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Life after Graduation… Debt Management and Loan Repayment Strategies

Life after Graduation… Debt Management and Loan Repayment Strategies. Presented by: Sharon Gifford Vice President Graduate & Health Professions Programs. Types of Loans. Stafford Subsidized government pays interest during eligible periods Unsubsidized borrower pays interest

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Life after Graduation… Debt Management and Loan Repayment Strategies

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  1. Life after Graduation…Debt Management and Loan Repayment Strategies Presented by: Sharon Gifford Vice President Graduate & Health Professions Programs

  2. Types of Loans • Stafford • Subsidized • government pays interest during eligible periods • Unsubsidized • borrower pays interest • 10 year repayment • $50 minimum monthly payment • 6 month grace period • Grad PLUS • Fixed interest rate 8.5% • 10 year repayment • $50 minimum monthly payment • Immediate repayment (no grace period)

  3. Repayment Standard Graduated Income Sensitive Extended Consolidation Prepayment Loan Cancellation Death Total & permanent disability Some courses of study (check with FAO or guaranty agency) Loan Repayment

  4. What is capitalization? • Repayment begins 6 months after graduation • Interest accrues on unsubsidized debt during in-school, grace and deferment • Lenders retain the right to periodically add this unpaid accrued interest to the total outstanding unsubsidized principal, usually done once at repayment • The Result - borrowers are technically paying interest on capitalized interest that was added to principal

  5. Standard Repayment 8.25% Tip: you will repay approximately $12.25/month for each thousand you borrow if repayment is at the cap of 8.25%

  6. Standard Repayment 6.8% Tip: you will repay approximately $11.51/month for each thousand you borrow if repayment is at 6.80%

  7. What If I Can’t Make My Monthly Payment? Contact your servicer to discuss: • Deferment Options • Forbearance Options • Consolidation Loans

  8. Avoid Delinquency, Defaultand Bankruptcy • Delinquency • Usually occurs when 30 days late making payments • Late payments are reported to a credit bureau • Becomes part of your financial history • May impact eligibility for borrower benefits • Default • Occurs when loan payments are 270 days past due • Serious consequences

  9. What happens if I default? • Bad credit • May impact employment opportunity • Income tax refunds withheld through Federal Offset • Lottery winnings withheld • Wages can be garnished • Professional license may be revoked, cancelled or not renewed • Not eligible for future financial aid • Not eligible for Federal benefits • You will be responsible for all collection costs • You’ll lose the option of deferment and/or forbearance • Your payments may become larger and your ability to pay more strained • There is NO statue of limitations, so your obligation to repay this debt will never go away

  10. Talk To Your Lender/Servicer if: • You have questions • You move or change names • You transfer to another school • You can not make your payment • You want to apply for a deferment or forbearance

  11. Helpful Hints • Open, read, and respond to all correspondence sent from your school and lender • Keep all copies of loan information in one place • Make all payments on time • Contact your lender for options during times when financial difficulties occur • Use credit wisely!

  12. Auto-Pay and Overdraft • Most lenders offer incentives for electronic repayment of your education loans • Many offer additional incentives for on-time payments (after a certain number of months) • Why? Electronic payments = lower costs AND fewer delinquencies • BUT … if you bounce a payment, you lose the on-time incentive

  13. Auto-Pay and Overdraft If you enroll in auto-pay AND then elect overdraft protection from your bank, you’ll never again bounce a payment to any of your creditors. This saves you overdraft fees (from both your bank and your creditor). If you have a lender that offers repayment incentives, you will also ensure your ability to earn them without fear of eliminating yourself.

  14. Additional Assistance Office of the Ombudsman, Student Financial Assistance U.S. Department of Education Room 3012, ROB-3 7th & D Street Washington, D.C. 20202-5144 1-877-557-2575 http://ombudsman.ed.gov

  15. Consolidation • Combines eligible loans into a single new loan • Longer repayment term (up to 30 years) • Lowest payments • Highest total cost potential • The fixed interest rate for a Consolidation Loan is based on the weighted average of the interest rates of the loans you consolidate (rounded up to the nearest 1/8th percent).

  16. Eligible Federal Loans • Federal Stafford Loans • Federal Perkins Loans • Health Professions Student Loans (HPSL) • Federal Nursing Student Loans (NSL) • Health Education Assistance Loans (HEAL) • Federal Graduate PLUS Loans • Federal PLUS Loans • Federal Consolidation Loans • must consolidate at least one additional eligible loan

  17. Ineligible Loans • Private education loans • Spouse’s education loans

  18. Program Guidelines • Borrower may consolidate: • During grace period: application may be submitted and consolidation delayed until end of grace • When in repayment • Loans in deferred status: deferment continues, if consolidated

  19. Program Guidelines • Cannot consolidate again with competing program unless you have a new loan that has not been consolidated • Exceptions to repeat consolidation • Borrower needs income-contingent repayment plan • Initial consolidation loan has been submitted to the guarantor for default aversion assistance

  20. Program Guidelines • If you omitted a loan, it can be added to initial consolidation within 180 days • If you return to school and obtain a new eligible federal loan AND are no longer in “in-school” status you can re-consolidate

  21. What Happens to Borrower Benefits? • Consolidation creates a new loan with total loan balances and has new terms and conditions • Could lose certain benefits that were on the original loans • Can choose which loans to include in consolidation

  22. Things to Consider • Look at individual loan programs and benefits offered • Perkins Loan offers forgiveness for: • Teaching in shortage or low-income area • Social work • Nurse or medical technician • Law enforcement or corrections officer • AmeriCorps VISTA or Peace Corps volunteer • Service in Armed Forces

  23. Interest Rate Comparison • Perkins Loans • Fixed interest rate at 5% • Stafford Loans: Disbursed prior to July 1, 2006 • During Grace : 6.62% (variable rate) • In Repayment: 7.22% (variable rate) • Stafford Loans: Disbursed on or after July 1, 2006 • 6.8% (fixed rate) • Consolidation Loans • Fixed interest rate for life of loan • Weighted average of underlying loans (rounded up to next 1/8 of a percent)

  24. Weighted Average Multiple loans (currently in repayment): * Current variable rate, subject to change each July 1.

  25. RepaymentPeriods * Based on outstanding amount of all education loan debt, regardless of whether or not the loan is eligible and/or if you choose to consolidate the loan.

