Tips to Lower Your Adjusted Gross Income to Get the Most from Income Based Repayment

The income sensitive repayment plans offered by the federal government for public student loans are based around your family size and your Adjusted Gross Income – otherwise known as AGI. This is a very important number and the lower you can whittle it down, the more modest your monthly payments will be. Income Based Repayment (IBR), Income Contingent Repayment (ICR) and Pay As You Earn (PAYE) are all predicated on this all-important number.

To apply for any of these programs, you must submit information on your adjusted gross income, family size and loan information (balance, interest rate, etc). There are then pre-set formulas – usually on a sliding scale – that determine eligibility and how much your monthly payments will be. In many cases, payments offered can be as low as $0! Check out the following info on AGI to get the lowest possible repayment scenario for your loans.

What Is Adjusted Gross Income? The IRS defines AGI as “gross income minus adjustments to income.” That’s not very specific though, is it? Okay let’s try this way. It’s the income you’ve earned plus any distributions made that qualify as income minus certain amounts that are considered adjustments to income rather than deductions. See on the image below the roster of adjustments that are allowed. Click here for a simple AGI calculator offered by CNN Money. Below are listed some ways you can legally decrease your AGI to make your student loan payments more affordable under the income sensitive plans mentioned above.

#1 Increase Contributions to Your Health Spending Accounts These are those nifty little accounts your employer offers each year where you can sock away pre-tax dollars (i.e. money that’s not subject to FICA or income taxes) that can be used to pay out of pocket medical costs, co-pays and some over the counter medicine costs. The new annual cap for 2013 is $2,500. That’s roughly $208 per month.

If you routinely take medication, have Rx or doctor visit co-pays, these can be paid or reimbursed from this account. Contact lenses, eyeglasses, medical and dental copays, coinsurance percentages or fees, band aids, vitamins, over-the-counter medicines, orthodontia and more are all covered. If you’d be spending anyway out of necessity, it’s wiser to use an HSA so that you reap the tax benefit as well as the benefit of having a lower AGI for income-based repayment consideration.

#2 Increase Contributions to Retirement Contributions to 401(k) plans and Traditional IRAs can both be made with pre-tax dollars. This means that you’ll be lowering your AGI by tucking away money for your retirement. If you are eligible for a tax-free forgiveness program such as teacher, nursing, military or other public service loan forgiveness (PSLF), you want to minimize your AGI so you’ll pay in the least amount prior to your forgiveness threshold.

Imping up your retirement contribution not only benefits you in the short-run (particularly if you’re a PSLF candidate) but also in the long-run when you’ve got plenty socked away for retirement. If you don’t qualify for PSLF and are looking toward 20-25 year loan forgiveness, you need to balance out the tax implications of the forgiveness benefit versus how much you’ll accrue in matching funds and interest earned over that same period to weigh the cost-benefit.

#3 Be Mindful of Student Loan Interest Paid This may sound like a circular reference, but the more you pay in student loan interest, the lower your AGI will be and the lower your income-sensitive repayment amount will be. Interest becomes a concern if you are not eligible for tax-free student loan forgiveness and here’s why. If you don’t pay off at least the monthly amount of accrued interest, you will be hit by interest capitalization where interest piles on top of interest to accrue even more interest!

But if you service at least the amount of interest due each month (even if this is in excess of the amount IBR/ICR/PAYE determines you must pay) you won’t be facing a huge tax bill if your forgiveness is taxable and the balance has grown. For instance, if your IBR payment is set at $70 and your loan accrues $150 in interest each month, you’ll have $80 left over that then starts to accrue interest as well. This is a balancing act for those not eligible for PSLF. For those planning on PSLF, pay the low payments, include the interest on your AGI determination and enjoy the lowered payments!

Final Thoughts There’s a cost-benefit to every financial decision you make. If you can afford to pay your loans under the 10 year standard plan, you should do that. Even better, you should apply the debt avalanche mindset and try to pay it off even sooner. But if you’re too broke to pay your loans under the decade plan, adopt an income-sensitive plan and then still pile on any extra monies you have and ask that these funds be applied towards accrued monthly interest and then principal for any additional amounts! This will minimize the tax hit if you have to ride an income sensitive plan all the way out to forgiveness in 20-25 years.

What Is Student Loan Consolidation?

A Student Loan Consolidation allows borrowers to combine all of their federal student loans into one new loan with one lender. Sending two, three, or even four separate payments to different lenders and trying to track their loan balances, interest rates, and due dates can be quite cumbersome.  The consolidated student loan will be much easier to manage and keep track of.  There are many other benefits to the federal Student Loan Consolidation program as well.

The Student Loan Consolidation Process...

1. Determining client's current financial situation.

Eligibility for programs designed to lower student debt is determined by the Department of Education, based on key information – client's current income, their family size and their debt amount.  First all necessary information from the client is gathered. At this stage processing client's application for a Student Loan Consolidation is done directly with the Department of Education via their website at: StudentLoans.gov

It will easily be determined which programs clients qualify for and outline which program options best suits client’s needs.

2. Identify which program maximizes client's savings.

Any individual can qualify for any number of programs available through the department of education.  It’s important to choose the right program, based on client's current financial situation and future plans. Client is given in detail each qualifying program’s advantages and disadvantages so that clients can make an informed decision as to which program is best suited for them. 

Clients are then informed of the appropriate steps needed to move forward.

3. Student Loan Consolidation Application process.

If client chooses to hire a private company for their student loan consolidation service they will handle the application process for them from start to finish.  They will determine, gather and fully prepare all documentation needed to qualify client for the program chosen.  After the application is deemed sufficient, it is then submitted by the private company to the Department of Education on client's behalf. 

The entire Student Loan Consolidation process usually will take anywhere from 21 to 60 days to complete.

Note: Client should be advised that all Student Loan borrowers may also choose to complete the application process on their own without the help of a private company as the programs are available directly through the Department of Education.

