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debt imageThe Consumer Finance Protection Bureau, released statistics on student loan borrower habits and the stats are surprising. Their figures show that the majority of people are making poor repayment plan decisions. So what does this mean? It means that all the hard work you are doing to pay off your loans isn’t helping as much as you think.

Pay As You Earn repayment plan (PAYE) is by far the best federal repayment plan. For those who do not qualify, the next best repayment plan will almost always be Income Based Repayment (IBR). Looking at the CFPB statistics, we see that only 6.3% of people who are repaying their loans are taking advantage of these great plans. Here is the really shocking number: for every one person who is on PAYE or IBR, there are SIX people who are in default on their federal loan.

This statistic is mind blowing for several reasons. First, defaulting on federal student loans has devastating consequences. Your paychecks and tax refund can be garnished without a court order, and your credit is absolutely destroyed. Secondly, signing up for IBR or PAYE means that the very most you will have to pay for your student loans is 15% of your discretionary income. That means if you are broke and with no income, signing up for one of these plans would help you avoid default and get you one step closer to having your loans forgiven.

If you are currently on an extended or graduated repayment plan, it is time to make a change. Prior to 2007 the extended and graduated repayment plans offered the lowest monthly payments. With the creation of the IBR plan, this all changed.
Under IBR borrowers are expected to pay 15% of their discretionary income and nothing more. If these borrowers make timely payments for 25 years, their remaining debt is forgiven. Compare that to the extended repayment plan. Again, it takes 25 years, but your monthly payment does not consider how much you make each month. If you are struggling to make your payments, the extended play will help, but only to a certain extent.

Do the math. If your goal is to have your loans paid off in 25 years, which plan makes more sense? The one that takes a certain percentage of your income and nothing more, or the one with the rigid schedule and no flexibility?

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