I am advising my father, who in turn wants to help his granddaughter.
She has incurred a lot of SL debt. She is about to graduate and her Stafford loans will be coming out of deferment in a few months. The debt will be much more than she can realistically handle (given her projected income) but she and my father had an (unwritten) agreement that he'd take care of her SL debt when she gets out of school. He's a good guy so he naturally wants to step up and do that.
At the same time, he'd like to reduce the amount he might have to pay. He is wondering whether she could get into some kind of program that effectively reduces the amount of the debt if the borrower has a low income. I.e. perhaps reduces the monthly payment by a lot. He would then make the monthly payment on her behalf.
Any advice from the folks here? She is not an employee of the federal government (or a state government) nor was she in the armed forces nor is she planning to be a teacher. (I think there may be special programs for those groups.)
My father says he seems to see something in the paperwork she sent him called an Income-Driven Repayment Option. Would this effectively reduce the amount that he'd have to pay compared with simply paying them off in full right now?
He has the money to do the latter, but he'd prefer to explore the IDRO if it would effectively reduce the amount he'd pay over time in today's dollars.
You are 100% accurate. Despite the fact that HE is paying, the income driven repayment would be based off your daughters financials. She should apply for that & it may take 2-3 weeks to get a decision back. However, I believe under this type of payment plan the interest accrues higher than off the standard repayment. I would encourage him, or her, or whomever to read the fine print with these plans that outside of standard. Nothing is free lol
I am enrolled in the Pay As You Earn repayment plan. My monthly payments are current $0. I expect them to go up to $166 when my newest income is reported. and likely trend upward over the next decade, but will never exceed the flat monthly dollar amount pre program.
After 20 years, any unpaid amount (including interest) will get written off, and count as income for tax purposes, which means that I will be responsible for probably 10-12,000 in additional taxes that year.
If your father's grandaughter applies for an income based repayment plan, it would indeed lower your father obligation upfront. And it will never increase your father's obligation, excepting in the final year if he believe that paying the taxes on the remaining balances counts as part of the paying the loan agreement. But because this will be known well in advance, it shouldn't be an issue as he can plan for it.
Also I personally am planning on taking a couple months sabatical that year, to drop down my income and reduce my tax liability, or perhaps it will be a good year to sell off some under performing stock. Paying taxes is overrated.