The Student Loan Ranger's Mailbag Express: Repayment

Each month we will dedicate one of our blog posts to questions that readers have sent in to shed light on the educational debt decisions that our readers are facing. Please note that our responses are not meant to provide specific legal or financial advice. Every individual's situation is unique, and we encourage people to reflect carefully on their options and to consult a financial adviser who can review their specific financial situation.

Q: My daughter will graduate in December with a degree in journalism and $20,000 in Federal Direct loans and $70,000 in New Jersey Class loans. Are the New Jersey Class loans considered federal loans and will my daughter be eligible for Income-Based Repayment (IBR)?

Based on our research, it appears that New Jersey Class loans are a supplemental loan program authorized through the New Jersey State Legislature and are not federal loans. However, the writer should confirm this with the loan servicers.

The only loans considered in determining eligibility for IBR are federal loans. These include Stafford, Perkins, and Grad PLUS loans and do not include Parent PLUS, private or supplemental student loans. It would appear then that only her $20,000 in federal loans are eligible for IBR.

The writer's daughter will qualify for IBR if her federal debt is high enough relative to her income to constitute a partial financial hardship. The Department of Education has an Income-Based Repayment calculator that is useful for determining whether she will qualify for IBR. It is also worth checking with the State of New Jersey to determine whether it has a program similar to IBR that will help make her monthly loan payments manageable.

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Q: Our daughter is getting ready to start college in the fall. Even after taking out federal subsidized and unsubsidized loans, she will still need to borrow $20,000. Would it be better for us, her parents, to take out a federal Parent Plus loan, a home equity loan, or a secured loan?

Unfortunately, we are unable to answer specific questions on the relative merits of these loans as they will differ based on individual circumstances. However, this is a good opportunity to stress a few things.

First, IBR and Public Service Loan Forgiveness (PSLF) only apply to certain federal loans and these do not include Parent PLUS loans. If you want to benefit from these programs, it is important to maximize the number of eligible federal loans (such as Stafford, Perkins, and Grad PLUS loans) you take out.

Second, if you cannot cover the cost of your education solely with federal loans, it is worthwhile looking for grants and scholarships vs. taking out other types of loans. These are available from the federal government, state governments, and private sources.

Finally, as we noted in a previous blog post, factor cost into your choice of colleges. Taking out non-federal loans to finance your education can limit your choices after graduation.

Q: I am just completing my first year of law school. I am in the Army ROTC and will be commissioned as a JAG Officer after graduation. By the time I graduate, I will have $130,000 in private loans and $70,000 in federal loans. As a JAG Officer, I will be eligible for up to $65,000 in student loan repayment once I am commissioned. How can I best manage my debt when I graduate? Can I consolidate my private loans into a Federal Direct loan in order to ensure that I am eligible for PSLF?

This writer faces some tough decisions given his high debt burden. Fortunately, he is eligible for Income-Based Repayment on the federal loans. And, if he intends to work for the federal government—or state, local or tribal government or a 501(c)(3)—long enough to make 120 payments under IBR, he will then be eligible to earn Public Service Loan Forgiveness on your federal loans. In order to leverage these programs fully, he may want to consider using the funding from the Army to pay down only his private debt.

Thank you to all of the people who wrote in and to all of you reading this blog. Please continue to send in questions as we will have another mailbag next month.

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.