The problem with consolidated and extended student loan payments

November 25, 2019

I recently worked with a client who had just over six figures of federal student loan debt.  A few years ago, when cash flow was tight, she enrolled in an extended repayment plan. This managed to lower her payments to a manageable level, with her payments going up over time.  But, it also extended her repayment period by decades and her interest payments by a not insignificant amount.

She would still have trouble making the large payments they requested at the start due to her income.  After some analysis, it became clear she would benefit from enrolling in an income driven repayment plan.  The payments would be based on her income – not the loan amount, and the new payment amount is actually lower than it was on the extended payment plan.  She is also now eligible for loan forgiveness. The program we settled on allows for loan forgiveness after 20 years of payments. This is five years shorter than the extended payments program she was on.

When you enroll in an income driven repayment plan there is a good chance your payments will not cover all of the interest due.  This means you will see your loan balances go up over time. But, since you won’t ever pay the entire amount, this shouldn’t be a concern.  The bad news is that the amount of the forgiveness will be counted as income in the year it is forgiven. You will need to plan for that future tax bill.

However, this client also works for a non-profit.  As long as she makes 120 payments under this program while working for a non-profit, her payments will only last 10 years and the loan forgiveness will be tax-free.  She only wishes she had known this earlier and had taken control of her payment options rather than putting it off.

If you’d like to see if you would benefit in a similar way, please reach out.  We would be happy to work with you.


This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  Please keep in mind that one client experience may not be representative of the experience of other clients. There is no guarantee of future performance or success. Waddell & Reed does not offer tax or legal advice.