Loan Repayment Strategies

Understanding the Unique Nature of Federal Student Loans

Module 1

Tulane UniversityJeffrey HansonEducation Services

Majority of students …

… now graduate with an

EDUCATIONAL MORTGAGE

Copyright © 2013 by Law School Admission Council, Inc.

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What do you think?

Should you pay the interest as it is accruing in school?

Should you pay off your federal student loans as fast as possible?

Should you refinance your federal loans with a private loan to get a better rate?

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Doing so may not be best …

… you need to make “informed”

decisions when managing repayment!

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Did you know?Interest is accruing as SIMPLE interest!

Interest starts accruing on unsubsidized student loans when funds are disbursed, but it is NOT compounding! In other words, you are not paying interest on the accruing interest

while you are in school.

Accruing interest will capitalize when loans enter/re-enter repayment (e.g., six months after graduation).

Therefore, paying the accruing interest while you are in school is not the best use of your funds financially. If you have the funds, it is better to reduce the amount you are

borrowing rather than paying the accruing interest.

It is the principal balance that is accruing interest while you are in school—not the interest itself.

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Interest CapitalizationUnsubsidized Loans

What is capitalization? Unpaid interest is added to the principal loan balance

Once capitalized, interest starts accruing on the new higher loan balance (i.e., interest starts accruing on that capitalized interest)—thus, total debt increases

When is interest capitalized? When loan first enter repayment (after grace period)

OR

When loan re-enters repayment after a continuous period of deferment and/or forbearance

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Federal student loans are flexible and safe … You should never have to miss a payment or default

Payment relief options exist that provide financial “safety nets”

Payments can always be less than 15% of your AGI Flexible payment options exist including income-driven repayment

(IDR) plans that can limit debt-to-income ratio impacts

Debt should be gone within 25 years or less Portion of debt could be forgiven if not fully repaid

No penalty for prepayments Can always pay extra or make payments when not due to reduce total

interest paid and get debt paid off more quickly if that is your goal

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Your “educational mortgage” should not prevent you from: Pursuing your desired career Achieving your financial goals

What should you do?

Consider:Choosing the repayment plan that offers the LOWEST scheduled monthly payment

Why?This provides maximum cash flow flexibility so that you can:

Maximize amount you are prepaying in a targeted way at your most expensive debt (e.g., private student loans)

AND/OR Allocate “extra cash” for other purposes (e.g., investing and

saving for the future)

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Financially, you’re notboxed into a corner!

Federal Student Loans:Provide flexible repayment options including the income-driven repayment plans that can accommodate changes in your circumstances.

As such, consider leveraging this flexibility when planning for repayment so that you can:

Successfully repay your federal student loans

Achieve your professional, financial and personal goals more quickly

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For more information …

Contact your loan servicer(s)

Online resources: Federal student loans: StudentAid.gov

Federal student loan repayment: StudentLoans.gov

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Opportunities tolearn more …

Planning for Student Loan Repayment

Exploring the Student Loan Repayment Plans

Understanding the Income-Driven Repayment Plans

Estimating Your Monthly Student Loan Payments

Taking Stock of Your Student Loan Portfolio

Developing Your Student Loan Repayment Timeline

Choosing Your Student Loan Payment Plan

Understanding Student Loan Consolidation

Public Service Loan Forgiveness

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Check out all the loan repayment modules:

Be strategic:Take Charge ofLoan Repayment!

Jeffrey HansonEducation Services

Tulane University