Student Loans. Paying for college without taking out loans is ideal, but sometimes you need a loan to cover all the costs.

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1 student loans 1 Student Loans Paying for college without taking out loans is ideal, but sometimes you need a loan to cover all the costs. At CAPlus, we recommend the following student loan resources (in this order) if needed to further finance the cost of attendance. Stafford subsidized loan Stafford unsubsidized loan Private loans Parent PLUS loan All but the private loans are available through the financial aid office at the college, which is where you should start the process. The flowchart on the following shows how student loan decisions fit into the basic college application and financial aid process. Note: even if we did not recommend that you complete a FAFSA during the application process, it might be required if loans are needed to supplement the financial aid package. The following table outlines some of the most important considerations of the various loan programs available.

2 student loans 2 Loan name Stafford subsidized Overview Loan to student No co-signer required Must complete FAFSA Need-based Deferred payment on principle and interest Borrowing limits Stafford unsubsidized Loan to student No co-signer required Must complete FAFSA Open to anyone (not need-based) Deferred payment on principle Interest accrues throughout Borrowing limits Perkins loan Loan to student No co-signer required Must complete FAFSA Need-based Deferred payment on principle and interest Borrowing limits Parent PLUS loan Loan to parents Open to anyone (not need-based) No present borrowing limit Deferred payment on principle Interest accrues throughout

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4 student loans 4 Apply to Selected Schools Are you likely to be eligible for Need Based aid? Yes Complete FAFSA Have CAPlus Review FAFSA to avoid costly errors No Review College Financial Aid Package Submit FAFSA to Selected Schools Discuss with CAPlus to determine Appeal strategy Complete Appeals Process and Review Amended Offers Select School Are Supplemental Loans needed? Yes Complete FAFSA Have CAPlus Review FAFSA to avoid costly errors No Done! Apply for Student Loans Submit FAFSA to Selected Schools

5 student loans 5 Student Loan Overview Specific information on private loans can also be found by phone or online at most lending institutions. A recent survey of private loan options includes the following: Sallie Mae salliemae.com Discover discoverstudentloans.com Citibank studentloan.com Wells Fargo wellsfargo.com/student * Starting interest rates are primarily determined by the credit score of the applicant. Of these lenders, only Wells Fargo offers the loans to the parents and both variable and fixed-rate loans. All others are variable rate loans in the name of the student with a parent listed as a co-signer. The parent loan repayment begins 30 days after the last disbursement of the loan; student loans are automatically deferred (with interest accruing) until six months after graduation (or after withdrawing from college or going part-time). Some of the incentives that lenders offer include a discount on the interest rate when the loan goes into repayment for setting up automatic electronic transfers, no origination fees, no pre-payment penalties, and a 15-year repayment plan. Lenders may also require a minimum loan amount of $1,000 or adjust the variable rate quarterly (or monthly). Check with your potential lenders to determine what (if any) of these will be true for you. Student Loan Repayment Student loan repayment options are available to help college graduates ease their financial burden each month. This is especially true if you're struggling to find a job after graduation.

6 student loans 6 Loan Repayment Timeline For most federal student loans, the repayment timeline starts six to nine months after you graduate, leave school, or fall below half-time enrollment status. Essentially, this is a grace period that you are granted with all federal loan programs. You should be aware that you have options when it comes to repaying the loan. Loan Repayment Counseling Upon graduation you should receive a loan repayment counseling session which should help you to understand your financial obligations and avoid default on your student loan. Unlike a car loan or a mortgage, a student loan is an unsecured loan made to you. This means the government cannot take back the degree that you may have earned. Repayment of Direct Student Loans The direct student loan programs provided by the Department of Education offer former students a total of four different repayment plans including: Standard Repayment Plan - fixed monthly payments of at least $50. Depending on the loan amount, the repayment term is up to 10 years. Extended Repayment Plan - fixed monthly payments of at least $50. Depending on the loan amount, the repayment term is anywhere from 12 to 30 years. Graduated Repayment Plan - monthly payments start low, and then gradually increase over time. Depending on the loan amount, the repayment term is anywhere from 12 to 30 years. Monthly payments are "capped" at 1.5 times what your monthly payment would have been under the Standard plan. Income Contingent Repayment Plan - monthly payments are based on family size and your family's annual income. If your income goes up, then so do your monthly student loan payments. If the calculated monthly payments result in an outstanding loan balance after 25 years, then the remainder of the student loan is forgiven.