  26. Monthly Payments • Typically reduced after consolidation • May make monthly costs more reasonable • Costs more in the long run • Repayment term extended up to 30 years

  27. Repayment Example $ 60,000 student loan debt with various lenders/servicers:

  28. Repayment Example with Consolidation • Consolidation extends the repayment term • You pay more if you use the full term • You can pay the loan off early with no penalty

  29. Interest Subsidy • Portion of Consolidation Loan that was subsidized remains subsidized for: • FFELP and FDLP Stafford Loans • Does not retain subsidy on portion of FFELP Perkins Loans or FDLP Perkins Loans

  30. Consolidation Repayment Options • Standard • Same payment each month • Graduated • Payments start low and gradually increase • Income-sensitive or income-contingent • Monthly payments based on income • Adjusted annually

  31. Think Twice Before You Consolidate • If ALL of the following are true: • You only have eligible federal student loans with FIXED interest rates • You qualify for Extended Repayment • You qualify for on-time payment incentives on Federal Stafford/PLUS Loans • Then, you could have both a lower monthly payment and pay less over the life of repayment by NOT consolidating

  32. $40,000 Stafford Fixed 6.8%

  33. $100,000 Stafford Fixed 6.8%

  34. $40,000 Stafford Combination 6.8% & 7.14%

  35. $100,000 StaffordCombination 6.8% & 7.14%

  36. What should you do? • May still want to consolidate the federal student loans with variable interest rates • Can consolidate only the variable rate loans as a separate Federal Consolidation Loan • Can retain fixed rate loans as separate loans • May not want to include a prior consolidation loan as part of a new consolidation so that any prepayments can be targeted at the highest cost debt

  37. Consolidating Private LoansFactors to Consider • Interest rate may be higher • Increasing repayment period increases total costs • Grace period may be lost • Additional fees may be assessed • Borrower benefits will be lost

  38. Consolidating Private LoansMORE Factors to Consider • If you have good credit • If you don’t have borrower benefits to lose • If you have loans from multiple lenders

  39. Graduation -Time for a Budget Update • How much will you earn? • What are your new expenses? • Education loan payments start soon. • Build savings into your budget. • Be prepared for emergency expenses. • Your money earns more money - for you.

  40. Taxpayer Relief Act of 1997 Highlights • Interest Deductions: • Potential education loan interest deduction if income less than $40M single filers, $60M married filers. • Tax Credits: • Students and families may be eligible for either HOPE ($1500 maximum for 1st two years of post-secondary study)or Lifetime Learning Credit ($1000 maximum annually); certain income limitations apply. • Contact a tax advisor to determine your personal eligibility

  41. Debt Management Strategies Create a spreadsheet showing the following: type of creditbalancemo pmtAPR student loan $87,000 $ 361 6.8% car loan $14,000 $ 350 8.9% Visa $ 7,200 $ 144 15.9% MasterCard $ 2,400 $ 48 18.9% mortgage $95,000 $ 750 6.3% TOTALS $292,000 $1653

  42. Debt Management Strategies Now sort by APR - highest to lowest: type of creditbalancemo pmtAPR MasterCard $ 2,400 $ 48 18.9% Visa $ 7,200 $ 144 15.9% car loan $14,000 $ 350 8.9% mortgage $95,000 $ 750 6.3% student loan $87,000 $ 361 6.8% TOTALS $292,000 $1653

  43. Credit The only reason a great many American families don’t own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments. -Mad Magazine

  44. Credit Cards Free t-shirts aren’t free. Low rates won’t stay low. Airline miles are paid for somehow. Cash saved is better than cash back.

  45. How bad is the current crisis? Top Credit Card Interest Rate? 35.20% Average Credit Card Debt? $8,000 2003 Profits by Credit Card companies? 1.5 trillion globally / 60 billion nationally • Elizabeth Warren, Harvard University School of Law

  46. But Worse Yet… • Fees have doubled. • Income from over-limit charges, calendar manipulation and returned checks has far outpaced actual interest rates.

  47. Interest Rates • One late payment can eliminate all low teaser rates, raising interest from 3.9% to over 20%. • Cash advance interest rates may capitalize daily, not monthly. • Annual fees, points program fees, authorized user fees all add up.

  48. Lets talk about those rates . . . There are no regulations which prevent credit card companies from changing your rate at any time for any reason • Failing to make a timely payment to another creditor • Account balances deemed too high (sufficiently obligated)

  49. The lure of the “minimum payment” $2,500 At an interest rate of 24%, making only the minimum payment: • 304 payments over 25 years (to 2031) • Interest payments of $7,625.48 • Increase the cost to $10,125.48

  50. Why not the day to day? • Snacks at coffee shop ($5 x 4) $ 20.00 • Gum or mints ($1.20 x 4) $ 4.80 • Soda or bottled water ($1.25 x 4) $ 5.00 • Movie & snacks ($12.00) $ 12.00 • Occasional magazine ($4.50) $ 4.50 • Gas $ 25.00 • A music CD $ 15.00 The costs of the “Little Things” $ 86.30 Total over 52 weeks? $ 4,487.60

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