Understanding Student Loan Repayment Options

Consolidating a client's Federal Student Loans gives them a few different Student Loan Repayment options. This module is designed to explain how the calculations are made, and also to assist clients on when it may be wise to choose one repayment plan over another. Each have their benefits, and client should allowed to make the final decision as to which option they think will benefit them the most in the short and long term.

The repayment plan options are: Standard Repayment, Graduated Repayment, Extended Fixed Repayment, Extended Graduated Repayment, Pay As You Earn, Income Based Repayment (IBR), Income Contingent Repayment (ICR), and finally Income Sensitive Repayment (ISR).

Standard Repayment Plan

In the standard repayment plan, the payment on the client's loan is calculated like any normal loan payment, based upon the size of the loan and also the term of the loan. The term is always based on the size of the loan. Depending on client's income and family size, the standard repayment plan can be a good option if:

They want to pay off the loan as soon as possible and currently have less than 30 years left on the term.

They do not qualify for an income based repayment plan because of a higher income

Their loan amount is small enough where they can be paying a minimal amount over a short period rather than extending it for an additional X amount of years.

The standard repayment plan allows client to take care of their loans in a timely manner if they are making regular and full payments on them. They will pay less interest on a standard repayment plan than they will under the graduated.

Often times customers that do not qualify into either of the Income Based Repayment plans do not see a benefit of consolidating their loans into a Standard Repayment plan when their current payment can be nearly the same. This often is misguided as one of the major benefits of this consolidation is the flexibility with the repayment plans. If they come under hardship in the future, at any moment they can change their repayment plan into an Income Based Repayment plan. What this does for them is allow them to then have a payment based on their income, which may prevent them from falling into default on their loans. In many cases their payment can roll to zero on their loans. This is not a deferment status, which essentially pauses their term. They would have a zero payment for however long their hardship lasts, and the term continues to move forward. This is where the forgiveness aspect plays a large roll. Once the term is over the loan is completely forgiven. This is a huge benefit to the program that is often overlooked by clients until this benefit is explained to them.

Public Service' Loan Forgiveness: A Flawed White House Aid Plan

In a series of speeches last week (8/20/2014), President Obama promoted policies designed to “make college more affordable and make it easier for folks to pay for their education.” He attracted attention mainly for the novel idea that a federal ratings system might help borrowers decide which schools are really worth the cost. 

But the President also pushed for an expansion of an existing, but not well-known program, known as “pay as you earn,” which ties—and limits—student loan payments to the ability of borrowers to pay. That proposed expansion would also extend the reach of something called the Federal Public Service Loan Forgiveness Program, which makes it possible for college graduates who take jobs in government or non-profit organizations to get big breaks on their student loan payments. While it may be an attractive program on the surface, it should not be expanded. Rather, it should be rethought altogether.

Originally passed in 2007 as part of College Cost Reduction and Access Act, the Public Service Loan Forgiveness program makes it possible—if you take and keep a designated type of job—to make loan repayments for just 10 years, rather than 25, with the remainder of the interest and principal written off. That puts all taxpayers, rather than the borrower, on the hook. The program—which the President is hoping will attract more customers than it has to date—is quite specific about what types of jobs qualify as public service. They include government at any level—including public education—as well as organizations offering everything from child care to services for the elderly and disabled. A job at any tax-exempt organization qualifies—except for labor unions or partisan political groups. The implicit theory here: that such jobs are relatively poorly paid and that taxpayers have an interest in having well-qualified college graduates take them.

Such a collection of good causes make it hard to oppose, but the program does present serious problems. First, it’s become clear, especially since the financial crisis, that, even if government salaries of some types may be lower than their private sector counterparts, public employment offers a combination of job security and retirement benefits that are actually the envy of those in the private economy. At the same time, for those who go on to careers as lobbyists, public employment can also be what The Wall Street Journal has termed “deferred compensation.” What’s more, as the National Commission on Public Service, chaired by Paul Volcker, pointed out as long ago as 1989, there are plenty of barriers to our having an effective government—including outdated civil service rules and poor recruiting strategies—besides sheer salary levels.

But the larger problem with the program—one that includes its provisions for non-profits as well as government—has to do with the concept of government seeking to influence the career choices of college graduates in the belief that some jobs do more than others to serve the public interest. Both the government and the non-profit sectors, after all, ultimately rely on the growth and prosperity of the private economy. As Carl Schramm, former head of the Kauffman Foundation, has long argued, entrepreneurs—from Steve Jobs to Sergei Brin and countless others—provide the hope for economic growth. But private sector employment of any kind is effectively made less attractive by the terms of federal student loan forgiveness program. That is not, to coin a phrase, what made America great.

Even those who are devotees of the non-profit sector—and this column, after all celebrates the virtues of American civil society and what it can do that government cannot—should be skittish about the Obama proposal. The program’s long list of qualified organizations raises the prospect that, at some point, Washington will decide to favor certain non-profits at the expense of others. We are already seeing something like this in the White House Social Innovation Fund, which encourages private philanthropy to invest in ameliorating a specific, and limited, set of social problems. Some, including some in Congress, have raised the possibility that the charitable tax deduction itself should be confined to select types of non-profits.  (I elaborate on this in my forthcoming book Philanthropy Under fire, published by Encounter Books).

Participation to date in the income-based student loan repayment plan which the President proposes to expand and promote has been limited. Indeed, Time Magazine has reported that only  630,000 of  some 37 million student loan borrowers have availed themselves of the  option, despite its  being made more attractive, in 2010,  when the repayment requirement was   reduced  to 10 percent of income  for those who qualify on the basis of earnings and who  make  payments faithfully. Only a fraction of even those fall into the public service loan forgiveness category.

Still, we should be careful in pushing to increase that number.  All sorts of problems arise when government decides how to allocate financial capital—as recent New York Times reporting about the poor record of Department of Agriculture loans reminds us. We should be no more confident of the wisdom of the government when it comes to allocating human capital—that is, the talents of the American people.

Elizabeth Warren: Sallie Mae May Be Hurting Borrowers, Taxpayers

For student loan giant Sallie Mae, it may seem that every passing day brings word of yet another government probe.

