Going to college is a big decision for anybody, particularly for those who have to obtain what can be a very costly student loan and pay it back slowly after they’ve received the education and have found a job. Making the decision has very far reaching consequences, so how do you know if college is right for you?
Well, according to a study out of the Brookings Institution’s Hamilton Project, college is definitely worth it. Their findings seem to indicate that obtaining a college degree is an across the board way of increasing an individual’s total earning potential. Regardless of what is actually studied, those who have attended college have higher median earnings than those who have not.
It isn’t simply a slight increase, either, as the study found that someone who has obtained a bachelor’s degree will earn, on average, twice the amount that someone with only a high school degree will earn in their lifetime.
The increase in lifetime earnings is a net benefit, but it does come with the cost of debt. The amount money required for college and the amount of debt that each individual student must take on is rising. While no one is happy about this, it’s still a net benefit to go to college and get a degree. There are other downsides involved, too, as college debt has been shown to decrease the housing market, makes the graduates more likely to default, and cuts down significantly on other spending.
There are a number of other ways that would make the whole situation better for Americans, such as having the federal government use its own credit rating to give students a much better deal, giving better funding to schools to make it so colleges don’t have to increase tuition costs, and there are also grants to consider as well.
While there certainly are lots of areas to improve the system, obtaining a student loan in order to go to college is still the best way for an individual to increase their overall earning capacity throughout their life. Investors do love leverage, as borrowing money is an overall more cost effective way to purchase something than saving up for it beforehand. Average Americans aren’t strangers to debt, as loans are used all the time for things such as cars, furniture, or even homes. Unfortunately, those sorts of things fall in value as soon as they’re purchased, whereas a loan to get a degree earlier will give you even more value throughout your life.
Public Service Loan Forgiveness
Everyone with student loan debt wonders if there’s some secret method to discharging college loans. For some people, there is a way to make a student loan balance disappear, but there are several stipulations. The Public Service Loan Forgiveness (PSLF) program is one of the most popular ways to get rid of student debt. Here’s what you need to know:
What is PSLF?
PSLF is designed to help public service employees bridge the gap between lower paying jobs and high student debt. Approximately 25% of America’s full-time employees qualify for this type of student loan debt discharge. In fact, most people who work in the public sector qualify. Examples of qualifying employees include law enforcement, public health, public education, full-time active duty military, Peace Corps and AmeriCorps volunteers.
How It Works
In order to incentivize public service, PSLF initiatives were created in 2007 to make lower salaried, though still intrinsically rewarding public service careers more appealing financially. In the past, fantastic candidates for public service had decided against government employment in order to make a higher salary. Many times, the reason for needing higher pay was to offset the large amount of student debt accumulated during college. PSLF works by providing public sector employees with lower payments and debt forgiveness after 120 on time payments for their federal student loans. This equals 10 years of on time payments, which may seem overwhelming. However, in addition to debt forgiveness, public service employees can also take advantage of Income Based Repayment Plans (IBR) and Pay As You Earn (PAYE) programs. This significantly reduces the required monthly payments, and in some cases it eliminates the need to make payments while keeping student loans in good standing and allowing public service employees to meet their 120 payments goal.
After the 120 payment stipulation is met, the remaining principal and interest is discharged, meaning you are federal student loan debt free. If you have taken out private student loans to finance your education, you will still be required to pay those debts. Some sources imply that student loan debt discharge or in this case PSLF will result in higher taxes, but section 108(f) of the Internal Revenue Code states that student loan discharge is not taxable. In order to ensure you are not taxed for discharging your loans, be sure to use a reputable accountant or tax service on the year your loans are discharged.
Who Can Qualify
According to the Federal Government, the following people can qualify for PSLF:
Employees of a government organization/public service
Not-for-profit, tax-exempt organizations
Private, not-for-profit organizations that provide public service
A complete list can be found at studentaid.ed.gov.
With many different careers providing a pathway for PSLF, you’ll want to see if you qualify. There are several other options for lowering your student loan repayment and managing student loan debt, but ideally if you work in the public sector you will qualify for this generous loan forgiveness plan.
How to Choose a Student Loan Repayment Plan
Many students struggle with the cost of servicing their loans after graduation. While some students get lucky and find a good job quickly, other students are left unemployed and unable to pay their loans. There are several options that can enable students to pay their loans in a way that is adjusted for their income or graduated to account for lifetime earnings. Students who decide on a payment plan that is right for them can begin their transition into the working world with more money in their pockets.
Understanding the Basics
Different repayment options can be available depending on the type of loan that a student took out during school. The most common student loans are federal loans, which are the most flexible student loans. In contrast, private loans rarely offer any repayment options besides six months of deferment after graduation. Variable rate student loan payment amounts can fluctuate from month-to-month because they are indexed to average interest rates in the bond market. When interest rates go up, former students could find themselves facing an increased monthly payment. Current students should avoid private loans as much as possible while in school to prepare for the possibility of financial hardship later in life.
A student borrower’s first responsibility after graduation is to contact the lender and inform them that they have graduated. Lenders will usually inform borrowers about their repayment options immediately. In some instances, borrowers may need to work with different company, called a loan servicer, that specializes in managing the repayment process. Typical repayment options include:
- Standard repayment: Students who do not foresee any trouble repaying their loans can choose a standard monthly payment that continues for 10 or 15 years.
- Variable interest: Variable interest plans repay the same amount of principal each month, but the payment amounts vary for the borrower.
- Graduated repayment: Some student loans allow borrowers to repay their loans with a monthly payment that starts out low and increases every year. This plan can make sense for students who expect their lifetime income to increase significantly every year.
- Extended repayment: Most lenders are happy to decrease monthly payments by extending the term of the loan, but keep in mind that this means paying more interest in the long run.
Choosing an Option
Principal balances can be repaid at any time, so it is usually recommended for borrowers to choose a longer-term repayment plan if the interest rates are the same. By choosing this option, borrowers can simply pay more when they have extra money without being legally obligated to pay a higher amount. Borrowers who took out loans without a co-signer should plan on refinancing once their credit rating increases. Plans that are adjusted for income are usually recommended for borrowers who do not foresee enough income to comfortably make their monthly payments.
Borrowers should remember that they have to keep their long-term interests in mind when deciding on a student loan repayment plan. Some plans do not allow borrowers to change their plan once one has been selected. Students who choose a high, fixed-rate payment, therefore, could face unaffordable monthly installments later down the road. In contrast, it’s also important to remember that loans must be repaid as quickly as possible to prevent interest from compounding. Striking a balance between rapid repayment and risk mitigation is usually recommended for most borrowers.