College Numbers Planning

Transcription

1 College Numbers Planning

2 Today s Plan What s new in financial aid and student borrowing What s the deal with student loan interest rates How to use consolidation (and how not to) Comparing repayment options Income-driven repayment in depth Advising married student loan borrowers Public Service Loan Forgiveness Eye on policy Q&A

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4 What Colleges are Looking At Free Application for Federal Student Aid (FAFSA) CSS/Financial Aid Profile

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6 How much of what families have do colleges want? Parents making about $60,000 often pay more than 20 percent of earnings. A family making between $100,000 and $200,000 is often paying nearly half of each additional dollar it earns. Sources: (Edvisors, New York Times 2014)

7 How much do colleges want? 5 percent of the value of parents assets Plus 20 to 25 percent of the students assets Some take into account home equity But the federal formula doesn t

8 What do families actually pay?

9 The wealthiest colleges are the most generous: Princeton, Harvard, Yale, Columbia and Stanford give need-based aid to families making more than $200,000.

10 Consumer Tools Net-price calculators on college sites College Navigator Obama administration s financial aid shopping sheet

11 A college degree increases an individual s potential for earnings

12 20 million americans go to college each year 12 million borrow annually

13 1 Trillion dollars in outstanding student loan debt: $1,000,000,000,000 Roughly $864 billion is outstanding federal student loan debt $150 billion is outstanding private student loan debt (Source: Consumer Finance Protection Bureau).

14 37 million student loan borrowers

15 How much do individuals owe?

16 What does all this borrowing cost? Interest rates are a moving target 16

17 Before 2006, federal loans had variable interest rates Since 2006, new federal loans are at fixed interest rates set by Congress Beginning July 1, 2013, federal student loan interest rates are tied to the market Private student loan interest rates are based on creditworthiness and are nearly always more expensive

18 Rates for subsidized loans and unsubsidized loans to undergraduate students are: 10-year Treasury rate plus 2.05 percentage points (presently 3.86 percent), capped at 8.25 percent. Rates for unsubsidized loans to graduate students are: 10-year Treasury rate plus 3.60 percentage points (presently 5.41 percent), capped at 9.50 percent Rates for GradPLUS and Parent PLUS loans are: 10-year Treasury rate plus 4.60 percentage points, (presently 6.41 percent) capped at percent

19 Student loan case evaluation The ultimate checklist

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21 Analyze your client s circumstances Inventory the federal loans Inventory the private loans Identify the needs of your client Evaluating where his or her student loans fit into the bigger financial picture Establishing an affordable monthly payment Minimizing the total cost of debt over time Restoring eligibility for federal student aid Improving credit record Determine and explain your client s options Discharge and cancellation Consolidation Repayment options Curing default (if necessary) Potential for forgiveness Tax considerations Develop an appropriate strategy and establish next steps

22 Evaluating consolidation It a int what it used ta be

23 Consolidation Federal consolidation loans have fixed interest rates based on the weighted average of the underlying loans

24 Consolidation pros and cons Access to Public Service Loan Forgiveness Access to Pay As You Earn Access to a longer repayment period and lower monthly payments Group loans together with one lender Perkins cancellation lost Borrower Incentives lost Not good, but not widely applicable. Limited options for private loan consolidation Good! Meh.

25 Comparing repayment plans Federal Student Loans 25

26 Federal loans offer (too) many repayment options Standard Graduated Extended Income- Sensitive Alternative Income- Contingent Income-Based Pay As You Earn

27 Who should consider income-driven plans? Government and nonprofit employees Because they might benefit from Public Service Loan Forgiveness High-debt graduate and professional borrowers Borrowers with low income as compared to debt Because they might benefit from income driven forgiveness

28 Income-driven repayment Income- Contingent Repayment Income- Based Repayment Pay As You Earn

29 Adjusted Gross Income Family Size Federal Poverty Rate Partial Financial Hardship?

30 Income-driven repayment advantages Affordable monthly payments Two possible paths to forgiveness: Possibility of forgiveness that is NOT tied to employment Occurs after making payments based on income for years (depending on the income driven repayment plan) IF a balance still remains at that point Possibility of forgiveness that IS tied to employment (Public Service Loan Forgiveness) Occurs after making 120 QUALIFYING payments over at least 10 years IF balance still remains at that point Interest subsidy and capitalization rules

