Question

The assignment is to provide specific financial suggestions for how to pay off student debt early using one or more business decision-making techniques. Please specific and provide specific actions. Thank you

Answer 1

The federal aid and the loan program for the students are advocated under higher education Act(HEA). The reform measure taken under this Act has opened several options to pay off the loan or debt of the students. One of such action in favour of the debt repayment is called “Payroll deduction” and the other is known as IDR

1.Payroll deduction

It is a process where student loans can be repaid directly by means of payroll deductions. Therefore, the effort to be taken for check delivery or to exercise electronic transfer of the repaid amount is not required which can restrain the default to repay the money to the authority who disbursed the loan for a student. Alike with payroll taxes the repayment amount will be automatically reduced from the check amount. Moreover, if any adverse situation arises in the job and for which it becomes difficult for the student to repay the required sum, the application of payroll can be effective which ensure the repayment sum through deduction directly from the check.

However, the demerit side also exists in this system as the wage garnishment for the students whose earnings are very low may face problem in the future for such deduction as the garnishment will continue until the entire payoff of the debt amount.

2.

Another way for the payoff of debt is the application of Income driven repayment plan(IDR)

When it is found that the loan repayment amount is very high for a student who belongs to the lower income group then IDR can be applied which facilitates to repay lower amount of money and brings relief to the borrower in making the loan payment.

The relief that a student gets due to his lower income is the way by exercising a plan called Income based repayment or IBR. It is part of IDR.

By default the standard time of repayment is 10 years and in most cases the repayment amount remains very high which in most cases is not affordable.

Process

The due payment of loan is attached with the income which is an easy way to pay the loan amount for a student. It encompasses to avoid the loan payments from the computed loan balance amount.

To exercise the IBR plan a certain percentage of IBR can be set in the discretionary income for making the payment of loan and while setting such IBR the time of taking such loan is also considered as the disbursement time is a factor for the settlement of IBR rate over the discretionary income.

Way to find the discretionary income

The discretionary income of a student is measured in the following way

It is the difference between the adjusted gross income of a student and 150% of FPL as per the family size of the student. Suppose the adjusted gross income of a student is $20000 and 150% of the FPL(Federal Poverty line) is $18000 therefore the discretionary income is $12000.

Advantage

It means the loan amount is affordable for a student which is balanced due to the application of discretionary income and exercising the IBR on such discretionary income. The adjusted loan is affordable as it is made up by considering the specific income of a student, his cost of living and family size.

Moreover, those borrowers where IBR is exercised can get the facility to forgive the loan amount after 20 years of repayment w.e.f. 1.7.2014.

Those who are not in such a income driven plan may face the problem as the extension time limit which is available in the IBR plan cannot be availed and they have to repay the loan amount within 10 years.