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

Joe Braxton- Senior Default Aversion Consultant

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

Taking inventory

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

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

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

Overview of repayment plans

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*

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

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

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

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

Borrower eligibility

Criteria IBR ICR Pay As You Earn

Who qualifies FFELP and Direct Loan borrowers who have a partial financial hardship

Direct Loan Borrowers Direct Loan “New” borrowers who have a partial financial hardship

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.

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

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

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.

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.

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

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.

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

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

Income driven plans example

ICR IBR PAYE

Initial Payment $397.17 $228.06 $152.04

Final Payment $535.23 $575.40 $492.19

Time in Repayment 13 years, 8 months

20 years, 2 months

20 years

Total Paid $78,444.28 $101,673.34 $70,709.53

Forgiveness $0 $0 $44,979.06

10-year Standard Extended & Consolidation

Payment $575.40 $347.04

Time in Repayment 10 years 25 years

Total Paid $69,037.44 $104,080.83

For comparison:

Source: 2012 FSA Conference

Income driven plans example: With forgiveness

ICR IBR Pay As You Earn

Time in Repayment

10 years 10 years 10 years

Total Paid $55,952.61 $37,222.34 $24,814.89

PSLF Amount $19,858.58 $45,711.82 $57,189.97

With PSLF (forgiveness after 10 years):

Source: Department of Education; 2012 FSA Conference

Comparison ICR IBR PAYELoan program eligibility

FDLP FFELP and FDLP FDLP

Consolidation loans that include a Direct Parent Plus loan

Eligible Not eligible Not eligible

Monthly payment Usually higher than IBR

Usually lower than ICR

Usually lower than IBR and ICR

Monthly payments may be less than accrued interest

Yes Yes Yes

Interest subsidy (if monthly payment doesn’t cover interest)

No interest subsidy

3 years of interest subsidy

3 years of interest subsidy

ICR, IBR and PAYE Comparisons

The basics of consolidation

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

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

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

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

• 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

Loan consolidation calculator and application

Deferment, forbearance, discharge, and forgiveness options

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

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

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

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

Options after default

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

• Acceleration • Loss of Title IV aid eligibility• Collection costs, attorney’s fees• Negative credit reporting• Loss of deferment, forbearance, and traditional

repayment plans

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!

Consequences of default

• 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

How can you resolve a defaulted student loan?

• 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

Resources

© 2014 Texas Guaranteed Student Loan CorporationTo order additional copies, or to request permission to reproduce any of the information provided, please call TG Communications at (800) 252-9743.