I thought it might be helpful to do a blog post which holds new information for educators. Some of you may already be aware of these things and using them to reduce your monthly bills. For those who aren’t, summer might be a good time to check them out to see if they work for you.
I was recently consulted by two young people concerned about student loans. These were two separate clients. The first, a high school graduate who got into his early-decision college out of state and wants to be a teacher, came to me because he was nearly talked out of accepting his very sweet financial aid package by a teacher and a guidance counselor. The teacher told him her student loans were more than her mortgage; the guidance counselor that he was better off financially staying here and going to Daytona State. Both couldn’t have been more wrong, for reasons I’ll explore in a moment.
The second client was a young, recently married student who went to an expensive private school up north, and recently took a teaching job here. She had heard I knew how to access the student loan forgiveness programs. We were able to set that young family up with a program which will pay 100% of her remaining loans back if she teaches for ten years and her and her spouse’s incomes only increase by 5% per year. A five percent increase per year looks pretty good to local teachers!
Colleges offer financial aid based on two things: the Expected Family Contribution on the Free Application for Federal Student Aid (FAFSA), and the Cost of Attendance (COA). This is true for both public and private accredited institutions. If the COA is high ($200,000 over four years for the first student I mentioned), the college offers a package which first includes all federal and college grants, then scholarships, then offers loans. For the student above, his loans at the college for four years would total about $35,000. BUT, the cost of attendance covered includes laundry, three meals a day, and housing. And, since he will be teaching, he will not have to pay back that $35,000, effectively turning those loans into federal grants. All while building his credit. I’ll explain in a moment.
The second client will actually have to pay back a small amount of her federal loans, but was thrilled when I showed her how to drop her payments from $487 dollars a month to $25 a month. That will really help to offset her healthcare costs. Her loan balance was over $50,000. For her family of two, the adjusted gross income was $27,000. She chose the Income Based Repayment plan, which factored in up to a 5% increase in income for her and her spouse (if their income stays in that category, and they have children, both the AGI and the monthly loan payment drop).
Here is a key point, applicable to both of the above cases: The Income Based Repayment Plan is spread over 240 months; twenty years. BUT, this client, actually both clients, will participate in Public Service Loan Forgiveness, which forgives ALL outstanding FEDERAL loans after 120 (and they can be nonconsecutive) months of service. That’s key, because the teacher above is scheduled in the Income Based Repayment Plan to pay back $29,189 over 240 months, ending in $52,411 forgiveness (the higher figure is due to interest over twenty years.) However, she will only be paying back 13,212–because she is participating in both programs and her loans will be forgiven after ten, not twenty, years.
I know, I know. It’s complicated. There’s a lot to this, and you need to talk to the public servants at the end of the line on the federal end to get it straight. By the way, the first client? He will end up paying even less back. He plans to do several years with AmeriCorps and the Peace Corp before teaching; his payments will be nothing. Even if he went straight into teaching, since his loans are less than the second client’s, his payments would be less. And, he almost gave up a wonderful private-college education because his teacher and guidance counselor just didn’t know about this!
In order to participate in these programs, your loans need to be federal, and you need to have none in default. For the first, public service is not necessary. For the second, and the real money-saver, it is. One of the mistakes some teachers make is they think teacher loan forgiveness is the only path for them to get some assistance with paying back those loans. It isn’t.
Here are some links I hope you’ll find helpful, and please contact me with any questions. A word of caution: It is CRITICAL to do these steps in order. To have the low payments, you have to choose from the best federal repayment plan for your situation. To get public service loan forgiveness, you need to fill out the paperwork, and have your employer do it, annually. But, you need to be on a repayment plan (which means coming off of a forbearance or deferment) before signing up. Call them.