We are continually reading about the increase of student debt. According to the Institute of College Access and Success, 68% students who graduated from college in 2015 had an average of $30,100 in student loan debt. This amount is staggering and the amount borrowed is not going away soon. In fact, the number of people with student loans and the amount of debt per student has almost doubled since 2005.
November is here and many recent college graduates will need to start repaying their student loans. This is the main reason EFC PLUS is dedicating November as Student Loan Awareness Month. As part of this effort, all of our posts this month are on student loans and repayment. We held a webinar on November 9 to explain both student loans and the various loan repayment options. (Student Loan Repayment Video Link)
Our goal is to help students and parents with their student loan decisions by providing them with information on how to better understand their repayment options. This article will focus on making the repayment decision and walk a person through that process.
Take inventory of Student Loans
What is unique about the student loan process is not the lender but the types of loans a student has borrowed. Many student borrowers have different loans from the same lender. To properly consolidate your loans you need to focus on the loan type. Each loan needs to be classified as a federal or private loan. The lender or servicer can be confusing at times. It is important to properly separate the two types when creating your inventory.
There are two major sources where a student loan data resides. For the federal loans, the data resides in the system called the National Student Loan Data System (www.NSLDS.ed.gov). To get access to the system you will need your FSA ID. The second resource is your credit report. This source should list all of your outstanding loans both private and federal.
By using both sources of information, you should be able to create a complete inventory of all your student loans. In some cases, a student may be responsible to repay their parents for a Parent PLUS loan. The Parent PLUS loans will be listed under the parent’s FSA ID and not the student’s FSA ID.
You are unable to consolidate federal and private loans together under the federal loan process. This can only be done through a private lending company. The federal loans have some advantages that are not available through private lenders. These would include more flexible repayment options, loan forgiveness plans, death and disability benefits. You may forfeit these federal loan advantages by consolidating them into a private loan consolidation. Plan carefully because once you leave the federal repayment program, through private consolidation, there is not the ability to be re-instated.
The complexity of financing your college education is different than any other financing experience most people will have in their lifetime. It can be very confusing and is one reason why people should consider consolidating their loans. If you have multiple loans, it may also seem like you are making a student loan payment once a week. This can be overwhelming and increases the risk of you missing a payment. A missed payment could affect your credit and other aspects of your financial life. The loan consolidation may minimize this risk and confusion.
If you have delayed your consolidation and have worked for a while, additional analysis needs to be done before consolidation. With a federal loan consolidation, the time clock starts over each time you consolidate your loans. Do the research and don’t lose out on this timing opportunity. Due to this restart, if you have qualified loan repayment toward loan forgiveness you need to be careful before consolidating certain loans. This would start your qualified payments to public service loan forgiveness to zero.
When consolidating your federal loans, you will need to select one of the following loan servicers. The 4 major loan servicers that are used for any new federal direct student loan consolidation are Fed Loan servicing (formerly AES), Great Lake, Nelnet, and Navient (formerly Sallie Mae). Fed Loan Servicing (AES) is the servicer who handles the Public Service Loan Forgiveness Program. If you consolidate your federal loans, you will need to select one of the loan services. If you have old FFEL loans they can still be serviced by the original servicers until you consolidate or the servicer sells your loans.
Listed below are the Federal student Loans that are eligible to consolidate:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct Plus Loans
- Federal Family Education Loan (FFEL) Loans
- Supplemental Loans for Students (SLS)
- Federal Perkins Loans
- Federal Nursing Loans
- Health Education Assistance Loans
- Some existing consolidation loans
The Federal Student Loan rates change every July. Some older loans have variable rates. Depending on the direction of the interest rates a borrower may want to accelerate or delay their consolidation
Various Repayment Options
By understanding the various rules of repayment and loan forgiveness, your debt repayment can be manageable and not a surprise. There are currently 9 different federal student loan repayment methods. Depending on your student loan debt, income level, marital status and a few other key points making the correct choice can be difficult. Listed below are your options and some key points on each of the repayment method:
Standard 10 year Repayment Plan
The loan payment is a fixed amount and is paid off in 10 years. It can be used for all federal student loans. This method is the normal default repayment method. This number is important to know since this is the highest amount you can pay if you use any of the income determined methods. If you no longer qualify for the income determined methods but qualify for the Public Service Loan Forgiveness Program this will be the amount you will need to pay.
Extended Repayment Plan
The repayment amount is fixed. The number of years of extension is based on the outstanding loan balance. It is fixed for the life of the repayment. This can be an attractive method from cash flow reasons and if combined with a pre-payment plan it can help you avoid default. This plan can be extended for 25 years but it is the most expensive repayment total over the life of the loan. If you consolidate the time frame can extend to 30 years.
