Loan Repayment Strategies: Help Your Students Choose the Right Plan for Success
Loan Repayment Struggles Millions of students are senselessly defaulting on their debt while failing to take advantage of programs meant to protect them financially. Many of the student borrowers running into trouble are almost certainly college dropouts who never got any sort of debt counseling, and automatically enrolled in a standard 10-year plan. The Atlantic, August 2013
Loan Repayment Struggles Two out of five student loan borrowers or 41% are delinquent at some point in the first five years after entering repayment The Institute of Higher Education Policy, March 2011 Borrowers cite unaffordable payments as the top reason for falling behind on loan payments Great Lakes, Borrower Services May 2012
Objectives Share repayment options available to borrowers Walk through borrower case studies to determine the right plan for success Review repayment strategies for your borrowers
Repayment Options
Repayment Options Repayment Option Eligible Loan Program(s) Borrower Eligibility Payment Terms/Calculation Standard Direct or FFEL loans All Payments are fixed; up to 10 years to repay Graduated Direct or FFEL loans All Payments start lower and increase over a 10-year period Extended Direct or FFEL loans Must have $30,000 loan debt in DL or FFEL Payments are fixed or graduated; up to 25 years to repay Consolidation Direct or FFEL loans Must be in grace, repayment, or default Range of 10 to 30 years, depending on repayment plan and/or total education loan debt
Repayment Options Repayment Plan Eligible Loan Program Borrower Eligibility Pay As You Earn Direct loans Partial Financial Hardship plus new borrower as of 10/1/07 and received a disbursement of loan on or after 10/1/11 Income-Based Repayment (IBR) Income- Contingent Repayment (ICR) Direct or FFEL loans Partial Financial Hardship Payment Calculation 10% of discretionary income 15% of discretionary income Direct loans All Lesser of: 12-year standard repayment schedule multiplied by income percentage factor or 20% of discretionary income Forgiveness 20 years 25 years 25 years Income-Based Repayment (IBR) (effective 7/1/14) Direct loans Partial Financial Hardship plus new borrower on or after 7/1/14 10% of discretionary income 20 years
Choosing the Right Plan for Success
Meet Shelby Shelby Employment status Pharmaceutical Sales Income $55,000 Loan debt $35,000 federal; $25,000 private Which repayment option should Shelby consider?
Shelby s Repayment Options Shelby s repayment options Standard repayment $402 Private loan repayment $277 Total monthly payment $679 Graduated repayment $276 (years 1-2) Private loan payment $277 Total monthly payment $553
Shelby s Repayment Options Shelby s repayment options Extended repayment $242 Private loan repayment $277 Total monthly payment $519 Extended graduated repayment $201 (years 1-2) Private loan repayment $277 Total monthly payment $478
Shelby s Repayment Options Total cost of Shelby s $35,000 Federal loans Standard repayment $48,333 Graduated repayment $50,944 Extended repayment $72,877 Extended graduated repayment $78,485
Meet Shane Borrower Shane Employment status Art Director Income $48,000 Loan debt $32,000 federal Which repayment option should Shane consider?
Shane s Repayment Options Shane s repayment options Standard repayment $368 Graduated repayment $252 (years 1-2) Extended repayment $222 Extended graduated $184 (years 1-2)
Shane s Repayment Options Total cost of Shane s $32,000 Federal loans Standard repayment $44,190 Graduated repayment $46,577 Extended repayment $66,630 Extended graduated repayment $71,758
Meet Sean Borrower Sean Employment status Automotive Retail Sales Income $28,000 Loan debt $22,000 federal Which repayment option should Sean consider?
Sean s Repayment Options Sean s repayment options Standard repayment $253 Graduated repayment $146 (years 1-2) Extended repayment not eligible Extended graduated not eligible
Sean s Repayment Options If Sean meets the eligibility requirements, he could consider Pay As You Earn: Initial monthly payment $90 Amount paid by Sean in 20 years $37,255 Amount of debt forgiven under Pay As You Earn $2,505 *Assumes a 4% increase in Cliff s income each year and a 3% annual increase in the poverty guidelines
Sean s Repayment Options If Sean does not meet the Pay As You Earn requirements he could consider IBR: Initial monthly payment $135 Final monthly payment $253 Payments are no longer based on income in his 12th year of IBR Pays off his loan in 16.2 years of IBR Amount paid by Sean in 16.2 years $39,413 *Assumes a 4% increase in Cliff s income each year and a 3% annual increase in the poverty guidelines
Sean s Repayment Options Total cost of Sean s $22,000 Federal loans Standard repayment $30,381 Graduated repayment $32,691 Income-based repayment $39,413 Pay As You Earn $37,255
Meet Selena Borrower Selena Employment status Human Resource Manager Income $89,000 Loan debt $62,000 federal Which repayment option should Selena consider?
