Few Student Loan Borrowers Take Advantage of Repayment Help

There’s nearly $1.2 trillion in outstanding student loan debt, and more than $1 trillion of it is from federal student loans, the federal government says.  Those federal student loans come with more repayment options than private ones, but most students aren’t taking advantage of them. Why not? They may not know how, Bloomberg Businessweek suggests.

Two-thirds of Federal Direct Loan Program borrowers are on a normal, 10-year repayment plan. The rest are on different kinds of plans, with about two-thirds of this group using options that make loans cheaper in the short term but more expensive in the long term, Businessweek says. That’s either through increasing the term of the loan or by using a gradually increasing payment schedule.

That leaves just three out of 10 who are using an income-based repayment plan, which not only ties payment amounts to monthly income but also forgives the balance remaining after 10, 20 or 25 years, depending on the program. They are:

Public Service Loan Forgiveness. Full-time employees in some public service jobs, such as teachers, can have their remaining debt forgiven after 10 years of on-time, income-based payments.

Pay As You Earn. This income-based repayment plan debuted in December 2012 and is available only for those who received a loan disbursement more recently than September 2011. Eligible balances are forgiven after 20 years.

Standard income-based repayment allows forgiveness after 25 years.

There are advantages and disadvantages to each option, but you have to know about them to even consider switching to income-based repayment. The problem is, “publicizing the programs is largely up to the loan servicers that collect monthly payments and are supposed to work with borrowers in trouble,” Businessweek says. They don’t always do a good job of it.

The application process was streamlined this summer, the White House says, and the U.S. Department of Education is pushing borrowers to educate students about their repayment options before they leave school.

Do you know someone who would benefit from one of these programs?