The Oh Crap! Moment. Repayment Strategies for Borrowers on the Edge by Access Group, Inc. All rights reserved.

Transcription

1 The Oh Crap! Moment Repayment Strategies for Borrowers on the Edge 2008 by Access Group, Inc. All rights reserved.

2 Student Loan Repayment Flexible, But Complex!

3 Managing Loan Repayment An Example from the Class of 2009 Graduates could have federal student loans with: Different terms and conditions Subsidized and Unsubsidized Stafford Loans PLUS Loans Perkins Loans Consolidation Loans Multiple loan holders (including both FFELP and Direct) Lender that has exited FFEL program Differing variable and fixed interest rate(s), e.g., : Stafford has variable rate and beyond: Staffords have fixed rate at 6.8% (or 6.0% in case of undergraduates with subsidized Staffords from )

4 Managing Loan Repayment An Example from the Class of 2009, cont. Graduates could have federal student loans with: Different grace periods (or none at all if they consolidated the loans prior to 7/1/2006) Choice of five different repayment plans on Stafford, PLUS, and Consolidation loans Possibility to postpone repayment using deferment or forbearance or to prepay Option to consolidate some or all of their loans Potential for loan forgiveness at some point if working in eligible area, but may need to consolidate in Direct

5 Challenges Facing Borrowers What information will borrowers need to make the best choices regarding repayment options? Where can they go to get the information? Do tools exist that can help simplify the available options and help them choose a payment plan? What role will schools play? What role will lenders/guarantors play? What role will the Department of Education play? Will borrowers pay more than intended?

6 Strategies for Successfully Managing Loan Repayment

7 To successfully manage loan repayment, borrowers should... Know how much they have to repay and to whom Understand the terms and conditions of their loans Define their short- and long-term financial goals Develop an affordable budget plan and estimate how much they can afford to pay each month on their debt Keep good financial records Select the repayment plan that best achieves their goals given what they can afford to pay each month Take advantage of loan forgiveness programs when they qualify for them

8 Repayment Realities How much will you have to repay? Who must you repay?

9 How much have you borrowed and what will it cost to repay? Student Loan Debt Total Student Loan Debt* Estimated Monthly Loan Payment $ $ *The Total Student Loan Debt should include both the principal amount borrowed while in school AND any accrued interest that was not paid while in school that accrued interest will be capitalized (added to the loan principal) prior to the loans entering repayment

10 Sample Loan Repayment Debt $10,000 $25,000 $30,000 $40,000 $50,000 $60,000 $65,000 $70, % Interest Rate Monthly Payment $115 $288 $345 $460 $575 $690 $748 $806 Total Paid $13,810 $34,524 $41,429 $55,239 $69,048 $82,858 $89,763 $96,667 Assumptions: - Standard repayment plan - 10-year repayment period - No payment incentives 8.5% Interest Rate Monthly Payment $124 $310 $372 $496 $620 $744 $806 $868 Total Paid $14,878 $37,196 $44,635 $59,513 $74,391 $89,270 $96,709 $104,148

11 Sample Loan Repayment Total Debt $60,000 $75,000 $100,000 $125,000 $150,000 $175,000 $200,000 $225, % Interest Rate Monthly Payment $690 $863 $1,151 $1,439 $1,726 $2,014 $2,302 $2,589 Total Paid $82,858 $103,572 $138,096 $172,620 $207,145 $241,669 $276,193 $310,717 $744 $930 $1,240 $1,550 $1,860 $2,170 $2,480 $2,790 $250,000 $2,877 $345,241 $3,100 Assumptions: - 10-year repayment period - No payment incentives 8.5% Interest Rate Monthly Payment Total Paid $89,270 $111,587 $148,783 $185,979 $223,174 $260,370 $297,566 $334,761 $371,957

12 Who must you repay? Creating a Detailed Listing of All Loans You must repay your current loan holder/servicer Loan Type/ Account # Stafford PLUS Name: Address: Phone Number: Website: Name: Address: Phone Number: Website: Loan Holder Loan Servicer Name: Address: Phone Number: Website: Name: Address: Phone Number: Website: Information about the current loan holder/servicer of your Title IV federal student loans is stored in the NSLDS at:

13 Federal Student Loan Database National Student Loan Data System (NSLDS) Information about your Federal Stafford, Federal PLUS, Federal Consolidation and Federal Perkins Loans stored in the NSLDS Toll-free telephone 800-4FED - AID Web site

14 Federal Student Loan Repayment Options

15 Repayment Plans Federal Family Education Loan Program (FFELP) Standard (Fixed) Repayment Graduated Repayment Extended Repayment Income-Sensitive Repayment Income-Based Repayment (effective 7/1/2009) Choice of a repayment plan may depend on your eligibility for that plan. Once you choose a plan, you can change to a different plan once a year provided you qualify for that plan.