31 Income-driven repayment disadvantages Negative amortization means lots of interest adds up Payments are based on income reported on tax returns so married people must sometimes trade off tax benefits for student loan benefits Possibility of substantial tax liability upon forgiveness Paperwork like you ve never seen

32 Married student loan borrowers can choose to either: File taxes jointly and have monthly payment based on joint AGI and combined student debt, or File taxes separately and have monthly payment based on individual AGI and individual student debt

33 Hunter and Juan-Carlos Gomez Juan-Carlos earns $45,000 as a police officer. His wife Hunter earns $60,000 as a veterinarian. Juan-Carlos and Hunter have no children. Juan-Carlos owes $25,000 on his eligible federal student loans Hunter owes $75,000 on her loans (Hunter owes 75 percent of the total marital student loan debt).

34 Comparing Taxation Tax Filing Status Adjusted Gross Income Annual Tax Due Combined Annual Tax Due Jointly $102,500 $14,439 $14,439 Separately Hers: $60,000 His: $45,000 Hers: $9,401 His: $5,660 $15,061 Difference Filing separately costs $622 more annually in tax payment

35 Comparing IBR Payments Tax Filing Status Jointly Monthly IBR Payment Combined Monthly IBR Payment Hers: $743 (75% of total) His: $248 (25% of total) $991 $11,892 Combined Annual IBR Payment Separately Hers: $459 His: $272 $731 $8,772 Difference Filing jointly requires $260 more monthly in student loan payments Filing jointly requires $3,120 more annually in student loan payments

36 Hunter & Juan-Carlos They determine that filing separately costs $622 more annually in tax payment than filing jointly. Also, they find that filing jointly requires $260 more monthly in student loan payments for a total of $3,120 more annually in student loan payments. They decide to file separately this year because they need to build a small cash reserve in case of emergencies and they plan to reevaluate the pros and cons each year.

37 Although AGI is driven by federal tax return, family size is not.

38 PAYE more generous than IBR Income-Based Repayment But PAYE is only for new borrowers : Monthly payments 15% of discretionary income 25 year forgiveness (or PSLF after 120 qualifying payments) No balance on a federal loan on October 1, 2007, AND Pay Borrowed As You Earn a federal loan on or after October 1, 2011 Monthly payments 10% of discretionary income 20 year forgiveness (or PSLF after 120 qualifying payments) And PAYE is only available for Direct Loans

39 Recent Law Graduate Tatiana borrows $100,000 to finance her legal education. She borrows $61,500 in unsubsidized Stafford loans at a 6.8% interest rate. She also borrows $38,500 in GradPLUS loans at a 7.9%. Imagine that following graduation, Tatiana works in private practice in a mid-sized law firm. Her starting salary is $60,000 and she gets 4% annual salary increases. 39

40 Year Total paid Forgiven AGI 54,000 63,172 72,589 88, ,729 Income driven forgiveness is taxable as income! 10-year 1,174 1,174 1, , year ,583 0 IBR , ,362 18,746 (tax) PAYE ,972 37,528 (tax) 64, ,743

41 What about people who want to save the world? Even if it means forgoing income

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43 Public Service Loan Forgiveness is earned by making payments 120 qualifying payments

44 Public Service Loan Forgiveness: 1. Make the right kind of payments, 2. on the right kind of loans, 3. while working in the right kind of job. 4. Repeat 120 times. 5. Prove it.

45 Tatiana in a Public Service Career Repayment Plan Standard 10-year term Monthly Payment (Year One) Years in Repayment Total Payments Not $ $140,881 N/A Total Forgiven taxable! Consolidation 30-year term Income-Based Repayment $ $245,583 N/A $ $68,438 $107,812 Pay As You Earn $ $45,625 $129,375 AGI $54,000; 3% annual increases; family size = 1

46 What s next?

47 askheatherjarvis.com