When looking to consolidate, the government website lists the Extended Repayment Plan as the Standard repayment plan. It can be confusing for borrowers especially if they think they are signing up for the Standard 10.
Graduated Repayment Plan
The repayment amount is lower at first and then it increases every two years. Payment is finished in 10 years. This method is affordable at the beginning but can get very expensive in the outer years. It is important to note that a borrower will pay more interest over 10 years than the standard repayment plan and interest accrues at the beginning of the payment plan.
Extended Graduated Repayment Plan
The repayment amount will increase in cost every two years. The number of years of extension is based on the outstanding loan balance. It is semi-fixed for the life of the repayment since it will increase at a fixed amount ever two years. This can be an attractive method from cash flow reasons but can get very expensive in the outer years.
Income-based repayment (IBR)
This repayment plan is based on your income, poverty level and family size. The monthly payment is limited to 15% of your discretionary income. Discretionary Income is the difference between your adjusted gross income (AGI) and 150 percent of the poverty guidelines for family size and state you reside in. Parent PLUS loans cannot use this method of repayment.
Pay As You Earn (PAYE)
This loan repayment method is based on the student’s adjusted gross income and is considered as an income determined method of repayment. The monthly payment under PAYE is calculated at 10% of your discretionary income. To be eligible for PAYE the person must have no federal student loan debt balance prior to October 1, 2007, applied for student loans after October 1, 2007 or have received a federal student loan program distribution after October 1, 2011. A borrower’s loan origination dates will affect your ability to use PAYE.
Revised Pay As Your Earn (REPAYE)
Newest income-driven repayment methods and is an extension of PAYE. REPAYE is not dependent on specific dates for a borrower to be eligible to use this method. REPAYE caps the monthly student loan payment amount to 10 percent of the annual adjusted income allocated on a monthly basis.
**If married, both incomes will be included. Tax filing status is excluded for married couples under this process. Unpaid interest is accrued during repayment and can have negative amortization limited to 10 percent of the original balance.
Income Contingent Repayment (ICR)
ICR payment is intended to make payments more affordable. Payment is determined by your total direct loan debt as well as your adjusted gross income and family size. ICR can be used for all direct students loans. One of the original income determined repayment methods. It is also the only income driven methods available for Direct Parent PLUS loans. It does not have negative amortization.
Income Sensitive Repayment
This repayment method is based on your annual Adjusted Gross Income or AGI. It can be used with subsidized and unsubsidized federal Stafford loans, FFEL plus Loans and FFEL consolidation loans. The borrower needs to apply each years based on their current income or prior year’s tax return AGI. This repayment plan does not have negative amortization which means the loan balance will not go up if a borrower uses this method.
One way students and parents can deal with the increasing cost of college is through the utilization of “loan forgiveness”. Only the following repayment methods work with loan forgiveness. They are Standard Repayment (10 Year Only), Income Based Repayment, Income Contingent Repayment, Pay As Your Earn and Revised PAYE As You Earn.
Each of loan forgiveness options has their own specific rules and can range from 10 years to 25 years in length. Factors such as changing jobs, company (Profit /Non-profit) or filing your taxes a certain way that could significantly affect your student loan forgiveness outcome.
An important point with loan forgiveness programs is that many of these forgiven amounts are taxable. Only the Public Service Loan Forgiveness program is not taxable. The loan amount that is forgiven will be added to your current income and that could raise a person’s income tax substantially. This is a significant issue for people using the income driven repayment methods since loan balances could have increased from the original loans.
As you can see, this is not an easy decision. There are a lot of moving pieces. Our recommendation is to have both a short-term and long-term plan. The primary focus on the short term is to stay current on the payments. Student loan default can be expensive and painful to a person’s financial future. The Income Driven Repayment options can help a student stay current but in many cases they are not a long term solution. As it listed in the Department of Education’s descriptions, the IDR repayment methods are meant for financial hardship.
This is why having a plan is important. A repayment plan that has the lowest monthly payment may not always be the best long term option. If you properly plan and understand the rules, other financial decisions become possible. Knowing that your student loans will be forgiven or repaid by a certain age may allow you to plan on a home purchase or start a family. Loan repayment mistakes can cost your thousands of dollars and may result in the lost of personal goals.
The interaction of your career path, types of loans, employer, salary level, repayment methods and how you file your taxes need to be part of your student loan repayment and forgiveness planning. Make the best decision! Please go to our webinar page to view other college and student loan repayment topics.