16 Repayment Plans Comparison of Terms Options Standard Graduated Extended Income Sensitive Income Based (IBR) Fixed Tiered Payment Structure Fixed or tiered Adjusted annually based on: - Total gross income Adjusted annually based on: - Household AGI - Household size - Poverty guideline - State residence Maximum Payment Period 10 years 10 years 25 years 15 years 25 years Additional Features - Highest initial payment - Lowest total interest - No negative amortization - Interest only payments initially - Payments increase incrementally - No negative amortization - Subject to 3 times rule - Lowest initial payment without considering income - No negative amortization - To qualify in FFELP: - FFELP debt must be > $30,000 - New FFELP borrower 10/7/98 - Monthly payments can t be more than three times greater than any other payment ( 3 times rule ) - No negative amortization - Payment is 15% of disposable income if experiencing partial financial hardship - Eligibility/payment amount reevaluated annually - Negative amortization allowed

17 Standard Repayment Monthly payment is fixed the same minimum payment is due each month (monthly payment typically changes only if loan has a variable interest rate and that interest rate changes) Maximum repayment period is 10 years on Federal Stafford/Federal PLUS Loans Results in lowest amount of total interest paid Requires the highest initial monthly payment Loan holder/servicer will place borrowers on this repayment plan unless they choose one of the other available repayment plans and notify their loan holder/servicer of that choice

18 Graduated Repayment Payments start low, then increase in one or more increments over time Maximum repayment period is 10 years on Federal Stafford/Federal PLUS Loans Results in higher cost of interest paid than under Standard Plan Lenders must offer at least one graduated repayment plan; some offer more than one graduated option

19 Extended Repayment Fixed or graduated (tiered) payments over 25 year repayment period Lower monthly payment than Standard or Graduated Plans with 10-year repayment schedules More total interest paid Available only to those who: First borrowed a FFELP loan on or after 10/7/98, or Have no outstanding balance on a FFELP loan that was borrowed prior to 10/7/98 Must have more than $30,000 in FFELP debt

20 Income-Sensitive Repayment Eligibility based on your expected total gross monthly income received from all sources and loan amount Payment must at least equal interest charges Reviewed and adjusted annually in case of any income changes Maximum repayment period is 15 years on Federal Stafford/Federal PLUS Loans Results in lower monthly payment, but higher cost of interest paid

21 Income-Based Repayment (IBR) Effective July 1, 2009, for repayment of Stafford, Grad PLUS and Consolidation Loans if experiencing partial financial hardship (not available for repayment of Parent PLUS or Consolidation Loans that paid off a Parent PLUS) Partial Financial Hardship exists when minimum amount due using IBR is less than the amount that would be required using 10- year Standard Plan Monthly payment is based on: Household AGI Household size HHS Poverty Guideline State of residence

22 Income-Based Repayment More Details Calculated payment is 15% of disposable income Disposable income is portion of household AGI that exceeds 150% of the HHS Poverty Guideline Monthly payment can be less than accrued interest (it allows for negative amortization) Unpaid interest that accrues on Subsidized Stafford debt will be subsidized for up to 3 years during IBR Repayment period using IBR can extend beyond 10 years regardless of the amount of your eligible debt Any outstanding eligible loan balance is cancelled after 25 years of being economically challenged

23 IBR Approx. Maximum AGI Needed to Qualify for IBR at Specified Debt (2008 Poverty Guidelines) Debt $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 AGI $20,203 $24,806 $29,410 $34,013 $38,616 $43,219 $47,822 $52,425 $57,028 $61,632 $66,235 $70,838 Debt $65,000 $70,000 $75,000 $80,000 $85,000 $90,000 $95,000 $100,000 $105,000 $110,000 $115,000 $120,000 $125,000 Assumptions: - Interest rate = 6.8% - Household size of 1 residing in 48 contiguous states AGI $75,441 $80,044 $84,648 $89,251 $93,854 $98,457 $103,061 $107,664 $112,267 $116,870 $121,473 $126,077 $130,680

