Student loan consolidation, income-driven repayment plans, public service loan forgiveness programs and employer-sponsored student loan repayment benefits are giving the nation’s 44 million student loan borrowers more ways to whittle down $1.5 trillion in collective student loan debt. But choosing the wrong repayment strategy, debt structure or tax filing method can increase the burden for an individual or a family, says this financial planner and college aid expert.

Fred Amrein, founder and owner of Amrein Financial and College Affordability LLC, a college financial software company, says loan servicers are pushing more borrowers to income-driven repayment methods (which are based on adjusted gross income) in order to help borrowers avoid default. Yet borrowers often don’t understand the financial consequences, he says, including the common problem of negative amortization from failing to pay the full interest charge on a loan.

For example, a borrower with interest charges of $350 per month may only be paying $300 per month under an income-driven repayment plan. The borrower may not understand that the loan balance is going up, he says, and loan servicers normally don’t disclose that this can happen.

According to the College Board report Trends in Student Aid 2018, 29 percent of federal student loan borrowers in repayment are in income-driven repayment plans, up from 13 percent in 2014.

Borrowers must know what they’re getting into with income-driven repayment plans, says Amrein. The same goes for public service loan forgiveness programs, which forgive outstanding balances held by individuals who work full-time for government agencies, school districts and 501(c)(3) nonprofits after they’ve made 120 on-time loan payments.

Public service loan forgiveness is a tax-free benefit, he says, and these programs also wipe out negative amortization from income-driven repayment plans. But people who leave public service jobs before 10 years, such as teachers who quit the profession to go work in the private sector, may be surprised to be hit with negative amortization. He encourages setting aside unpaid interest in a separate account to pay off that balance, “so if you do change careers you can at least know you didn’t go backwards,” he says.

With public service loan forgiveness, “It’s not what work you do – it’s who is paying you,” he adds, noting that individuals employed by third-party companies for jobs in public schools and nonprofit hospitals don’t qualify for loan forgiveness.

Borrowers contemplating turning over their federal loans to a private loan consolidator, to reduce their monthly payments, need to know this is a one-way door and weigh what they’ll be giving up, says Amrein. The federal loan program offers a death and disability advantage, more flexibility in repayment options and loan forgiveness.

Employees taking advantage of employer-sponsored student loan repayment assistance (a perk that’s becoming more popular) should be aware that this is a taxable benefit. Proposals in Congress seek to make this a tax-free benefit.

One of the biggest problems with student loans is that all advice is “siloed,” says Amrein. “Loan servicers help you stay current, lenders want you to refinance” and tax advisors try to figure out the lowest taxes. He emphasizes the importance of looking at the whole picture as well as potential life changes when making repayment decisions.

First « 1 2 » Next