On Tuesday, it was Sen. Elizabeth Warren’s turn.

Warren, a Democrat from Massachusetts, wants detailed information on Sallie Mae's practices, including scripts its customer service representatives follow, an accounting of its borrowers with federal student loans in income-based repayment plans, and the number of its delinquent borrowers who have brought their loan payments up to date. The reason for the request, according to a letter Warren sent Tuesday to Jack Remondi, Sallie Mae chief executive, was concern that the company may be hurting borrowers and taxpayers by pushing debtors into repayment plans that increase their burdens and put them at risk of default.

“I am concerned that Sallie Mae too often takes steps that hurt its student borrowers,” Warren wrote.

At least three federal agencies are investigating whether Sallie Mae, the nation’s largest student loan specialist, cheated active-duty members of the military and violated other borrowers’ consumer rights. About a half-dozen states, led by Illinois, recently joined together to probe how the company handles borrowers whose loans it collects payment on and how it treats others who have defaulted on their obligations.

In her letter, Warren told Remondi she worries his company regularly puts distressed borrowers with federal student loans in plans that temporarily delay required payments -- eventually leading to higher payments and increased loan balances -- rather than helping them enroll in federal programs that cap payments based on borrowers’ incomes and offer the possibility their debts will be forgiven.

Warren’s letter follows a September report in The Huffington Post, citing government documents, that revealed the company had enrolled relatively few borrowers into the Income-Based Repayment program, a federal initiative championed by the Obama administration that enables borrowers to make payments based on their monthly incomes and have remaining debts forgiven after years of steady payments. At the time, Sallie Mae owned close to 40 percent of loans made under the since-discontinued Federal Family Education Loan Program that were held by the private sector, but its share of borrowers with FFELP loans who were enrolled in Income-Based Repayment was about half that amount.

“This raises questions about whether Sallie Mae is failing to offer this option to borrowers, or otherwise discouraging them from enrolling in an income-based repayment plan,” Warren wrote, citing data reported by HuffPost.

For many borrowers, tying monthly payment amounts to their incomes would be the “best option,” Warren added. The data suggests the company is putting borrowers in various other types of repayment plans, even when linking payments to incomes would be their “best choice.”

Sallie Mae responded to the HuffPost report in September by sending a statement to the higher education community promising that it was “committed to helping federal loan customers identify the least costly, fastest option to repay their loans, including Income-Based Repayment (IBR) for those eligible.”

Sallie Mae, which by then had already disclosed pending probes by the Department of Justice and Federal Deposit Insurance Corp., later disclosed an additional investigation by the Consumer Financial Protection Bureau. The company has since set aside about $70 million to deal with the Justice Department and FDIC probes.

Several weeks later, the Department of Education told Sallie Mae it intended to renew its lucrative five-year federal contract to service student loans, despite the pending investigations into allegations of significant harm to borrowers.

The Education Department, in response to an earlier demand from Warren, then sent her a letter detailing how it had confidentially determined several times over the past decade that Sallie Mae broke federal rules, harmed borrowers and incorrectly billed the U.S. government -- but never fined the company in response.

Education Secretary Arne Duncan subsequently was criticized for the decision to renew Sallie Mae’s contract. A prominent group of colleges, students, and teachers demanded an Education Department investigation and for the department to suspend its work with the company.

Warren said the Education Department risks becoming a “lapdog” as a result of its lackluster oversight of the companies it pays to handle borrowers. She said she also worries that the department’s procedures may encourage Sallie Mae’s treatment of borrowers with federal student loans.

Education Department representatives did not respond to requests for comment.

“Current federal contracts give loan servicers like Sallie Mae little incentive to keep borrowers from falling behind on their payments or to help borrowers find solutions that are best for them when they do fall behind,” Warren wrote in her letter to Remondi.

Earlier this year, Remondi wrote a letter to Duncan and federal lawmakers explaining that, despite the mounting criticism of the company, the unit that deals with troubled federal borrowers receives three times as many thank-you notes from borrowers in default than verbal complaints. His figures wildly contrasted with other publicly available information that suggest Sallie Mae is among the worst student loan specialists when it comes to the borrower experience.

Skyrocketing student debt burdens -- which now total $1.2 trillion, up 47 percent over the past four years, according to the Federal Reserve -- are holding back the U.S. economy and “threatening the futures of so many young Americans,” Warren said. She said she reckons that the government and the public “should be able to look more closely at the role that servicers and lenders play in keeping students on the path to successful repayment.”

Warren told Remondi she wants Sallie Mae to publicly disclose how many of its borrowers with federal student loans are in income-linked repayment plans and the number of borrowers who have been been placed into forbearance or deferment schemes multiple times. She also wants telephone scripts and guidance given to customer service representatives when they chat with delinquent borrowers and when they counsel borrowers on the benefits and drawbacks of various repayment options.

Warren also demanded to know how many borrowers who have defaulted on federal loans originally serviced by Sallie Mae were now being handled by the company’s default-focused business, Pioneer Credit Recovery, which also has a federal contract. Warren told Remondi the company should disclose the amount of commissions it has received on those loans.

“If Sallie Mae has confidence that its efforts at helping students avoid default are truly in the long-term interest of its distressed borrowers, it should be more transparent about the details of those efforts,” Warren wrote.

Patricia Christel, a Sallie Mae spokeswoman, said, “We are reviewing the request, and the facts confirm we service loans the right way: our customers default 30 percent less than the national average and are significantly less likely to postpone paying their loans by using forbearance.”

Warren may face a tough time getting answers. Sallie Mae and its competitors have resisted disclosing information on their federal student loan portfolios by claiming that the Education Department doesn’t allow it.

The Education Department has faced criticism for its lack of transparency on the $1.1 trillion federal student loan program. The department discloses little data, shares scant amounts with other federal agencies, and buries key information on obscure Education Department websites. Recently, the Education Department stopped disclosing performance information on its student loan servicers, including Sallie Mae.