Selena s Repayment Options Selena s repayment options Standard repayment $713 Graduated repayment $411 (years 1-2) Extended repayment $430 Extended graduated $351 (years 1-2)
Selena s Repayment Options If Selena meets the eligibility requirements, she could consider Pay As You Earn: Initial monthly payment $598 Payments are no longer based on income in her 5th year of IBR Pays off her loan in 10.8 years of IBR Amount paid by Selena in 10.8 years $89,007 *Assumes a 4% increase in Cliff s income each year and a 3% annual increase in the poverty guidelines
Selena s Repayment Options Total cost of Selena s $62,000 Federal loans Standard repayment $85,619 Graduated repayment $90,244 Extended repayment $129,097 Extended graduated repayment $139,031 Pay As You Earn $89,007
Meet Storm Borrower Storm Employment status Graphic Designer Income $35,000 Loan debt $50,000 federal Which repayment option should Storm consider?
Storm s Repayment Options Storm s repayment options Standard repayment $575 Graduated repayment $331 (years 1-2) Extended repayment $347 Extended graduated $283 (years 1-2)
Storm s Repayment Options If Storm meets the eligibility requirements, he could consider Pay As You Earn: Initial monthly payment $148 Amount of debt forgiven under Pay As You Earn $31,519 Amount Storm pays $58,100 *Assumes a 4% increase in Norm s income each year and a 3% annual increase in the poverty guidelines
Storm s Repayment Options If Storm does not meet the Pay As You Earn eligibility requirements he could consider IBR: Initial monthly payment $222 Final monthly payment $575 Payments are no longer based on income in his 21st year of IBR Pays off his loan in 22 years of IBR (therefore receive no loan forgiveness) *Assumes a 4% increase in Norm s income each year and a 3% annual increase in the poverty guidelines
Storm s Repayment Options Total cost of Storm s $50,000 Federal loans Standard repayment $69,048 Graduated repayment $74,299 Extended repayment $104,110 Extended graduated repayment $112,761 Pay As You Earn $58,100 Income-based Repayment $100,925
Meet Sandy Borrower Sandy Employment status Employment Lawyer Income $88,000 Loan debt $110,000 federal (FFEL and Direct loans) Which repayment option should Sandy consider?
Sandy s Repayment Options If Sandy has multiple loans, she may want to consider consolidation Standard repayment $772 Graduated repayment $630 (years 1-2) Extended repayment $768
Sandy s Repayment Options Total cost of Sandy s $110,000 consolidation loan Standard repayment $206,143 Graduated repayment $280,328 Extended repayment $230,612
Sandy s Repayment Options Sandy s repayment options Standard repayment $1,265 Graduated repayment $730 (years 1-2) Extended repayment $763 Extended graduated $623 (years 1-2)
Sandy s Repayment Options If Sandy meets the eligibility requirements, she could consider Pay As You Earn: Initial monthly payment $590 Pays off her loan in 20th year of Pay As You Earn Amount of debt forgiven under Pay As You Earn $623 Amount Sandy pays $200,383 *Assumes a 4% increase in Lilith s income each year and a 3% annual increase in the poverty guidelines
Sandy s Repayment Options If Sandy does not meet the Pay As You Earn eligibility requirements she could consider IBR: Initial monthly payment $885 Final monthly payment $1,265 Payments are no longer based on income in her 9th year of IBR Pays off her loan in 13th year of IBR (therefore receive no loan forgiveness) *Assumes a 4% increase in Lilith s income each year and a 3% annual increase in the poverty guidelines
Sandy s Repayment Options Total cost of Sandy s $110,000 Federal loans Standard repayment $151,906 Graduated repayment $163,459 Extended repayment $229,043 Extended graduated repayment $248,090 Pay As You Earn $200,383 Income-based Repayment $174,234
Repayment Options Details
Standard Repayment Available for Direct and FFEL loan borrowers Pay off with the least amount of interest Monthly payments stay the same Drawbacks Monthly payments may not be affordable for those with higher debt
Graduated Repayment Available for Direct and FFEL loan borrowers Provides lower payments initially Drawbacks Payments will be higher near the end of the term
