The Ins and Outs of Student Loan Repayment: Understanding Your Options

1. The Ins and Outs of Student Loan Repayment: Understanding Your Options • Joe Braxton- Senior Default Aversion Consultant

2. Learning objectives • You will learn how to educate borrowers on: • Taking inventory of federal student loans • Choosing the right repayment plan that works • The basics of loan consolidation • Deferment, forbearance, discharge, and forgiveness options • Options after default

3. Taking inventory

4. Taking inventory • Where can the borrower obtain information on federal loans? • National Student Loan Data System (NSLDS) • http://www.nslds.ed.gov/ • Provides federal student loan amounts, loan holders, and loan servicers • May have multiple loan types (FFEL, Direct, Perkins, Grad PLUS, and Consolidation) and multiple servicers • Where can the borrower obtain information on private education loans? • Refer to promissory note or credit report • Focus today will be on FFEL, Direct (unsubsidized and subsidized) and Grad PLUS loans

5. During the grace period • What does the loan holder/servicer expect from the borrower? • To select a repayment plan • To provide updated contact information whenever it changes • To contact the loan holder whenever you are having difficulty managing repayment

6. During the grace period • Can a borrower prepay on a loan? • Yes • If sending in a prepayment, make sure you inform the lender to apply the prepayment to the principal of the loan balance • There is no prepayment penalty

7. Overview of repayment plans

8. What repayment plans are available? • Standard • Graduated • Extended • Income Driven Plans: • Income-sensitive (FFEL Borrowers Only) • Income-based • Income-contingent (Direct Borrowers Only) • Pay As You Earn *NEW*

9. Repayment plan comparison • NEW repayment plan comparison calculator available at http://www.aie.org/paying-for-college/repayment-plans/Repayment-comparison-calculator.cfm • Visit the repayment estimator before making a decision about repayment options • Once the borrower knows which plan(s) they are eligible for, spend some time researching the details of each plan and thinking about how the various options will fit within short- and long-term financial goals

10. Repayment plans overview • Standard • 120 equal monthly payments/10 years • Least expensive way to repay a student loan • Graduated • Payments increase over time • Maximum 10-year repayment term

11. Repayment plans overview • Extended • For borrowers with over $30,000 in debt • Up to 25 years to repay loan • Income-sensitive (FFEL only) • Based on expected gross monthly income • Adjusted annually

12. Repayment plans overview • Income-based, Income contingent and Pay As You Earn Plans • Considers the borrower’s income, family size, and total amount borrowed • Results in a lower monthly payment that is adjusted annually • Provides forgiveness of remaining balance • Under current IRS rules, the amount of debt discharged is treated as taxable income • Counts payments made toward the 120 required payments for Public Service Loan Forgiveness

13. Borrower eligibility

14. Borrower eligibility • Income-based • Designed to help borrowers experiencing a “partial financial hardship” • Available to Stafford/Direct, Grad Plus, and certain consolidation borrowers • Provides interest subsidy on subsidized loans for up to 3 years if IBR payment is less than accrued interest on those loans.

15. Borrower eligibility • Income-contingent • Repayment plan available only to DL borrowers • You do not have to meet any specific income/loan debt/family size criteria • If your payment doesn’t cover interest, unpaid interest is capitalized annually-up to 10% of the original loan amount • Excess interest above the 10% cap continues to accrue but is not capitalized

16. Borrower eligibility • Pay As You Earn • Became available December 2012 • Caps annual payments for an eligible new borrower at 10% of discretionary income (AGI minus 150% of the poverty line) • Provides interest subsidy on subsidized loans for up to 3 years if PAYE payment is less than accrued interest on those loans. • Available only to certain borrowers

17. Borrower eligibility • For purposes of PAYE, you are a “new” borrower if you: • Had no outstanding balance on a Direct or FFELP loan as of 10/1/2007 (or had no outstanding balance on a Direct or FFELP loan when you obtained a new loan on/after 10/1/2007) AND • Received a disbursement of a Direct Subsidized or Unsubsidized Stafford, or Grad PLUS loan on or after 10/1/2011 (or received a Direct Consolidation Loan based on an application received on/after 10/1/2011) • The repayment estimator will help the borrower determine if he/she meets this eligibility requirement.

18. Partial financial hardship • What does PFH mean in plain English? • The borrower has a large amount of federal student loan debt compared to income and the expenses that go along with supporting the borrower and his or her family. • The repayment estimator will help determine if the borrower has a PFH.

19. Repayment terms • Repayment can extend beyond 10 years regardless of the amount of the eligible debt • Annual evaluation may result in monthly payment going up or down depending on change in annual income and/or family size • Borrower can change repayment plan, but could have consequences • Borrower can elect to remain in IBR or PAYE even when he or she no longer meets PFH

20. IBR, ICR and PAYE payment amounts • IBR payment amount: • Capped at 15% of discretionary income • ICR payment amount: • Capped at 20% of discretionary income • PAYE payment amount: • Capped at 10% of discretionary income • What is discretionary income? The borrower’s income minus the poverty guideline for the borrower’s family size. The repayment estimator will calculate this for the borrower.