Tuesday probably should have been a happy day for Sallie Mae. The company, which is planning to split itself into two separate firms -- one focusing solely on its private student loan business -- announced that the firm focusing on federal borrowers will be called Navient. Remondi went on CNBC to tout the change.

When asked what Sallie Mae is doing to help borrowers repay their debts, amid worries that growing student debt bills imperil the economy, Remondi responded by pointing to an initiative that he ranks as among the “most important” the company offers: “Encouraging students and families to pay the interest on their loans while in school.”

Remondi said that by doing so, the typical borrower could save thousands of dollars over the life of the loan.

Sallie Mae’s shares fell 1.5 percent on Tuesday. Investors lately have hammered the company, selling on fears of increasing government scrutiny.

Tipping the Scales on Income-Based Repayment Eligibility

A lot can happen in one year.

A new job, a marriage, a newborn baby, a big promotion -- all these major life events can have a massive effect on borrowers' daily lives, salaries and -- if they are enrolled in an income-based repayment plan -- their student loan payments.

This time of year marks the anniversary of when many college graduates began repaying student loans, right at the end of their six-month grace periods.

Those who enrolled in an income-based plan during that time are engaged in the annual process of submitting their latest financial information to determine future monthly payments, usually capped at 10 percent or 15 percent of discretionary income, depending on the plan available when they entered repayment.

Sometimes, after years of making income-based payments, a spike in salary can boost borrowers beyond the income-to-debt ratio that initially qualifies them for income-based repayment. And when it comes time to resubmit financial information, they may wonder whether they can continue to pay on an income-based plan.

The short answer is: Well, sort of. Here's the inside scoop.

In order to qualify for Income-Based Repayment or Pay As You Earn, a student's debt must be high enough compared to income that the student will pay less under an income-based plan than under a standard 10-year repayment plan.

New graduates, curious to see whether they qualify for income-based repayment, can plug their information into the Department of Education's repayment calculator.

Note that this advice doesn't apply to income-contingent repayment, which is typically a less generous plan and has its own set of guidelines.

A variety of life changes can cause a person's income-to-debt ratio to cross the income-based threshold.

One reason might be a big promotion or a new job, which could make a borrower's salary so high that debt is no longer a substantial portion of income.

A marriage may be culprit if the couple decides to file taxes jointly. "Marriage is the most common reason we see," says John Collins, managing director of GL Advisor, a financial advisory firm for advanced degree professionals with student loan debt.

Graduates may tip the scales while riding the wave of an improving economic climate. Many recent college students graduated into tough economic times, filled with unemployment or underemployment, and are now finding better-paying or full-time jobs and are able to afford the standard 10-year amount.

If a borrower's payments under Income-Based Repayment or Pay As You Earn increase to more than what the borrower would pay under the standard 10-year plan, then the borrower pays the amount that would have been owed under the 10-year plan when repayment first began.

Simply put, the amount owed under the standard 10-year plan acts as a cap on monthly payments.

When income is too high, "the payment amount is no longer calculated as a percentage of income and, at that point, it is a benefit to the borrower," says Heather Jarvis, an attorney specializing in student loans. But keep in mind, says Jarvis, that income-based borrowers aren't forced above the standard 10-year amount but can choose to exceed it if they accelerate repayments to tackle debt faster.

While a change in income may cause monthly payments to no longer be tethered to salary, borrowers are still enrolled in the same income-based plan and can still qualify for loan forgiveness, says Chopra, of the Consumer Financial Protection Bureau.

Someone working toward the 10-year forgiveness benefit of Public Service Loan Forgiveness, for example, can still plan on the federal government forgiving that debt after the requisite 120 on-time payments.

And if a borrower's income dips back down in the future, or the borrower has a child, monthly repayments may sink back down below the 10-year plan payment threshold and the borrower may be eligible to tie payments to income once again.

While making too much won't get someone thrown out of the plan or affect eligibility for loan forgiveness, there are other ways to lose the option to make monthly payments based on income. "If you don't document your income every year, your servicer could boot you out of an income-based payment," says Jarvis. You'd have to submit income documentation -- and meet the income-to-debt requirement again -- to get a payment based on your income again, she says.

So, for borrowers settling into a new job, new marriage or living with a newborn: Congratulations, and relax. Monthly payments are capped at the amount owed under the standard 10-year plan. Just find a minute to get that paperwork in on time.

President Obama extended eligibility for an income-based monthly federal-student-loan repayment program

By executive order, President Obama extended on Monday afternoon eligibility for an income-based monthly federal-student-loan repayment program to all holders of student debt. The move expands the number of student-loan debtors qualified for the monthly pay cap by about five million.

Weighed down by more than a trillion dollars of student loan debt, millions of young Americans are struggling to find jobs their costly college educations were supposed to provide, which is why President Barack Obama is expected to announce Monday an expansion of current programs aimed at reducing the burdens of federal student loan borrowing.

The plan would broaden the number of young student loan debtors who would qualify for monthly payments capped at 10 percent of discretionary income under the “Pay As You Earn” (PAYE) program. Remaining debt for many of these borrowers also would be forgiven after 20 years for private sector workers and 10 years for government workers and employees of some nonprofit organizations.

The details are similar to those outlined in the White House’s 2015 budget proposal (pdf) at a cost of $7.3 billion between 2015 and 2019. The president will be answering questions on Tuesday about student-loan relief submitted though the Tumblr microblogging site.

Under the current five-year-old Income-Based Repayment Plan, federal student loans can be adjusted annually based on changes to income and family size and are capped at 15 percent of income after basic costs of living are paid, known as discretionary income.

Starting next month borrowers with financial hardship will be eligible for the 10-percent monthly repayment cap. Obama’s proposal would remove the financial hardship requirement.

Federal student loan debtors who began making debt payments after October 2007 are eligible for some debt forgiveness under the Public Service Loan Forgiveness program. Civil service agencies can also repay federal student loan debt as a recruitment and retention incentive.

The Education Department estimates that the number of debtors that joined the Income Based Repayment Plan increased 24 percent to more than 1.6 million in the first quarter.