7 student loans 7 Repayment of Federal Family Education Loans (FFEL) FFEL student loans, such as Stafford loans, are repaid to a private lending institution. This means each lending institution can have slight variations on the information presented below. That being said, the FFEL program offers four repayment plans: Standard Repayment Plan and Graduated Repayment Plan - the terms of these two plans are identical to those mentioned above for Direct student loans. Income Sensitive Repayment Plan - the monthly payments are based on annual income under this plan. If your income goes up, then so does your monthly loan payment. Extended Repayment Plan - this plan is only available to FFEL borrowers that received aid in excess of $30,000, and obtained their first loan before October Under this plan, the repayment schedule is increased up to 25 years. Additional Student Loan Repayment Options In addition to the traditional student loan repayment plans listed above, there are other repayment options that are available to everyone, or under certain conditions: Student Loan Consolidation - if you would like to manage just one loan, and perhaps even get a better interest rate, then you might want to consider consolidating your student loan. Loan Discharge or Forgiveness Programs - in the event of a permanent disability or the passing of the borrower, it is likely that the student loan will be discharged or forgiven. Teachers or childcare providers working in certain areas of the country may also be eligible for student loan discharge or forgiveness. Loan Deferment - if you are faced with unemployment or another economic hardship, then you might be eligible for a student loan deferment. A deferment allows you to stop your monthly payments on a loan until the deferment period is over.

8 student loans 8 Failure to Repay a Student Loan If you do not abide by the repayment schedule for your student loan over a long enough period of time, then you run the risk of being in default on your loan. Under these conditions, the lender and the federal government have a right to take action against you to collect the money owed on your student loans. The actions that can be taken against you include: Financial Penalties - the lending institution can bring a lawsuit against you demanding payment. You can also be fined, or assessed, late payment fees. Forced Repayment - if you are working, the government can take actions to have the loaned money taken directly from your paycheck. This is sometimes referred to as garnishing wages. They also have a right to withhold any income tax refunds, and apply that money towards your student loan. Credit Reporting - notification can be sent to credit reporting agencies, which will affect your credit rating and / or credit score. A poor credit rating can make securing future loans, such as a mortgage, more difficult. Ineligibility for Student Aid - in the event that you ever want to go back to school, you may no longer be eligible for a student loan. Student Loan Deferment There are several situations that allow current, and former, students to qualify for student loan deferment. These deferment options will vary depending on the kind of loans that are outstanding as well as the borrower's financial and workplace status. But let's first answer the question: What is a student loan deferment? A deferment means that no payments need to be made on a student loan during the approved deferment period. The payments can be deferred until a later date. In the case of Subsidized Stafford Loans, interest charges will not accrue during

9 student loans 9 the deferment. This means that the size of the loan will not grow due to interest charges, as long as the deferment is in effect. Types of Student Loan Deferments There are a total of five types, or categories, of student loan deferments that we're going to discuss. The types of deferments listed below apply to Federal Stafford loans, Supplemental Loans, PLUS, and consolidated student loans. Each of these has its own set of rules, and will be explained in more detail in subsequent sections: Education Deferments - this type of deferment has to do with a student's enrollment status, and is sometimes referred to as an in-school deferment. Economic Deferment - generally dealing with specific types of economic hardships or unemployment. Disability Deferment - a student loan deferment program that applies to disabled students. Family Related Deferments - a loan deferment program that applies to mothers re-entering the workforce, or those on parental leave from work. Public Service Deferment - a student loan deferment program that applies to students that are in the Armed Forces, Peace Corps, volunteers, or in public health service. Education Deferments As long as the student borrower is attending school at least half-time, as defined by the school itself, then payments on the loan can be deferred until after the student ceases to be enrolled half-time. In fact, most loan payments will resume six months after halftime enrollment ceases. An in-school deferment form may be needed to verify enrollment. If the school is a member of the National Clearinghouse, then the enrollment data is kept electronically and may be sent to the lender through electronic transmission.