24 IBR Approx. Maximum AGI Needed to Qualify for IBR at Specified Debt (2008 Poverty Guidelines) Debt $130,000 $135,000 $140,000 $145,000 $150,000 $155,000 $160,000 $165,000 $170,000 $175,000 AGI $135,283 $139,886 $144,489 $149,093 $153,696 $158,299 $162,902 $167,506 $172,109 $176,712 Debt $180,000 $185,000 $190,000 $195,000 $200,000 $205,000 $210,000 $215,000 $220,000 $225,000 AGI $181,315 $185,918 $190,522 $195,125 $199,728 $204,331 $208,934 $213,538 $218,141 $222,744 Assumptions: - Interest rate = 6.8% - Household size of 1 residing in 48 contiguous states

25 Portion of AGI Available for Loan Payment in IBR Total AGI Disposable Income Portion of AGI Available for Other Expenses Portion of AGI Available for IBR Loan Payment (15% of remaining AGI) Portion of AGI Needed to Cover Basic Needs (150% of poverty guideline) Calculators are available at: Finaid.Org/calculators and IBRinfo.org

26 For more information on IBR U.S. Department of Education, 34 CFR Parts 674, 682 and 685; Final Rule, October 23, 2008 Schrag, Philip G., "Federal Student Loan Repayment Assistance for Public Interest Lawyers and other Employees of Governments and Nonprofit Organizations". Hofstra Law Review, Vol. 36, Fall Equal Justice Works at: EqualJusticeWorks.org Calculators available at: FinAid.Org/calculators, IBRinfo.org Project on Student Debt has created a special Website specifically about IBR at: IBRinfo.org

27 Comparing Payment Plans $20,000 Stafford Loan Balance Options Standard Graduated Extended IBR Monthly Payment Maximum Payment Period Total Paid Assumptions: $ years $27,619 $113 (2 yrs) $271 (8 yrs) 10 years $28,706 Not eligible $180 (1 st yr) 11.8 years $29, % fixed interest rate - No payment incentives - For IBR Payment: - Household AGI = $30,000 in year 1, then increases by 3% annually Poverty Guideline for household size of 1 = $10,400. $230 (10 th yr).

28 Comparing Payment Plans $100,000 Stafford Loan Balance Options Standard Graduated Extended IBR Monthly Payment $1,151 $567 (2 yrs) $1,353 (8 yrs) $694 $555 (1 st yr). $703 (9 th yr). Maximum Payment Period Total Paid Assumptions: 10 years $138, years $143, years $208, years $215, % fixed interest rate - No payment incentives - For IBR Payment: - Household AGI = $60,000 in year 1, then increases by 3% annually Poverty Guideline for household size of 1 = $10,400

29 Loan Repayment Calculators Access Group offers online calculators at: AccessGroup.Org/calculators Loan Repayment both simple and advanced Compare Monthly Payments provides a comparison of monthly payments using Standard Repayment and Extended repayment IBR calculators available at: FinAid.Org/calculators IBRinfo.org

30 Choosing a Repayment Plan

31 Choosing A Repayment Plan Steps to consider Define financial goals Develop an affordable budget plan This will help determine how much they can afford to pay each month on their debt View debt as a portfolio Evaluate trade-offs given goals and available funds Select the loan repayment plan that best meets individual needs

32 Setting Goals Sample Questions How quickly do they want to be debt-free? What do they need to buy as soon as they graduate? What kind of lifestyle do they want? What are the needs of their family? How long do they want to work? When do they want to retire? What kind of lifestyle do they want in retirement? How much money will they need to retire?

33 Developing a Budget Plan How much can they afford to pay each month? Quantify monthly earnings and other available financial resources Estimate monthly expenses Include monthly student loan payment Include investment/savings contributions Do the math subtract expenses from earnings to determine if there is a surplus or a deficit If there is a surplus, more can be allocated to debt repayment, to investment/savings, and/or to lifestyle If a deficit occurs, then what?