“The recession brought a sudden reversal in this relationship. As house prices fell, homeownership rates declined for all types of borrowers, and declined most for those thirty-year-olds with histories of student loan debt,” according to an article on the New York Fed’s blog “Liberty Street Economics.”

In the article, the Fed’s senior economist Meta Brown points out that in the years after the 2007-2009 Great Recession, young Americans without student loan debt were more likely to have a home mortgage by the age of 30 than those with student loan debt. Before that, young Americans with student loan debt were more likely to take out a mortgage by the age of 30 because they tended to out-earn Americans without student-loan debt.

But now more college graduates are working in jobs that don’t require college diplomas and are earning less, according to a Fed study from earlier this year (pdf).

“In recent years, the economy has grown annually at 2 percent or so,” an editorial in Saturday's New York Times said, which points out that young Americans who have entered the workforce since the end of the last recession are facing increased economic hardship. “That’s too slow to make up the current shortfall of nearly seven million jobs, let alone to absorb new graduates or push up wages in jobs that do exist.”

In the first quarter, total U.S. student loan debt increased by $31 billion, breaking through $1 trillion for the first time, according to the Fed’s Household Debt and Credit Report in May.

How You Might Qualify for Student Loan Forgiveness

In its report, "Searching for Relief," the NCLC found numerous problems, including: charging for services that are available for free; failure to disclose fees online or when initially requested; and providing inaccurate information about crucial topics such as consolidation loans and garnishment.

Most of these companies claimed to offer a broad range of services, but NCLC's secret shoppers didn't find that. They're not a counseling service, and they don't usually go through all the options available. They're usually selling loan consolidation, so they are going to steer you in that direction, no matter what." Loan consolidation is a good option for some people, but it doesn't work for everybody and may not be available to all borrowers.

NCLC's mystery shoppers also found that some companies charge a monthly fee that ranges from $20-$50 on top of the steep upfront payment. The report calls these fees "particularly suspect" since it's unclear what service, if any, the customer is buying on a monthly basis.

People are looking for debt relief, but they don't know where to get help. That enables companies to charge them for something they could do on their own for free. And while that's not illegal, it is against the law to make false claims about the nature of the service or lie about being affiliated with the government's Direct Loan Program.

Students should receive better counseling about their loan repayment options—especially students who are about to drop out of school. Dropouts are four times more likely to default and represent about two-thirds of the loan defaults, he said.

Students can consolidate their loans on their own for free at StudentLoans.gov. In 2008, Congress decided to require a similar notice for companies that charge to prepare the Free Application for Federal Student Aid (FAFSA) form, he noted.

Last week, Illinois AG Madigan told a congressional committee that these scams are the result of a larger problem—too many former students are having a hard time paying down their student loan debt. At the very least, she said, the Department of Education should create a public awareness campaign to get the message out to current and former higher education students that there are programs available that can help them.

"The scammers have advertisements and these advertisements are working," she testified. "We need ads highlighting real programs to counteract them."

The U.S. Education Department provides borrowers with information about their options and federal programs that might be able to assist them with repayment.

Do your homework before you do anything. Start with free options and be highly skeptical of any company that charges a fee and requires payment in advance. "Watch out for companies pretending to be blessed by or vetted by the federal government and watch out for companies that pretend to be part of a public repayment program.

Is This Student Loan Debt Collection Tactic Out of Control?

Much like back taxes and delinquent child support payments, college loan debt cannot be extinguished by bankruptcy. And, much to the dismay of thousands of Americans, long-ago student debt that borrowers thought had either been paid off or forgiven is coming back to haunt them - in the form of income garnishment.

Wages and Social Security targeted

According to The Wall Street Journal , nearly 175,000 people are experiencing wage garnishment by the federal government for defaulted student loans, a 45% increase from just a decade ago. Possibly, this is due to the tightening of bankruptcy laws that occurred in 2005, making all student loans exempt from bankruptcy - unless a borrower could show undue hardship, a practically unprovable set of circumstances.

It's bad enough to suddenly have 15% of your after-tax pay taken by the government, but it isn't only working folks who are getting nabbed. Social Security recipients are also feeling the sting of those often long-forgotten loans.

For these retirees, some who are in their seventies and eighties, the situation is especially distressing: not only are they making due on less income, but the intervening years have caused their original debt to balloon, often to unmanageable amounts. In one case, a 67-year-old man saw his original debt of $3,750 increase to over $21,000 , which he is required to repay.

Boomers are in particular trouble

Baby boomers are in a real pickle, holding not only their own college debt, in many instances, but that of their children and grandchildren as well. Americans aged 60 and older hold $43 billion in unpaid student loans, and the average debt level is $20,000. That's 60% higher than just nine years ago. In 2013, 156,000 retirees had their Social Security checks garnished for unpaid student loan debt - almost as many as non-retirees. Approximately 4.7 million boomers in their fifties still owe money on college loans.

There are options

Luckily, there are some steps you can take if the government notifies you that it plans to garnish your Social Security benefits. Don't ignore the notice - you will get a 20-day window in which to request a review on the issue. You can make this request at any time, but you will be subject to garnishment in the meantime.

If you cannot get a hardship exemption, ask about an income-based repayment plan. In the past, you would have had to pay high payments for a few months after your loan came out of default, but a new law has put that onerous requirement in the past.

The new loan rehabilitation rules now clearly state that the government can take 15% of the amount that your adjusted gross income exceeds your state's poverty level. For many retirees on Social Security, that number may be zero, which means you will only have to pay a $5 per month minimum on your debt.

Remember that, for non-tax debt, the first $750 of monthly Social Security income is exempt, so you will never receive a check lower than that amount due to government garnishment. These rules pertain only to federal student loans; private lenders cannot touch your benefits.

In spite of the apparent heartlessness of the government toward retirees, there is little likelihood that federal student debt will ever be dischargeable like other forms of debt, since the programs are taxpayer-supported.

The new rules take into consideration the lower income of retirees, however - so taking advantage of these repayment options can, at least, make the debt less onerous for those least able to pay.

