Joe Braxton- Senior Default Aversion Consultant
The Ins and Outs of Student Loan Repayment:
Understanding Your Options
Learning objectives
• You will learn how to educate borrowers on:
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Taking inventory of federal student loans
Choosing the right repayment plan that works
The basics of loan consolidation
Deferment, forbearance, discharge, and forgiveness options
Options after default
Taking inventory
Taking inventory
• Where can the borrower obtain information on federal loans?
– National Student Loan Data System (NSLDS)
• http://www.nslds.ed.gov/
– Provides federal student loan amounts, loan holders, and loan
servicers
– May have multiple loan types (FFEL, Direct, Perkins, Grad PLUS,
and Consolidation) and multiple servicers
• Where can the borrower obtain information on private
education loans?
– Refer to promissory note or credit report
• Focus today will be on FFEL, Direct (unsubsidized and
subsidized) and Grad PLUS loans
During the grace period
• What does the loan holder/servicer expect from the
borrower?
– To select a repayment plan
– To provide updated contact information whenever it changes
– To contact the loan holder whenever you are having difficulty
managing repayment
During the grace period
• Can a borrower prepay on a loan?
– Yes
• If sending in a prepayment, make sure you inform the lender
to apply the prepayment to the principal of the loan balance
• There is no prepayment penalty
Overview of repayment plans
What repayment plans are available?
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Standard
Graduated
Extended
Income Driven Plans:
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Income-sensitive (FFEL Borrowers Only)
Income-based
Income-contingent (Direct Borrowers Only)
Pay As You Earn *NEW*
Repayment plan comparison
• NEW repayment plan comparison calculator available at
http://www.aie.org/paying-for-college/repaymentplans/Repayment-comparison-calculator.cfm
• Visit the repayment estimator before making a decision about
repayment options
• Once the borrower knows which plan(s) they are eligible for,
spend some time researching the details of each plan and
thinking about how the various options will fit within short- and
long-term financial goals
Repayment plans overview
• Standard
– 120 equal monthly payments/10 years
– Least expensive way to repay a student loan
• Graduated
– Payments increase over time
– Maximum 10-year repayment term
Repayment plans overview
• Extended
– For borrowers with over $30,000 in debt
– Up to 25 years to repay loan
• Income-sensitive (FFEL only)
– Based on expected gross monthly income
– Adjusted annually
Repayment plans overview
• Income-based, Income contingent and Pay As You Earn
Plans
– Considers the borrower’s income, family size, and total
amount borrowed
– Results in a lower monthly payment that is adjusted
annually
– Provides forgiveness of remaining balance
– Under current IRS rules, the amount of debt discharged is
treated as taxable income
– Counts payments made toward the 120 required payments
for Public Service Loan Forgiveness
Borrower eligibility
Criteria
IBR
ICR
Pay As You Earn
Who qualifies
FFELP and Direct Loan
borrowers who have a
partial financial
hardship
Direct Loan Borrowers
Direct Loan “New”
borrowers who have a
partial financial hardship
Borrower eligibility
• Income-based
– Designed to help borrowers experiencing a “partial
financial hardship”
– Available to Stafford/Direct, Grad Plus, and certain
consolidation borrowers
– Provides interest subsidy on subsidized loans for up to 3
years if IBR payment is less than accrued interest on those
loans.
Borrower eligibility
• Income-contingent
– Repayment plan available only to DL borrowers
– You do not have to meet any specific income/loan
debt/family size criteria
– If your payment doesn’t cover interest, unpaid interest is
capitalized annually-up to 10% of the original loan amount
• Excess interest above the 10% cap continues to accrue but is not
capitalized
Borrower eligibility
• Pay As You Earn
– Became available December 2012
– Caps annual payments for an eligible new borrower at 10%
of discretionary income (AGI minus 150% of the poverty
line)
– Provides interest subsidy on subsidized loans for up to 3
years if PAYE payment is less than accrued interest on
those loans.
– Available only to certain borrowers
Borrower eligibility
• For purposes of PAYE, you are a “new” borrower if you:
– Had no outstanding balance on a Direct or FFELP loan as of
10/1/2007 (or had no outstanding balance on a Direct or
FFELP loan when you obtained a new loan on/after
10/1/2007) AND
– Received a disbursement of a Direct Subsidized or
Unsubsidized Stafford, or Grad PLUS loan on or after
10/1/2011 (or received a Direct Consolidation Loan based
on an application received on/after 10/1/2011)
• The repayment estimator will help the borrower
determine if he/she meets this eligibility requirement.
