The total amount of student loan debt in the United States is approximately $2 trillion. Over 44 million individuals and households are dealing with this obligation, and the typical amount owed is nearly $40,000.
Although pandemic-related relief has helped many borrowers, it hasn’t stopped the debt from being an obligation that eventually needs to be paid.
If a borrower cannot make their monthly amount due, they may be eligible for a deferment or forbearance, which allows them to temporarily postpone or reduce their payments.
A deferment or forbearance might not be an option when you have a job. That’s when it is worth looking at the income-driven repayment rules to see if any relief is available.
What Are the New Income-Driven Repayment Rules?
The new income-driven repayment rules for US-backed student loans require undergraduate borrowers to pay 5% of any income above $33,000 annually. These figures are 50% less than what was previously required. The government forgives the amount if the payments are insufficient to cover monthly interest charges.
Income-driven repayment plans are a type of repayment plan for federal student loans that allow borrowers to make payments based on their income and family size.
The US government currently offers four income-driven repayment plans to consider. Some individuals and families might qualify for multiple options, so the best solution is to choose the one that saves the most money.
Here is a closer look at what is available in 2023.
What Are the Income Driven-Repayment Plans?
| Income-Driven Repayment Plan | How to Qualify For This Income-Driven Repayment Plan |
| IBR Plan | Under the Income-Based Repayment Plan, your monthly payments are calculated based on your income, family size, and state of residence. It would help if you had a partial financial hardship to qualify for this plan. |
| PAYE Plan | The Pay As You Earn Plan has monthly payments calculated on your income and family size, but the payments are limited to a specific percentage of discretionary income. Borrowers must be new borrowers as of October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011, to qualify for this plan. |
| REPAYE Plan | The Revised Pay As You Earn Plan removes the requirement for being a new borrower by a specific date. All Direct Loan borrowers are eligible for this plan. |
| ICR Plan | With the Income-Contingent Repayment Plan, the monthly payments are based on the total amount borrowed, family size, and income. A partial financial hardship must be present to qualify. |
Each of these plans has different eligibility requirements, repayment periods, and calculations for monthly payments. They require borrowers to recertify their income and family size annually to ensure their rates are still based on their current financial situation.
Any remaining loan balance after the repayment period is over may be eligible for forgiveness, but this also depends on the repayment plan chosen.
What Happens If I Don’t Make the Monthly Student Loan Payments?
You will become delinquent if you do not make your monthly student loan payments. It could default when the account stays that way without receiving any money from you for an extended time (often 4-6 months).
Here are some of the consequences to review if that happens.
- If you miss a payment deadline, you may be charged a late fee.
- Late payments and delinquency can damage your credit score, making it harder to get approved for loans, credit cards, and even apartments or jobs in the future.
If you are more than 90 days delinquent, your loan servicer may report your delinquency to credit bureaus, which can result in collection actions, such as phone calls, letters, or emails from collection agencies. - Should you default on your federal student loans, the government can garnish your wages, which means they can take a portion of your paycheck to repay your loans.
- Defaulting on your student loans could cause you to lose eligibility for future financial aid, including grants.
If you default on your private student loans, your lender may take legal action to recover the debt. That includes filing a lawsuit in court or requiring you to go to mediation to determine your responsibility and create a repayment plan.
Please note that filing for bankruptcy might not relieve you of this debt, even if you still need to make the monthly payments.
The best option is to be proactive with your student loan debt before it becomes delinquent. Contact your servicer to determine what income-driven repayment options are available to you.
How Do I Rehabilitate a Defaulted Student Loan in the United States?
You are given one chance to rehabilitate a defaulted student loan. If you complete the rehabilitation process and then stop making payments again, you aren’t given a second chance under the current rules.
The rehabilitation process allows your student loan status to change from “default” to “current” on your credit bureau report. This change significantly boosts your lending worthiness and restores your ability to apply for future grants and loans.
Once you default on a federal student loan, your entire loan balance becomes due and payable immediately, including interest and collection fees. You’ll need to follow several specific instructions to complete the rehabilitation process and get your finances back on track.