10 student loans 10 To qualify for an in-school student loan deferment: You must have an outstanding Federal Stafford, Supplemental, PLUS, or consolidation loan. Your college or university must certify your enrollment as a full-time or parttime student. Economic Deferment Economic deferments generally fall into one of two categories: economic hardships and unemployment deferments. For the student borrower to qualify, the candidate must demonstrate need through a statement of annual earnings. This statement will indicate income is below certain wage guidelines established by the Bureau of Labor Statistics. Economic Hardship Deferment To qualify for an Economic Hardship Deferment, the student must meet one of the following criteria: Have been granted an Economic Hardship Deferment under the Federal Direct or Federal Perkins Loan programs. Receiving public assistance payments. Working at least 30 hours per week, and have federal education loan payments that equal or exceed 20% of monthly income. Also, when subtracting federal student loan payments, monthly income must fall at, or below, 220% of the minimum wage or the poverty level, whichever is greater. Working at least 30 hours per week, and earning no more than minimum wage or below the poverty level for a family of two, whichever is greater. Working less than 30 hours per week, and earning no more than twice the minimum wage or the poverty level amount, whichever is greater. Also, when

11 student loans 11 subtracting federal student loan payments, monthly income must fall below the minimum wage or poverty level. Serving as a Peace Corps volunteer now, or sometime in the future. Unemployment Deferments Students with outstanding loans may be eligible for an unemployment loan deferment for up to three years after they halt attendance at a school. The individual trying to defer loan payments will likely be required to complete the unemployment deferment form every six months. To qualify for an Unemployment Deferment, the student needs to: Have an outstanding Federal Stafford, Supplemental, PLUS, or consolidation loan. Conscientiously seek full-time employment in the United States. Register with a private or public employment agency if there is one within 50 miles of the student's permanent or temporary address. Confirm a job search for full-time employment during the preceding six months, when applying for a continuation of an unemployment deferment. Disability / Rehabilitation Deferment A student may qualify for a loan deferment if they are receiving rehabilitation training under an approved program, if they are unable to work due to an injury or illness, or if they are caring for a dependent or spouse that is disabled. To qualify for a disability deferment, you must have an outstanding Federal Stafford, Supplemental, PLUS, or consolidation loan and in the case of disability, the student must: Be unable to work, or attend school, for at least 60 days to recover from the illness or injury.

12 student loans 12 Developed the disability after obtaining student loans. Be pregnant, and with complications. Have a spouse, or dependent, that requires at least 90 days of nursing or similar care. This care must prevent you from working full time. To qualify for a rehabilitation deferment, the student must: Be in a program that is licensed, or recognized, by a state agency as one that can provide rehabilitation training for drug / alcohol abuse and mental health services. Be in a program that provides written, individualized plans with specific end dates for services, and requires significant commitment to achieve rehabilitation. Family Leave Student Loan Deferment A parental leave, or family leave, student loan deferment is available to present and former students that are pregnant or caring for a newborn or a newly adopted child and cannot work or attend school. Parental leave deferments apply to an outstanding Federal Stafford or Supplemental Loan that was obtained before July 1, To qualify for a parental leave deferment, the student or former student needs to be: Pregnant, caring for a newborn, or a newly adopted child. Unemployed, or unable to attend school. At least a half-time student during the six months preceding the application for this type of student loan deferment. A parental leave deferment can be obtained for a maximum time limit of six months for each occurrence. There is presently no limit on the number of occurrences.

13 student loans 13 Public Service Student Loan Deferments The student loan deferment rules, as they apply to what is termed a public service deferment, are quite generous. To qualify, you must have an outstanding Federal Stafford or Supplemental loan that was obtained before July 1, 1993, or a Federal PLUS loan that was obtained before August 15, There are a total of five types of public service deferments: Military Deferment - this can be obtained while on active duty as a member of the Armed Forces, or when serving full time for a minimum of one year in the National Guard or Reserves. Public Health - a public health deferment applies while serving as a full time officer in the Commissioned Corps of the United States Public Health Service. NOAA - a NOAA deferment applies while serving actively in the National Oceanic & Atmospheric Administration (NOAA). Peace Corps - applies while serving as a volunteer under the Peace Corps Act, or in an ACTION program. Tax Exempt Organization / Volunteer - applies while serving as a volunteer for a tax exempt organization the U.S. Department of Education has determined to be comparable to a Peace Corps or ACTION program volunteer. The qualifying rules for a public service student loan deferment, as they apply to each of the five program types, are as follows: Military Deferment - documentation proving full-time active duty status in the U.S. Armed Forces. Public Health - a statement from an authorized official of the U.S. Public Health Service that certifies the individual is serving as a full-time officer in the Commissioned Corps. This needs to include beginning and end dates of service. NOAA - certification of active duty from an authorized official of the NOAA Corps.

