“Even the friends that I have who are frugal, even they have debt,” Olivia began.
Taking a pause, she shared that her friends talk about the anxiety they have about paying back their loans and how they are dreading the end of their six-month grace period when their loans go into repayment.
“I just don’t have those fears,” Olivia said.
It’s in these types of moments, when your children are speaking to others, that you learn their heart.
“When you are little, you don’t care,” Olivia said. ” ‘College fund? Who cares? I want this toy.’ Or: ‘College fund? Who cares? I want that milkshake.’ But I didn’t need the toy. I didn’t need the milkshake. I’m going to graduate without debt. And I’m also going to go to grad school without debt. When I think about that, I can now set my kids up. The money I would be spending for my student loans, I can put that away for my kids. Generationally, we can have debt-free students.”
What Olivia presents is an ideal situation. But what if your child is going to graduate with debt?
There’s some relief. Borrowers with federal loans can opt for repayment plans to reduce their monthly payments based on their income and family size. There are four such plans:
• Income-contingent repayment. Your monthly payment is capped at 20 percent of your discretionary income.
• Income-based repayment. Generally, payments are set at 10 percent of discretionary income for new borrowers on or after July 1, 2014. Someone who has loans prior to that date will be at 15 percent even if they have some loans after that date, points out Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, a free website with information about college admissions and financial aid.
• Pay-as-you-earn repayment. Payments are set at 10 percent of discretionary income. But this option is only available to borrowers who have at least one federal student loan first disbursed on or after October 1, 2011, and no loans prior to October 1, 2007.
• Revised pay-as-you-earn repayment. This is the newest plan designed to give relief to all borrowers, not just those with recent loans. Payments are 10 percent of discretionary income.
To figure out which repayment plan works best for you, contact your lender.
“The important thing is to look for an affordable plan that you can work into your budget,” says Rohit Chopra, senior fellow at the Consumer Federation of America.
Kantrowitz has compiled summaries on the various options, which you can find at www.cappex.com/best-idr. The two must-reads:
• “Everything You Need to Know About Income-Driven Repayment Plans.”
• “Which is the Best Income-Driven Repayment Plan?”
Lots of borrowers focus on the fact that debt can be forgiven under the various income-based plans after 20 or 25 years. But it’s a long road to that forgiveness.
“Except for borrowers who are living at close to 150 percent of the poverty line, most borrowers under an income-driven repayment plan will not reach the 20- or 25-year forgiveness point,” Kantrowitz says.
And many borrowers don’t realize that if their remaining loan balances are forgiven, the canceled debt is treated as income and will be taxed.
The May 1 college decision deadline is coming up. And where students choose to attend college can result in years of debt obligations. I’m glad that, for those aspiring scholars who do take on debt, there are plans that can ease their monthly burden.
But maybe Olivia sharing what it’s like to be debt-free at the start of her adult life will help somebody make a different decision.
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, DC 20071; or singletarym@washpost.com.