Contact Your Loan Servicer(s)
The first step is to contact your loan servicer to determine your options for rehabilitating your loan. They can tell you how much you owe and your monthly payment under the rehabilitation plan.
Your representative will also let you know if you don’t qualify for rehabilitation and why. Although this conversation might be difficult because it requires you to acknowledge the debt and not pay it, you’re taking a step forward to take charge of your financial health.
Loan servicers want your loans to be in a repayment status.
Agree on the Payment Plan
You will need to agree on a payment plan. Under a rehabilitation plan, you will make nine monthly payments of an agreed-upon amount. The amount is based on your income and expenses.
Since the monthly payments could be significant, borrowers with multiple student loans in default might consider rehabilitating them individually.
Make Timely Payments
You must make all nine payments on time and in full to complete the rehabilitation process. Late or partial payments will not count.
The loan servicer will outline the rules to follow so that you can complete this restoration process successfully. If you fail to meet any of the terms, the process might have to start over. In some situations, a single missed payment might remove you from this program.
Have the Default Status Removed
Once you have made all nine payments, your default status will be removed, and you will be eligible for new loans and other benefits.
It takes about 30 days for the credit reporting bureaus to receive updates about your loan status. If it has been more than 90 days without changes, contact your loan servicer to see if there are any problems that require resolution.
You can also file a dispute with one of the credit reporting bureaus to have them investigate the matter on your behalf.
Maintain Good Standing
After completing the rehabilitation process, it’s important to keep making your payments on time and in full. You may also want to consider enrolling in an income-driven repayment plan to help make your payments more manageable.
Can I Have My Student Loans Forgiven?
It is possible to have your student loans forgiven, but it depends on several factors, including the type of financial product you have, your repayment plan, and your career.
The PSLF (Public Service Loan Forgiveness) option is the most popular way to have student loans removed from your debt obligations. If you work full-time for a qualifying public service employer, you may be eligible. You must make 120 qualifying payments while working in this capacity.
Another option is teacher loan forgiveness. If you work in a low-income school district or with an educational service agency, you might qualify for up to $17,500 in forgiveness.
If you are enrolled in an IDR plan and make payments for a certain number of years (usually 20 or 25 years), any remaining balance may be forgiven.
For those who have their school closed while enrolled or shortly after withdrawing, there could be partial or full forgiveness options available.
The final option is a total and permanent disability discharge. If you cannot work and this health issue prevents you from repaying your student loan obligations, you could be eligible for forgiveness.
Loan forgiveness is not automatic, and you will need to meet certain eligibility requirements and apply to have them forgiven. If you are unsure if you are eligible, contact your loan servicer or the US Department of Education for more information.
Won’t Income-Driven Repayment Plans Extend My Debt?
Income-driven repayment plans could extend the term of a borrower’s debt, which means making payments for a longer time. This option also makes the monthly obligation more manageable, especially for those with low household income or a significant amount of student loan debt to juggle.
Unfortunately, I allowed my student loans to reach default status about a decade ago. I had just moved across the country, started a new job that paid more, and was barely making ends meet with everything from rent to utilities.
When I applied for an income-driven repayment plan, my application was denied. I was told that I had made too much money to qualify for that option.
Although I kept paying what I could and kept trying to get a forbearance or deferment, the results were always denials. Eventually, my loans went to a collection agency. That caused my credit score to drop by 50 points.
I talked to the collectors each time they called. They wanted to set up a repayment plan, but I didn’t have enough available from my paycheck to meet the minimum amount they wanted.
That caused me to give up. I stopped opening the mail and blocked all the numbers from the collectors. It took about six months for them to be switched to default.
Once my financial situation improved, I went through the nine-month rehabilitation process. After making each payment on time, the rules changed enough for me to qualify for the IDR plan.
Since the pandemic started, those required payments are now $0, but they go toward total loan forgiveness now since I have a job in the public sector.
My best advice to you is this: don’t give up. Be proactive about what you can do with your finances. In return, you’ll get your student loans to where you want them to be.