14 student loans 14 Peace Corps - serving full-time in the Peace Corps for at least a one-year term. Tax Exempt Organization / Volunteer - employed in an organization that is tax exempt Section 501 (c) (3) of the Internal Revenue Code that involves providing services to low income persons and their communities, assisting them in eliminating poverty and the related human, social and environmental conditions. Compensation received must not exceed the federal minimum wage. Student Loan Deferment Forms As you can see, there are many different types of student loan deferment programs. If you believe that you qualify for a program that allows for deferring a student loan, then you should contact your lending agent, or loan servicing organization, for more information on the exact qualifying rules. Your lending agent, or loan servicing organization, should have the student loan deferment forms you will need to complete to be considered for each type of deferment. Student Loan Forgiveness Student loan forgiveness and service payback programs provide aid to students. These programs are designed to attract individuals to serve in certain jobs, or work in regions of the country, that are experiencing a shortage of talented workers. Student Loan Forgiveness Programs The first federal student loan forgiveness program dates back to the National Defense Student Loan Program of This was a forgiveness program aimed at increasing the enrollment of students willing to be public school teachers. Today, loan forgiveness programs have expanded to new categories of borrowers, and ideas for new programs continue to be introduced into Congress.

15 student loans 15 As previously mentioned, student loan forgiveness programs and service payback programs are really just a variation of a work-contingent student financial aid program. For example, service payback programs cover all or a portion of a student's costs if they agree to work for a specific period of time in a certain field or job after completing their education. These programs pay for a student's expenses while they are attending school. Forgiveness Versus Service Payback A loan forgiveness program will repay a percentage of a former student's educational debt, in exchange for work in a designated job. Unlike service payback programs that pay for educational expenses while the student attends college, forgiveness programs payoff a student's loan after they start working. DOE Student Loan Forgiveness Programs As part of the Higher Education Act (HEA) of 1965, and its amendments of 1998, both teachers and childcare providers were now eligible for student loan forgiveness through the Department of Education. These provisions applied to outstanding interest and principal for holders of unsubsidized Stafford loans obtained through the Federal Family Education Loan (FFEL) Program as well as the William D. Ford Federal Direct Loan Program (Direct Loan). Student Loan Forgiveness for Teachers The teacher loan forgiveness programs are offered through FFEL and Direct Loans. They provide teachers up to $5,000 in loan forgiveness after five consecutive years of full time teaching. The teaching position must be in a low income, public or private nonprofit school, which is district eligible for Elementary and Secondary Education Act (ESEA) funding. Loan Forgiveness Rules for Teachers

16 student loans 16 A low income community is defined as one in which 70% of the population earns less than 85% of the state median household income. Only new student loan borrowers as of October 1, 1998, with no outstanding loan balances, are eligible for this loan forgiveness program. Teachers must also have accrued at least five years of consecutive teaching before they are entitled to receive this money / award. Student Loan Forgiveness for Childcare Providers Eligible childcare providers must have a degree in early childhood education and work in a child care facility that meets state or local requirements, provides for children five or younger, and serves a low income community. After the second consecutive year of employment, loan forgiveness is 20% of the outstanding loan balance annually. After each of the forth and fifth years, 30% of the loan balance is forgiven. Loan Forgiveness Rules for Childcare Providers As was the case with teachers, only ex-student borrowers as of October 7, 1998 are eligible for this loan forgiveness program. If funding is not sufficient to forgive all of the eligible applicants, then student loan forgiveness will proceed on a first-come, firstserved basis. Priority will be given to borrowers receiving funding under this program in prior years. Campus Based Student Loan Forgiveness Programs The following student loan forgiveness programs are campus-based. This means the student loans originated with colleges and universities and were made to students based on demonstrated financial need. Perkins Student Loan Forgiveness Programs In addition to the federal loan forgiveness programs mentioned earlier, there are Perkins Loan forgiveness programs for ex-student borrowers who work in specific public service jobs.