21. Loan forgiveness • All three plans provide for forgiveness • Under ICR and IBR, remaining balance is forgiven after 25 years of qualifying payments • Under PAYE, remaining balance is forgiven after 20 years of qualifying payments • Under current IRS rules, the forgiven amount is considered taxable income

22. Income driven plans example Example: • If the borrower is: • Single with no dependents • Live in one of the lower 48 states • Have an Adjusted Gross Income (AGI) of $35,000, and • Have $50,000 in Direct Loan debt ($23,000 of which is subsidized), all of which has a 6.8% interest rate… *Assumes a 5% increase in income each year and a 3% annual increase in the poverty guidelines. Source: 2012 FSA Conference

23. Income driven plans example For comparison: Source: 2012 FSA Conference

24. Income driven plans example: With forgiveness With PSLF (forgiveness after 10 years): Source: Department of Education; 2012 FSA Conference

25. ICR, IBR and PAYE Comparisons

26. The basics of consolidation

27. Consolidation overview • Consolidation enables the borrower to bundle one or more federal student loans into a single new loan • The consolidating loan holder pays off the outstanding balances of the loans included in the consolidation • Same repayment plan options (except ISR) • No fees

28. Consolidation eligibility • What loans may be consolidated? • Federal Family Education Loans • Federal Direct Loans • Federal Perkins Loans • Health Professions Student Loans • Nursing Student Loans • Health Education Assistance Loans

29. Consolidation eligibility • What loans may not be consolidated? • Private or state education loans • Other consumer debt • Private consolidation loans • Don’t offer the same advantages (i.e., repayment options, deferments, etc) as a federal consolidation loan • Interest rate will be credit-based and likely higher than a federal consolidation loan

30. Factors to consider-Cons • May lose some or all of grace period • May lose certain borrower benefits • Federal Perkins Loans lose their deferment subsidy and cancellation eligibility when consolidated • May increase total cost of loan: If you lengthen your repayment period, you will pay more interest in the long run

31. Loan consolidation calculator and application • At studentloans.gov • For calculator, first visit NSLDS to determine loan types, amounts, and current interest rates • If the borrower is still in his grace period, provide grace end date; ED will put application on hold and start processing it within 45 days of the grace period end date

32. Deferment, forbearance, discharge, and forgiveness options

33. Deferment • A period of time during repayment in which the borrower, upon meeting certain conditions, is not required to make payments of loan principal • Entitlements, but the borrower must meet eligibility criteria and cannot exceed time limitations • Interest subsidy for subsidized loans, but the borrower is still liable for all interest that accrues on an unsubsidized loan • There are many deferments available to borrowers of any loan type, such as in-school, economic hardship, unemployment, military

34. Forbearance • A period of time during which the borrower is permitted to temporarily cease making payments or reduce the amount of the payments • Generally not entitlements • The borrower is liable for all interest that accrues on the loans, even subsidized loans • May be the quickest and easiest option, but not a long-term solution

35. Loan discharge • Discharge release the borrower from all or a portion of their loan obligation • Generally due to circumstances beyond the borrower's control • Types of FFEL and Direct Loan discharges • Total and Permanent Disability • Death • Unpaid Refund • False certification by the school • False certification due to identity theft • Closed School • Parents and spouses of September 11, 2001, victims • Bankruptcy

36. Loan forgiveness • Forgiveness also releases the borrower from all or a portion of your loan obligation • Generally due to employment in a public service field • FFEL/Direct Loan forgiveness programs available for: • Teachers • Public service

37. Options after default

38. What is default? • Occurs after 270 days of delinquency • During delinquency—and even for a short time after default—many entities (lender, servicer, guarantor, school) are attempting to contact the borrower by phone, mail, email, etc. to resolve the delinquency • Many times a delinquent borrower cannot be located

39. Consequences of default • Acceleration • Loss of Title IV aid eligibility • Collection costs, attorney’s fees • Negative credit reporting • Loss of deferment, forbearance, and traditional repayment plans

40. Consequences of default • Forced collections: • Administrative wage garnishment • Loss of eligibility for other federal loans (VA, HUD/FHA) • Treasury offset program (income tax refunds, Social Security benefits) No statute of limitations for enforceability!

41. How can you resolve a defaulted student loan? • Pay the defaulted loan in full or over time • Make satisfactory repayment arrangements • One-time option • Restores Title IV eligibility • Rehabilitate the defaulted loan • One-time option • Removes default from credit report • Consolidate the defaulted loan • Receive a discharge on the defaulted loan

42. Resources • Helpful resources • www.nslds.ed.gov: view your student loan portfolio • www.loanconsolidation.ed.gov: apply for a Consolidation loan • https://studentloans.gov/myDirectLoan/repaymentEstimatorLoginRedirect.action: repayment estimator • http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp#: Public Service Loan Forgiveness FAQs • https://myeddebt.com: ED’s Debt Resolution Group • https://www.tgslc.org/borrwers/default/: TG’s “Handling Default” page