Student loan debt surges for senior citizens

When they should be worrying about affording retirement, a growing number of senior citizens are drowning in student loan debt instead.

Between 2005 and 2013, student loan debt among seniors 65 and older rose by more than 600% from $2.8 billion to $18 billion, according to a new report from the Government Accountability Office.Out of all student debt holders, seniors still account for a small percentage. But their ranks are growing rapidly -- quadrupling in size since 2004 to 706,000 households.

While the majority of debt, about 80%, owed by seniors comes from loans taken out to fund their own college educations, 20% of loans were taken out for a child or dependent, according to the GAO report.

At age 57, Rosemary Anderson is approaching retirement age with $152,000 in student loan debt.

Twenty years ago, she took out $65,000 in loans in order to pay for her bachelor's and master's degrees. But after getting divorced, losing her job and caring for her sick brother, she basically gave up on making payments. She was hit hard by interest and penalties and the amount she owes has since climbed by tens of thousands of dollars.

40 million Americans now have student loan debt.

CNNMoney profiled Anderson last month, and she testified at a congressional hearing about older Americans with student debt on Wednesday.

"I will be indebted for life," Anderson said in her testimony. "I find it very ironic that I incurred this debt as a way to improve my life, and yet I sit here today because the debt has become my undoing."

Default rates have also been rising with a debtor's age, the report found. While only 12% of federal student loans belonging to people ages 25 to 49 were in default in 2013, that rate spiked to 27% for Americans between 65 and 74 years old, and to more than 50% for people 75 and older.

Retirees' Social Security checks garnished for student loans.

Failing to pay back these loans can have dire consequences. Lenders will even take a bite out of Social Security payments to get the money they're owed.

Last year, 156,000 Americans had their Social Security benefits garnished because they had student loans that were in default, according to analysis conducted by the U.S. Treasury for CNNMoney. That's triple the 47,500 people who had payments garnished in 2006.

"Some may think of student loan debt as just a young person's problem," said Senate Special Committee on Aging Chairman Bill Nelson. "Well, as it turns out, that's increasingly not the case."

How to Avoid Losing Social Security to Student Loans

Much like unemployment isn’t going to get you out of repaying student loans, retirement isn’t going to, either. Social Security recipients – whether they’re retired or disabled – can have up to 15% of their checks taken for defaulted federal student loans, and it’s a common problem.

Joshua Cohen, a consumer law attorney who bills himself as The Student Loan Lawyer, says he hears from someone in this situation about every two weeks. He’s received a steady flow of clients losing Social Security to student loan payments since he started practicing in 2008.

“A majority of them are for parent PLUS loans,” Cohen said. “Nobody told them about affordable repayments, and there’s a sizable number of boomers and others who were forced into retirement earlier than they expected because of the downturn.”

He remembers the first client he encountered with this issue: A retired truck driver came to him after his Social Security checks came in smaller than usual, and Cohen helped him consolidate his loans to emerge from default. He then entered an income-contingent repayment plan of $5 a month, eliminating the offset from his Social Security payout.

This applies to any loan situation: When you realize you can’t afford the payments, act immediately. Student loans offer a variety of repayment options allowing borrowers to lower their monthly payments, and contacting your loan servicer to work out an affordable payment should be your first step.

“If that doesn’t work, the Department of Education has an ombudsman you can contact, and if that fails, contact a lawyer,” Cohen said. “When contacting the ombudsman, there’s no harm in contacting the CFPB (Consumer Financial Protection Bureau), because it has jurisdiction over student loans.”

Letting unaffordable loan payments go unaddressed is a near-certain route to default, which can seriously damage your credit, not to mention the potential wage garnishment (or Social Security offset). That path only holds more trouble.

“For a lot of my folks, they are barely surviving to begin with,” Cohen said. “They have credit card debt, because that’s how they’re charging their prescriptions. The Social Security check is their credit card payment. It could be their auto insurance if they’re still driving. It can sometimes cut into their food bill.”

Student loans have a lot of potential to damage your credit and your well-being, so prioritize your payments and take advantage of assistance programs available to you. You can see how your student loans are currently affecting your credit scores for free on Credit.com.

Don't Stress Over Student Loans

The most straightforward repayment plan for federal loans is the standard ten-year plan. Under this arrangement, you pay the same amount each month until your loan is repaid. But that can be challenging for graduates with a lot of debt or a low-paying job. Borrowers who have $30,000 or more in loans can opt for the extended-repayment plan, which lowers the monthly bill by lengthening the re­payment period to as long as 25 years. The graduated repayment plan requires lower payments at first and then raises them, usually every two years, for up to ten years, presumably as your income increases. (With the extended and graduated plans, you’ll pay more interest than with the standard repayment plan.)

Or check out income-based repayment plans, such as Pay As You Earn, the newest of such options.

Income-based repayment is for borrowers with a lot of debt relative to income. You qualify if you have a “partial financial hardship”—that is, your monthly payments would be higher under the ten-year standard repayment plan than under the income-based plan.

With Pay As You Earn, you must also have taken your first loan on or after October 1, 2007, and received a disbursement of at least one loan on or after October 1, 2011. You put 10% of your “discretionary” income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

Borrowers in income-based repayment programs who work in public-service positions—for the federal government or a qualifying nonprofit, for example—also qualify for public-serv­ice loan forgiveness; federal loans are forgiven after ten years (or 120 on-time payments) instead of 20 years.

Consolidation lets you combine your federal loans under one interest rate and one bill (you can’t consolidate federal loans with private loans). The interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth point. Consolidating still gives you access to the range of repayment plans.

No matter which repayment plan you choose, sign up for automatic debit. You’ll qualify for a 0.25-percentage-point reduction on your federal interest rate.

Among graduates of the class of 2012 who borrowed, the average debt is $29,400—not a crippling amount, but no easy lift, either. Many graduates have a mix of federal loans at a variety of interest rates (federal Direct Loans, the most widely available, carried a 3.86% rate for the 2013–14 school year), and some borrowers also have private loans with variable rates as high as 11%. You can pick a repayment plan that fits your finances; if your circumstances change, you can always change the plan. (See which best fits your budget with the Department of Education's Repayment Estimator.)