17 student loans 17 These student loans have another set of forgiveness programs, which include up to 100% of the loan amounts forgiven for: Full-time teachers serving full-time elementary or secondary schools in low income areas Head Start staff persons Full-time special education teachers or qualified providers of early intervention services for the disabled Members of the Armed Forces serving hostile areas Peace Corps volunteers Full-time law enforcement or corrections officers Full-time teachers in shortage areas Full-time nurse or medical technicians Full-time employees of providers to high risk children and families in low income communities If you're planning to enter these or similar fields, you should review the details of these programs. It's a win-win situation, since your education is being paid for by the federal government, and these areas in need get the attention they deserve. Federal Student Loan Forgiveness Programs In addition to Department of Education and campus-based student loan forgiveness programs, there are some fairly large federally funded programs. These programs apply to specific groups of federal employees, or ex-students that are involved in specific occupations.

18 student loans 18 Loan Forgiveness for Military Employees The military has several loan forgiveness programs that can help students pay for college in exchange for military service. This includes ROTC scholarships, as well as: Army's College Loan Program - that will forgive one-third of approved student loans for each year of full-time duty served, up to a maximum of $65,000. Navy's Loan Repayment Program - that offers a student loan forgiveness program for up to $65,000 for full-time duty soldiers who have no prior military service, a high school diploma, and a qualified loan. Air Force College Loan Repayment Program - that offers up to $10,000 in loan forgiveness to eligible recruits. Civilian Employees Federal agencies may even use loan forgiveness in an attempt to recruit new employees. Agencies can use incentives up to $10,000 per year for up to $60,000 in payments towards student debt. In return, the employee must usually agree to work at least three years for the agency. Loan Forgiveness for Health Care Workers Medical and Health Researchers and Professionals can apply for student loan forgiveness through the National Institutes of Health, which runs several programs. The purpose of this program is to attract research persons to the NIH. In exchange for repayment of up to $70,000 of education debt, the student commits to working at least 20 hours a week for two years. The National Health Service Corps (NHSC) has both a student loan forgiveness program as well as a service payback program. The purpose of these programs is to encourage health professionals to work as primary health providers in certain areas of the country where health professionals are in short supply.

19 student loans 19 The NHSC will pay up to $50,000 in outstanding student loans in exchange for two years of service. Specifically, recipients of this loan forgiveness program need to sign a contract agreeing to provide two years of clinical service in one of the identified shortage areas. The Nurse Reinvestment Act, which was signed into law on August 1, 2002, established a service payback program that provides a scholarship to nursing students, in addition to a loan forgiveness program. Under this program, nurses must agree to work in a nursing facility for a pre-determined period of time. Loan Forgiveness for Volunteers In addition to the Peace Corps volunteer program mentioned earlier, members of AmeriCorps, the National Civilian Corps, and Volunteers in Service to America (VISTA) are eligible for education awards that can be used to repay student loans. One term of service is required to qualify for this award. The award is $4,725 for a year of full-time service. Smaller awards are available for volunteers of part-time service. Members of VISTA can choose between an education award and a lump sum stipend that accrues at the rate of $100 for each month of service. State Funded Student Loan Forgiveness Programs Recent studies indicate a greater number of state run and funded student loan forgiveness programs. That research, conducted in 2001, indicated that nearly 90% of states (43) offered either service payback programs or loan forgiveness. As is the case with the federal programs, teaching and healthcare professionals are benefiting the most from these initiatives. Tax Implications of Loan Forgiveness