Extended Repayment Available for Direct and FFEL loan borrowers Must have loan debt of $30,000 in Direct or FFEL Payments may be 40% lower than Standard Payments can be fixed or graduated Drawbacks Longer repayment terms means more interest paid
Income-Based Repayment Direct and FFEL loan borrowers (excludes Parent PLUS) Payments will be capped at 15% of discretionary income If monthly payment amount is not enough to pay accrued interest on subsidized loan, ED will not charge the remaining interest for three consecutive years
Income-Based Repayment Remaining balance after 25 years of repayment will be forgiven Drawbacks Must reapply each year Could pay more interest over time May pay taxes on amount forgiven
Pay As You Earn Direct borrowers only (excludes Parent PLUS) Must meet new borrower definition No outstanding DL or FFEL balance as of 10/1/2007, or no outstanding balance on the date a borrower receives a new loan after 10/1/07; AND Receives a disbursement of a DL on/after 10/1/2011 OR Receives a Direct Consolidation loan based on application received on/after 10/1/2011
Pay As You Earn New borrower qualification Sabrina takes out her first loan on 8/28/2007 She gets a second loan on 8/28/2010 and a third loan on 10/28/2011 If Sabrina pays off her 8/28/2007 loan today, is she eligible for Pay As You Earn?
Pay As You Earn New borrower qualification Seth takes out his first loan on 8/28/2007 He pays off that loan in 2009 He gets a second loan on 8/28/2010, and a third on 10/28/2011 Is Seth eligible for Pay As You Earn?
Pay As You Earn Payments will capped at 10% of discretionary income If monthly payment amount is not enough to pay accrued interest on subsidized loan, ED will not charge the remaining interest for three consecutive years Remaining balance after 20 years of repayment will be forgiven
Pay As You Earn Drawbacks Must reapply each year Could pay more interest over time May pay taxes on amount forgiven
Income-Contingent Repayment Direct borrowers only (excludes Parent PLUS loans unless included in a Direct Consolidation loan after 7/1/06) Borrowers do not have to demonstrate a partial financial hardship Remaining balance after 25 years of repayment will be forgiven
Income-Contingent Repayment Drawbacks Must reapply each year Could pay more interest over time Interest is capitalized during periods of negative amortization May pay taxes on amount forgiven
Consolidation Available for Direct and FFEL borrowers Will give borrower a single payment Could have a lower payment Subsidized loans retain their interest subsidy May qualify for renewed deferment benefits Defaulted loans can be consolidated to regain Title IV eligibility
Consolidation Drawbacks Could have slightly higher interest rate Could pay more interest over life of loan Will lose remainder of grace period if consolidate during grace Repayment begins within 60 days after the consolidation loan is made FFEL loans will lose borrower benefits
How to Help Borrowers Develop a Strategy for Repayment
Counseling Borrowers What borrowers should do to prepare for repayment: Use NSLDS to determine how much they owe and to whom Compare payment amounts under the different plans
Counseling Borrowers What borrowers should do to prepare for repayment: Determine how much they can afford Know the amount of accumulated interest for each plan Know eligibility for the repayment plans and the loan forgiveness programs
Counseling Borrowers With an online account at mygreatlakes.org or with their servicer they can: Determine how much they owe Compare payment amounts under the different plans Learn how much interest will accumulate for each plan Determine whether they are eligible for the incomedriven repayment plans Select their repayment plan
Counseling Borrowers Remind them that they: Will be placed in the standard plan, if they do not chose a different one during their grace period Can change their plan Can change their due date Can postpone with a deferment/forbearance if they have difficulty making a payment Will pay more in interest with longer repayment periods
Counseling Borrowers Identify students who may need additional repayment counseling: Students in academic programs with larger debt and lower incomes Students who have withdrawn without completing their degree Any former students having trouble making their payments
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