The most straightforward repayment plan for federal loans is the standard ten-year plan. Under this arrangement, you pay the same amount each month until your loan is repaid. But that can be challenging for graduates with a lot of debt or a low-paying job. Borrowers who have $30,000 or more in loans can opt for the extended-repayment plan, which lowers the monthly bill by lengthening the re­payment period to as long as 25 years. The graduated repayment plan requires lower payments at first and then raises them, usually every two years, for up to ten years, presumably as your income increases. (With the extended and graduated plans, you’ll pay more interest than with the standard repayment plan.)

Or check out income-based repayment plans, such as Pay As You Earn, the newest of such options. Income-based repayment is for borrowers with a lot of debt relative to income. You qualify if you have a “partial financial hardship”—that is, your monthly payments would be higher under the ten-year standard repayment plan than under the income-based plan.

With Pay As You Earn, you must also have taken your first loan on or after October 1, 2007, and received a disbursement of at least one loan on or after October 1, 2011. You put 10% of your “discretionary” income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

Borrowers in income-based repayment programs who work in public-service positions—for the federal government or a qualifying nonprofit, for example—also qualify for public-serv­ice loan forgiveness; federal loans are forgiven after ten years (or 120 on-time payments) instead of 20 years.

Consolidation lets you combine your federal loans under one interest rate and one bill (you can’t consolidate federal loans with private loans). The interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth point. Consolidating still gives you access to the range of repayment plans.

No matter which repayment plan you choose, sign up for automatic debit. You’ll qualify for a 0.25-percentage-point reduction on your federal interest rate.

If you drop out of the program, you lose the benefit. Take the TEACH grant, which awards up to $4,000 annually to students who agree to work four years in high-need teaching positions, such as science and special education, in low-income areas. If you don’t complete your service, the grant converts to an unsubsidized Federal Direct Loan, or Stafford.

That means you will repay every dime of the grant at 6.8% interest starting from the day you received the award. And if you declined a subsidized Stafford loan—with a current rate of 3.4%—to accept a TEACH grant, you lose twice because the grant converts to the higher rate.

Some organizations, including AmeriCorps and Teach for America, offer grants after service is completed. Your federal loans go into forbearance during that time, meaning interest continues to add up. If you complete your service, the government will pay some or all of the interest, but you’ll pay it—on top of your loans—if you don’t.

The Peace Corps forgives 15% of Perkins loans for each of your first two years of serv­ice and 20% for each of the next two, capping the forgiven amount at 70% of your combined loans. That’s helpful, but only if you’re willing to commit to several years of hard work for minimal pay—and only if you have Perkins loans to begin with.

AmeriCorps and Teach for America offer more flexibility. Volunteers are eligible for the Segal AmeriCorps Education award, tied to the Pell amount ($5,550 in 2012). To receive the award, members must generally complete their term of service—for AmeriCorps, typically 1,700 hours; for Teach for America, about one year. Two terms of service earn you the maximum amount of $11,100 (in 2012). But bowing out early for eligible reasons, such as serious illness, may qualify you for a prorated payout.

The Public Service Loan Forgiveness program also rewards service. If you work in the public sector—say, in public health or at a public school—the PSLF program forgives the remainder of your student loans after 120 on-time payments while you’re employed in the public sector.

The catch? To benefit from the program, you must also qualify for an income-based repayment plan, which reduces your monthly bill below what it would be under a standard ten-year repayment plan. After ten years, the remaining amount is forgiven. But lower monthly bills mean the loan principal stays larger longer and accumulates more interest. If you drop out of the public sector before making 120 payments, you’ll end up losing the forgiveness and paying more than if you had paid over ten years.

Your program may not last. The dependence of volunteer programs on congressional funds means that you pin your chances of loan forgiveness on Washington politics. For instance, funding for AmeriCorps was briefly on the chopping block in 2011, during the debt-ceiling debate.

And at just five years old, the PSLF program hasn’t yet forgiven anyone’s federal student loans. The first beneficiaries will emerge in 2017, giving Congress plenty of time to impose new restrictions or even eliminate the program.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

What You Should Know About Student Loan Forgiveness Programs

Two-thirds of students who receive bachelor's degrees leave college with debt in tow. Depending on the amount owed (the average among borrowers is $26,600), it can take decades to pay off the outstanding balance.

For help with paying down your student loans more aggressively, consider the many programs that reduce your debt in exchange for relocating to specific regions and/or providing needed services in underserved communities. From Kansas to Chad, and in fields from nursing to teaching, there are programs to help graduates slash college debt. But the programs aren’t always easy to get into -- nor easy to stick with. Here are nine things you should know:

1. There are two broad categories of loan-forgiveness programs. You can enroll in the federal government's Public Service Loan Forgiveness program and/or apply for a loan repayment assistance program (LRAP) run by an organization or state. Know the differences: Public Service Loan Forgiveness requires you to make ten years of monthly payments toward your loan via an income-based repayment plan while working in a qualified public-service job before the remaining balance will be canceled or "forgiven." To qualify for one of the income-based repayment plans, you must have high debt relative to your income.

An LRAP, in contrast, tends to require dedicated service to a specific organization for a relatively short period of time in exchange for a limited amount of loan forgiveness.

2. You can double-dip. You can join an LRAP such as AmeriCorps or the Peace Corps and receive loan-forgiveness benefits at the end of your program (after one year for AmeriCorps, two for the Peace Corps), and you can count your time as eligible employment toward the ten-year public-service requirement for the federal government's Public Service Loan Forgiveness.

3. Only federal loans are eligible for forgiveness in most of these programs. Few programs allow their money to go toward private loans.

4. You should apply early. Start assessing programs before the beginning of your senior year. Deadlines vary, but Teach for America accepts submissions through February 20, and the rolling application process for AmeriCorps takes about six months. The Peace Corps requires more records and medical clearance, so aim to submit your application seven to 12 months before you hope to start working.