34 Will there be a deficit? Case of the JD Class of 2007 $60,000 Stafford Loan Debt $25,000 Auto Loan $250,000 Mortgage RED indicates a deficit is likely 10 year loan period 25 year loan period 5 year loan period 30 year loan period Payment $690 Payment $416 Payment $483 Payment $1, year plan 25 year plan Employer Type Median Salary* Ratio Ratio Ratio Ratio Total Ratio Total Ratio Private Practice $108,500 8% 5% 5% Business $69,100 12% 7% 8% Government $50,000 17% 10% 12% Judicial Clerkship $48,000 17% 10% 12% Academic $45,000 18% 11% 13% Public Interest $42,000 20% 12% 14% All Employer Types $65,750 13% 8% 9% *Salary data taken from Jobs & JD s, Class of NALP 19% 32% 30% 51% 42% 70% 44% 73% 47% 78% 50% 83% 32% 53% Fannie Mae Norm = 29% 46% 64% 66% 71% 76% 48% 28% 36%

35 Eliminating a Budget Deficit What can they do? Reduce spending on their lifestyle Is this realistic? Their lifestyle may already be bare bones Reduce their monthly investment and savings contributions Doing so may make it more difficult to achieve short-and long-term financial goals Reduce how much they pay each month on their student loans by switching to a different loan repayment plan

36 Extended Repayment Why it might be right for borrowers Provides more affordable monthly payment without having to consolidate or use IBR that requires yearly adjustments and possibility of negative amortization Reduces monthly payment on Stafford Loans with 6.8% interest rate by 40% Reduces monthly payment on PLUS Loans with 8.5% interest rate by 35% Extending repayment will increase the total amount of interest paid, but: That may not reduce the borrower s purchasing power in the long run depending on the rate of inflation And, it may make it possible to afford basic living expenses more easily

37 Extended Repayment Why it might be right for borrowers Lower monthly federal loan payments allows more cash each month for: Affording basic living expenses, something that may not be possible with the Standard 10-year fixed payment plan Paying down higher cost debt like private loans and credit card debt more quickly Saving for down payment or the purchase of a new home Investing for retirement, children s education and other long-term financial goals Borrower retains the right to make prepayments if they so choose, but extending repayment provides more flexibility financially

38 Consolidation may be right when Borrowers: Have eligible federal loans with VARIABLE interest rates and want to fix the rate on those loans Do NOT qualify for Extended Repayment or IBR but need to reduce their monthly loan payments Have multiple loan holders/servicers and want to pay their federal student loans with a single monthly payment But note: The timing of consolidation is a factor when consolidating variable rate loans if they want to minimize the final fixed rate They may have to consolidate in the Direct Program if consolidation is needed (

39 Managing Debt Balancing Trade-offs Can view debt as a portfolio that can be leveraged to achieve financial goals May choose to pay off debt as fast as possible, OR more slowly based solely on what is affordable given all other expenses, OR more slowly to maximize ability to save and/or invest for the future

40 Typical Debt Portfolio Managing Cash Flow to Repay Debt Federal Stafford Loan 6.8% Private Loan 11% Total Cash Flow Federal PLUS Loan 8.5% Credit card 15.9% Other 9%

41 Loan Repayment - $60,000 An Investment Trade-off Years 0-10 Total years in repayment Total amount owed Monthly loan payment (annual interest rate = 6.8%) Monthly investment Total end of year 10 (annual rate of return = 8%) Standard Repayment 10 $60,000 $690 $0 $0 Extended Repayment 25 $60,000 $416 $274 $43,136

42 Loan Repayment - $60,000 An Investment Trade-off Net gain Years Monthly loan payment (annual interest rate = 6.8%) Monthly investment Total end of year 25 (annual rate of return = 8%) Total paid ($690 x 300 months) Difference (benefit of Extended Repayment) Standard Repayment $0 $690 $212,536 $207,000 $5,536 $0 Extended Repayment $237,461 $207,000 $37,461 $31,925 Investment gains require financial DISCIPLINE every month! $416 $274

43 Loan Repayment - $100,000 An Investment Trade-off Years 0-10 Total years in repayment Total amount owed Monthly loan payment (annual interest rate = 6.8%) Monthly investment Total end of year 10 (annual rate of return = 8%) Standard Repayment 10 $100,000 $1,151 $0 $0 Extended Repayment 25 $100,000 $694 $457 $71,945

