acknowledges that enrolling and getting certified for these programs is complicated. The Department of Education offers information on their website, and repayment tools that compare total costs. However, those resources can be just as confusing as the enrollment process. Many times, borrowers just get frustrated and leave… and leave the savings on the table.

That’s why Federal Student Loan Relief services are so vital. They do the same thing for your student loans that a tax prep service does for your annual income taxes. You don’t have to handle any paperwork or work out difficult calculations. They also have extensive knowledge about all these programs that could take days or weeks to digest on your own.

So, while you don’t have to hire a third party to handle student loan relief, it definitely has its merits. If you decide to use a student loan relief service, make sure they’re accredited, with a strong Better Business Bureau rating and good independent reviews online. You should also be wary of any company that charges fees upfront. You should only have to pay the service provider once you enroll and start saving.