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
Borrowers cite unaffordable payments as the top reason for falling behind on loan payments
The Institute of Higher Education Policy, March 2011
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
Repayment Options
Repayment Plan
Eligible Loan Program
Borrower Eligibility Payment Calculation
Forgiveness
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 10% of discretionary income 20 years Income-Based Repayment (IBR) (effective 7/1/14)
Direct loans Partial Financial Hardship 10% of discretionary income 20 years Income-Contingent Repayment (ICR)
Direct loans All Lesser of: 12-year standard repayment schedule multiplied by income percentage factor or 20% of discretionary income 25 years Income-Based Repayment (IBR) (prior to 7/1/14) Direct or FFEL loans Partial Financial Hardship 15% of discretionary income 25 years
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
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
•
New Direct loan borrowers
(excludes Parent PLUS)
on/after July 1, 2014
•
Payments will be 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
Income-Based Repayment
•
Remaining balance after
20 years of repayment will
be forgiven
Drawbacks
–Must reapply each year
–Could pay more interest over time –May pay taxes on amount forgiven
Effective July 1, 2014
Income-Based Repayment
•
Direct and FFEL loan
borrowers (excludes Parent
PLUS) with loans prior to July 1, 2014
•
Payments will be capped at 15% of
discretionary income
•
Remaining balance after 25 years of
repayment will be forgiven
Prior to July 1, 2014
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 –
Pay As You Earn
New borrower qualification
•
Diane 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 Diane pays off her 8/28/2007 loan
today, is she eligible for Pay As You
Earn?
Pay As You Earn
New borrower qualification
•
Fraiser 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 Fraiser 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
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
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
Meet Rebecca
•
Rebecca
oEmployment status – pharmaceutical sales oIncome – $55,000 oLoan debt – $35,000 federal; $25,000 private•
Which repayment option
should Rebecca consider?
Rebecca’s Repayment Options
Rebecca’s repayment options
oStandard repayment – $402 oPrivate loan repayment – $277 oTotal monthly payment – $679 oGraduated repayment – $276 (years 1-2) oPrivate loan payment – $277oTotal monthly payment – $553
Rebecca’s Repayment Options
Rebecca’s repayment options
oExtended repayment – $242 oPrivate loan repayment – $277 oTotal monthly payment – $519 oExtended graduated repayment – $201(years 1-2)
Rebecca’s Repayment Options
Total cost of Rebecca’s $35,000 federal
loans
Standard repayment $48,333
Graduated repayment $50,944
Extended repayment $72,877
Extended graduated repayment $78,485
Meet Sam
•
Borrower – Sam
oEmployment status – art director
oIncome – $48,000 oLoan debt – $32,000
federal
•
Which repayment option
should Sam consider?
Sam’s Repayment Options
Sam’s repayment options
oStandard repayment – $368oGraduated repayment – $252 (years 1-2) oExtended repayment – $222
Sam’s Repayment Options
Total cost of Sam’s $32,000 federal loans
Standard repayment $44,190
Graduated repayment $46,577
Extended repayment $66,630
Extended graduated repayment $71,758
Meet Cliff
•
Borrower – Cliff
oEmployment status – automotive retail sales oIncome – $28,000 oLoan debt – $22,000
federal
•
Which repayment option
should Cliff consider?
Cliff’s Repayment Options
Cliff’s repayment options
oStandard repayment – $253Cliff’s Repayment Options
If Cliff meets the eligibility requirements,
he could consider Pay As You Earn:
oInitial monthly payment – $90
oAmount paid by Cliff in 20 years – $37,255
oAmount 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
Cliff’s Repayment Options
If Cliff has loans prior to July 1,2014, he
could consider IBR:
oInitial monthly payment – $135 oFinal monthly payment – $253
oPayments are no longer based on income in his 12th year of IBR
oPays off his loan in 16.2 years of IBR oAmount paid by Cliff 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
Cliff’s Repayment Options
Total cost of Cliff’s $22,000 federal loans
Standard repayment $30,381 Graduated repayment $32,691 Income-based repayment $39,413Meet Carla
•
Borrower – Carla
oEmployment status – human resource manager oIncome – $89,000 oLoan debt – $62,000
federal
•
Which repayment option
should Carla consider?
Carla’s Repayment Options
Carla’s repayment options
oStandard repayment – $713oGraduated repayment – $411 (years 1-2) oExtended repayment – $430
oExtended graduated – $351 (years 1-2)
Carla’s Repayment Options
If Carla meets the eligibility requirements,
she could consider Pay As You Earn:
oInitial monthly payment – $598 oPayments are no longer based on income
in her 5th year of IBR
oPays off her loan in 10.8 years of IBR oAmount paid by Carla in 10.8 years –
$89,007
Carla’s Repayment Options
Total cost of Carla’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 Norm
•
Borrower – Norm
oEmployment status – graphic designer oIncome – $35,000 oLoan debt – $50,000 federal•
Which repayment option
should Norm consider?
Norm’s Repayment Options
Norm’s repayment options
oStandard repayment – $575oGraduated repayment – $331 (years 1-2) oExtended repayment – $347
Norm’s Repayment Options
If Norm meets the eligibility requirements,
he could consider Pay As You Earn:
oInitial monthly payment – $148
oAmount of debt forgiven under Pay As You Earn – $31,519
oAmount Norm pays – $58,100
*Assumes a 4% increase in Norm’s income each year and a 3% annual increase in the poverty guidelines
Norm’s Repayment Options
If Norm has loans prior to July 1, 2014,
he could consider IBR:
oInitial monthly payment – $222 oFinal monthly payment – $575
oPayments are no longer based on income in his 21st year of IBR
oPays 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
Norm’s Repayment Options
Total cost of Norm’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
Meet Lilith
•
Borrower – Lilith
oEmployment status – employment lawyer oIncome – $88,000 oLoan debt – $110,000federal (FFEL and Direct loans)
•
Which repayment option
should Lilith consider?
Lilith’s Repayment Options
If Lilith has multiple loans, she may want
to consider consolidation
oStandard repayment – $722
oGraduated repayment – $630 (years 1-2) oExtended repayment – $768
Lilith’s Repayment Options
Total cost of Lilith’s $110,000
consolidation loan
Lilith’s Repayment Options
Lilith’s repayment options
oStandard repayment – $1,265oGraduated repayment – $730 (years 1-2) oExtended repayment – $763
oExtended graduated – $623 (years 1-2)
Lilith’s Repayment Options
If Lilith meets the eligibility requirements,
she could consider Pay As You Earn:
oInitial monthly payment – $590
oPays off her loan in 20th year of Pay As You
Earn
oAmount of debt forgiven under Pay As You Earn – $623
oAmount Lilith pays – $200,383
*Assumes a 4% increase in Lilith’s income each year and a 3% annual increase in the poverty guidelines
Lilith’s Repayment Options
Total cost of Lilith’s $110,000 federal
loans
Standard repayment $151,906
Graduated repayment $163,459 Extended repayment $229,043 Extended graduated repayment $248,090
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
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 income-driven 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