5. It's a big commitment. In most of these programs, you'll spend two years working to serve the greater good -- teaching in Detroit's struggling schools, improving agricultural practices in Senegal or providing mental-health services in rural Minnesota. Some programs, such as AmeriCorps Vista and the Peace Corps, explicitly prohibit you from holding another job while you participate in the program. Usually, you'll have the option to extend your work in the program beyond the two-year term, which tends to reap even more loan-repayment help.

6. Yes, you'll earn a salary. In addition to the partial (or sometimes full) payoff of your loans, most LRAPs provide a small stipend (Teach for America is the highest, with a maximum salary of $51,000) and health benefits.

7. There’s no partial credit. If you don't fulfill the entire commitment, you won't earn any money toward paying off your student loans. You might even face penalties from employers such as the National Institutes of Health research program and Nurse Corps if you breach your contract. In 2010, 12.4% of TFA teachers left the program after the first year.

8. You'll pay taxes on the loan-forgiveness awards. AmeriCorps, for instance, awards a lump sum equal to the largest Pell Grant you could receive ($5,645 in 2013). You won't actually receive a check, but you can make payments toward your loan directly from your profile on the AmeriCorps Web site. You have seven years to apply the award. Any amount you use is considered taxable income that year. For example, a young adult in the 15% tax bracket who applies $5,645 in loan-forgiveness awards toward a loan will trigger $847 in taxes due the following spring.

9. You may not get accepted. Most programs accept only 15% to 30% of their applicants, with Teach for America and the Nurse Corps Scholarship Program taking even fewer candidates. Other programs aren't as restrictive: Kansas's Rural Opportunity Zones relocation program, for example, awards a maximum of $15,000 for living in one of 50 rural counties for five years and simply requests proof of a degree from an accredited college or university and an outstanding student-loan balance.

The Growing Consensus on Fixing Student Loans 

Sixty percent of graduates from the class of 2011-12 entered the real world with student-loan debt -- having borrowed $26,500, on average.

That's not small change, especially when you consider that interest charges will add thousands to debt payments over the life of the loans. It pays -- literally -- to understand your payment options.n

Repayment is a mountain you can climb, with the right guide. Here are seven things that can help (or maybe hinder) your debt repayment:

1) You can cut the interest rate on your federal student loans by 0.25 percentage points immediately with one simple step. Sign up to make your monthly loan payments via automatic debit, and your interest rate drops. It's that easy.

2) You can extend your repayment period on your federal loans. Borrowers who have $30,000 or more in federal loans can choose the extended repayment plan, which lowers your monthly bill by lengthening the repayment period to as long as 25 years.

3) You can make smaller federal student-loan payments -- and even have some of your debt forgiven -- if you don't earn much money. Income-based repayment plans, such as Pay As You Earn, are available for borrowers who have a lot of debt relative to income. The plans allow you to put 10% of your "discretionary" income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

4) Dropping out of your repayment program could cost you. For example, consider the federal TEACH grant, which provides up to $4,000 for those who commit to teaching low-income students in high-need fields for at least four years. If you don't complete your service, the grant converts to an unsubsidized Federal Direct Loan, or Stafford. That means you will repay every dime of the grant with interest starting from the day you received the award. And if you decline a subsidized Stafford loan -- with a current rate of 4.66% -- to accept a TEACH grant, you lose twice because the grant converts to the higher rate.

5) Small towns can offer big debt relief. For example, in exchange for moving to one of 77 rural counties in Kansas, recent college grads receive up to $3,000 per year (for a maximum of five years) to help pay back loans. Other struggling regions are following suit.

6) You'll pay taxes on loan-forgiveness awards from those Kansas counties or from organizations such as the Peace Corps and AmeriCorps. For example, a young adult in the 15% tax bracket who applies $5,645 in loan-forgiveness awards toward a loan will trigger $847 in taxes due the following spring.

7) Interest rates on some of your subsidized Staffords may kick in sooner than you think. Until recently interest was deferred during the six-month grace period that new grads have before they must start repaying student loans. But for loans issued between July 1, 2012, and July 1, 2014, interest starts accruing the moment grads hit the real world. This year's crop of grads will likely have a combination of loans that gain interest during the grace period and those that don't.

Student Loan Rates Inch Up

First, the bad news: Federal student loans are more expensive this year. Undergraduate Stafford loans disbursed after July 1, 2014, carry a 4.66% interest rate, up from 3.86%. Rates on Staffords for graduate and professional students are now 6.21%, and PLUS loans for graduates and parents now charge 7.21%. But there’s good news: The hikes are manageable.

Valerie Cathcart, a rising senior at Marymount Manhattan College, in New York City, isn’t too worried. She borrowed $6,500 in unsubsidized Stafford loans last year (the loans accrue interest while students are still in school) and plans to take out $7,500 (the maximum for dependent undergraduate third years and above) this year. But the higher rate will add only about $3 per month to a $7,500 loan, or about $345 over a standard ten-year repayment period. And last year’s debt will remain at the old rate of 3.86%—no retroactive rate change there. “I’m just happy that it’s happening my last year of college,” says Cathcart.

Borrowers can’t dodge higher rates, but they can borrow wisely. Reduce the need for loans by tapping savings, working part-time and cutting your cost of living. After graduation, sign up for automatic debits to repay your loans, which will cut your interest rate by 0.25 percentage point. Avoid private loans. Their rates are typically variable, and the loans don’t offer the same protections as federal debt.

Among graduates of the class of 2012 who borrowed, the average debt is $29,400—not a crippling amount, but no easy lift, either. Many graduates have a mix of federal loans at a variety of interest rates (federal Direct Loans, the most widely available, carried a 3.86% rate for the 2013–14 school year), and some borrowers also have private loans with variable rates as high as 11%. You can pick a repayment plan that fits your finances; if your circumstances change, you can always change the plan. (See which best fits your budget with the Department of Education's Repayment Estimator.)