20 student loans 20 Under the current tax law, the amount forgiven represents taxable income for federal income tax purposes. Taxable income should be recognized in the year the student loan was written off. There are some exceptions to this rule. For example, if a student loan was forgiven by a tax-exempt educational institution, then the forgiveness is excluded from gross income. This is true if the student is not employed by the educational institution or if the loan forgiveness was based on an agreement by the former student to work for a specific number of years in certain professions. Chapter 5 of IRS Publication 970 contains additional information on the tax implications of loan forgiveness. Student Loan Bankruptcy Options Student loans and bankruptcy filings used to be connected by a relatively simple process. Of course, nothing is simple when it comes to bankruptcy. The recent rise of bankruptcy filings has led to some very significant impacts on student loan forgiveness. Student Loan Discharge As a backdrop, student loans are considered unsecured loans, meaning there is no collateral, such as a car, which can be repossessed as payment toward the loan. You cannot unlearn what you were taught, and no one is taking your college diploma from you. But with the rising rate of bankruptcies here in the United States, it was too "easy" to simply declare bankruptcy and have your student loans discharged. Bankruptcy Law Changes In 1998, there was a significant change to the bankruptcy law under Chapter 7 and Chapter 13, which made it difficult to have your student loan discharged. The change meant that even if you declare bankruptcy, you may still have to pay back all outstanding student loans. Recognizing that this policy could create tremendous financial burdens on some individuals or families, a three part test was

21 student loans 21 established to determine hardship. Bankruptcy Hardship Rules for Student Loans In the normal course of bankruptcy, student loans will not be discharged or forgiven. However, after the initial bankruptcy proceedings are over, an adversary proceeding can take place in bankruptcy court to decide if you meet all three of the hardship rules or tests. In this adversary proceeding, the student loan creditors will be present to challenge your hardship request. You must be able to satisfy all three of the following tests in the eyes of the court: If you were forced to repay the student loan, then you will not be able to maintain a minimal standard of living. You are able to present evidence that this financial hardship will continue for a significant period of time over the remaining term of the student loan. A good faith effort was made to repay your student loan before you filed for bankruptcy. Effectively, this means you have been faithfully repaying your college loan for a minimum of five years. If your loan is discharged, then you will not have to repay the remainder of the money owed these creditors. However, you may have trouble getting a student loan of any kind in the future. Student Loan Payment Relief In addition to bankruptcy, there are actually five additional options you have when seeking payment relief from your student loans. These options include: Deferring Payment on a Student Loan Student Loan Forbearance Student Loan Forgiveness Flexible Loan Repayment Options

22 student loans 22 Student Loan Consolidation In the following paragraphs, we're going to discuss each of these options, which allow you to pay back your student loan without going through bankruptcy. They also become viable options when you do not meet the student loan hardship rules mentioned earlier. Deferring a Student Loan The first option you have is called deferment. We've talked about this at length earlier in this Guide. Deferment is suspending, or deferring, the student loan payments for specified periods of time, and under specific conditions. For example, you may be eligible for student loan deferment due to unemployment, disability, or military service. Student Loan Forbearance Instead of declaring bankruptcy, you also have an option known as forbearance. Student loan forbearance is the temporary postponement of payments, or a reduction in payments, for a specific period of time. This arrangement is worked out with the lender, or creditor, and is in-effect until the financial difficulty is over. Student Loan Forgiveness Perhaps the most desirable of all alternatives to bankruptcy would be to have your student loan forgiven or discharged. A loan forgiveness program will repay a percentage of a former student's educational debt in exchange for work in a designated job. Unlike service payback programs, which pay for educational expenses while the student attends college, forgiveness programs pay off a student's loan after they start working.

23 student loans 23 Student Loan Repayment Options The fourth option you have involves taking advantage of one of several loan repayment programs. These options include graduated payment options and even income sensitive payment options. These arrangements are covered more thoroughly in our article: Student Loan Repayment. These plans allow you to increase your monthly payments over time, or have them automatically adjusted as your family income increases or decreases. Student Loan Consolidation Finally you may be able to find relief from your high monthly student loan payments by consolidating your student loans. As soon as a student graduates, or drops below half time enrollment status, they are eligible to consolidate any Direct Loans or FFEL Loans that are outstanding. If you've been delinquent in paying back your federal student loans, then you may not be immediately eligible for loan consolidation. If that is the case, then you need to contact the holder of the loan to find out what corrective actions you can take before becoming eligible once again. Federal Student Aid Ombudsman If you are thinking about declaring bankruptcy, and your student loans are a big factor in your decision, the Department of Education has established an ombudsman to help. This office has checklists and tools that can help you figure out the best approach to deal with your financial crisis. Think of the Federal Student Aid Ombudsman as a consumer advocate for student loans. For more information about this service, just visit the FSA Ombudsman website.