With student loan default on the rise across the USA, it’s becoming increasingly important that people make educated decisions about their repayment plans and choose the one that will keep them in the good graces of credit companies and loan providers. Have you looked into Income Based Repayment Plans to avoid loan default.
Income Based Repayment Plans can drastically reduce the risk of defaulting on student loans, because the monthly payment amount changes with your income: when you make less, you pay less. When you make more, you pay more. With strict guidelines in place on most plans assuring that you will never pay more than a maximum of 15% of your total income, it’s a much easier payment to make than the fixed payment on most 10 Year Plans.
Why Isn’t Everyone Doing This?
With many changes being made to the Department of Education’s processes and applications, including a massive overhaul of the FAFSA, it has become apparent that people aren’t taking advantage of this plan. From 2010 to 2014, less than 1 percent of people on an Income Based Repayment Plan defaulted on their loans. Comparatively, 14 percent of borrowers on a Standard Plan defaulted. These numbers are particularly shocking because 51 percent of student loan borrowers qualify for an Income Based Repayment Plan. So why are only 20 percent using that to their advantage?
Quite simply, they probably don’t know that they are eligible for the plans. This is where defaulting begins. Student loan borrowers aren’t aware of their options, and therefore stick with the standard 10 year plan they are assigned, with a fixed monthly payment that may or may not be affordable for them. With an average student loan debt of approximately $35,000 per student and average incomes ranging from $20,000-$30,000 per year, you can see where things would quickly get out of hand. That is why Income Based Repayment Plans are so valuable.
The Government Accountability Report from August shows that borrowers often have to find information about their options themselves, and many simply don’t know where (or how) to look. The loan providers aren’t giving them accurate information about all of their options, and most people, not wanting to further confuse themselves, simply stick with their 10 year plan. When they can’t make their payments consistently, their loans fall into default and they get stuck.
How Do You Take Advantage of This?
The good news is that through a combination of efforts, more people have begun taking advantage of the Income Based Repayment Plans. June of this year marked a 56 percent increase in Income Based Plans since June of 2014. With the rise in Income Based Repayment Plans, the finance world is hopeful that there will be a decrease in default rates among student loan borrowers, which is a win-win for everyone.
Defaulting on student loans can affect your credit score, your ability to get further aid in the future, and can have long term repercussions. Make sure you have a reasonable payment and can make the payments on time and consistently. Log onto your student loan site, or call your provider and find out which repayment plan is best for you!
About the author
Trinya’s passion for helping others understand student loans started when she began learning all she could to fill in what she didn’t know about her own loans. She enjoys speaking at local schools about the cost of college and assisting friends with their finances. In her free time, Trinya also enjoys reading, writing, and playing music.