44 Loan Repayment - $100,000 An Investment Trade-off Net gain Years Monthly loan payment (annual interest rate = 6.8%) Monthly investment Total end of year 25 (annual rate of return = 8%) Total paid ($690 x 300 months) Difference (benefit of Extended Repayment) Standard Repayment $0 $1,151 $398,290 $345,300 $52,990 $0 Extended Repayment $434,619 $345,300 $89,319 $36,329 Investment gains require financial DISCIPLINE every month! $694 $457

45 Comparison of Plans Standard, Extended and IBR Plans Eligible Federal Loan Debt $60,000 $100,000 $150,000 Standard Repayment Fixed 6.8% for 10 yrs $690 $1,151 $1,726 Extended Repayment Fixed 6.8% for 25 yrs $416 $694 $1,041 IBR Repayment Fixed 6.8% up to 25 yrs, AGI=$60,000, Household size = 1 $555 $555 $555 Difference in first monthly payment between Extended Plan and IBR ($139) $139 $486

46 Loan Prepayment Borrowers have the right to make prepayments on their federal student loan(s) without penalty In other words, they can pay more than minimum amount required or make extra payment(s) at any time Doing so will reduce the total amount they ll pay on the loan because it saves the interest that would have accrued on the prepaid funds When prepaying on a loan, they should: Verify where prepayment should be mailed and include written explanation as to how it s to be applied Request that prepayment be applied to principal, if permitted Target prepayment at loans having highest interest rate

47 Payment Incentives Borrowers should take advantage of any payment incentives that are offered by their loan holder(s) Typical incentives include: Interest rate reduction (typically 0.25%) for making loan payments using auto-debit process They must sign up for this option before they receive any benefits This incentive not only can lower their interest rate a bit but it also can simplify the repayment process for them Interest rate and/or loan principal reductions for making a specified number of on-time payments Many lenders have stopped offering on-time payment incentives due to recent changes in the federal loan programs But they may still qualify for a benefit that was offered to them on a loan that they borrowed in prior years

48 Loan Repayment Assistance and Loan Forgiveness Programs Loan repayment assistance programs (LRAPs) and loan forgiveness may be available if borrowers qualify and funding is available Programs typically are sponsored/funded by: School of attendance Employer Federal, state or local government/jurisdiction 17 new federal loan forgiveness programs were created by HEOA but require federal appropriation for awards to be made

49 Repayment of Private Student Loans

50 Private Student Loans Less flexible than Federal Loans Interest Rate Grace Period Repayment plan(s) Repayment Period Minimum Payment Deferment/ Forbearance Typically variable Based on credit history, usually calculated using an index (LIBOR or Prime) plus a spread/margin 6 to 12 months (depends on lender) Standard, Graduated, other(?) Income-based options likely are not available 10 to 30 years (depends on lender) Depends on lender Depends on lender

51 Final Comments...

52 Deferment and Forbearance Options to Postpone Payments Borrowers may be able to get temporary relief if they are unable to make their required minimum monthly payment(s) Options include: Deferment Temporary postponement of your monthly student loan payments Forbearance Temporary postponement or reduction of your monthly student loan payments They should contact their loan holder/servicer for more information

53 When Choosing a Repayment Plan Borrowers should consider the following... If they want to pay the least amount of total interest over the life of repayment Standard Repayment Plan with a 10-year repayment schedule will result in the least amount of interest paid If they want the lowest possible monthly federal student loan payment Income-Based Repayment Plan likely will require the lowest monthly payment for those who qualify, but it could result in negative amortization and that will add to the total debt being repaid; it also requires annual adjustments Extended Repayment Plan over 25 years will result in a lower monthly payment than Standard Repayment over 10 years without the possibility of negative amortization

54 To successfully manage loan repayment, borrowers should... Know how much they have to repay and to whom Understand the terms and conditions of their loans Define their short- and long-term financial goals Develop an affordable budget plan and estimate how much they can afford to pay each month on their debt Keep good financial records Select the repayment plan that best achieves their goals given what they can afford to pay each month Take advantage of loan forgiveness programs when they qualify for them

55 Choosing the Repayment Plan That's Right for You Webinar Recording Available Access Group presented a webinar on October 28, 2008 for borrowers entering repayment on their Federal Stafford Loans A recording of that webinar is now available at:

56 Questions

57 For further information, contact... Jeffrey E. Hanson, Ph.D. Director, Borrower Education Services Access Group P.O. Box 7430 Wilmington, DE (800) , ext

58 We re here to help you! Access Group AccessGroup.Org