Partial financial hardship
• What does PFH mean in plain English?
– The borrower has a large amount of federal
student loan debt compared to income and the
expenses that go along with supporting the
borrower and his or her family.
– The repayment estimator will help determine if
the borrower has a PFH.
Repayment terms
• Repayment can extend beyond 10 years regardless of the
amount of the eligible debt
• Annual evaluation may result in monthly payment going
up or down depending on change in annual income
and/or family size
• Borrower can change repayment plan, but could have
consequences
• Borrower can elect to remain in IBR or PAYE even when
he or she no longer meets PFH
IBR, ICR and PAYE payment amounts
• IBR payment amount:
– Capped at 15% of discretionary income
• ICR payment amount:
– Capped at 20% of discretionary income
• PAYE payment amount:
– Capped at 10% of discretionary income
• What is discretionary income? The borrower’s
income minus the poverty guideline for the
borrower’s family size. The repayment estimator will
calculate this for the borrower.
Loan forgiveness
• All three plans provide for forgiveness
– Under ICR and IBR, remaining balance is forgiven after 25
years of qualifying payments
– Under PAYE, remaining balance is forgiven after 20 years of
qualifying payments
• Under current IRS rules, the forgiven amount is
considered taxable income
Income driven plans example
Example:
• If the borrower is:
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Single with no dependents
Live in one of the lower 48 states
Have an Adjusted Gross Income (AGI) of $35,000, and
Have $50,000 in Direct Loan debt ($23,000 of which is
subsidized), all of which has a 6.8% interest rate…
*Assumes a 5% increase in income each year and a 3% annual increase in the
poverty guidelines.
Source: 2012 FSA Conference
Income driven plans example
10-year Standard
Extended & Consolidation
Payment
$575.40
$347.04
Time in Repayment
10 years
25 years
Total Paid
$69,037.44
$104,080.83
For comparison:
ICR
IBR
PAYE
Initial Payment
$397.17
$228.06
$152.04
Final Payment
$535.23
$575.40
$492.19
Time in Repayment
13 years,
8 months
20 years,
2 months
20 years
Total Paid
$78,444.28
$101,673.34
$70,709.53
Forgiveness
$0
$0
$44,979.06
Source: 2012 FSA Conference
Income driven plans example: With forgiveness
With PSLF (forgiveness after 10 years):
ICR
IBR
Pay As You Earn
Time in
Repayment
10 years
10 years
10 years
Total Paid
$55,952.61
$37,222.34
$24,814.89
PSLF Amount
$19,858.58
$45,711.82
$57,189.97
Source: Department of Education; 2012 FSA Conference
ICR, IBR and PAYE Comparisons
Comparison
ICR
IBR
PAYE
Loan program
eligibility
Consolidation loans
that include a Direct
Parent Plus loan
FDLP
FFELP and FDLP
FDLP
Eligible
Not eligible
Not eligible
Usually higher
than IBR
Usually lower than
ICR
Usually lower than
IBR and ICR
Yes
Yes
Yes
No interest
subsidy
3 years of interest
subsidy
3 years of interest
subsidy
Monthly payment
Monthly payments
may be less than
accrued interest
Interest subsidy (if
monthly payment
doesn’t cover interest)
The basics of consolidation
Consolidation overview
• Consolidation enables the borrower to bundle
one or more federal student loans into a single
new loan
• The consolidating loan holder pays off the
outstanding balances of the loans included in the
consolidation
• Same repayment plan options (except ISR)
• No fees
Consolidation eligibility
• What loans may be consolidated?
– Federal Family Education Loans
– Federal Direct Loans
– Federal Perkins Loans
– Health Professions Student Loans
– Nursing Student Loans
– Health Education Assistance Loans
Consolidation eligibility
• What loans may not be consolidated?
– Private or state education loans
– Other consumer debt
• Private consolidation loans
– Don’t offer the same advantages (i.e., repayment options,
deferments, etc) as a federal consolidation loan
– Interest rate will be credit-based and likely higher than a
federal consolidation loan
Factors to consider-Cons
• May lose some or all of grace period
• May lose certain borrower benefits
– Federal Perkins Loans lose their deferment
subsidy and cancellation eligibility when
consolidated
• May increase total cost of loan: If you lengthen
your repayment period, you will pay more
interest in the long run
Loan consolidation calculator and application
• At studentloans.gov
– For calculator, first visit NSLDS to determine
loan types, amounts, and current interest rates
– If the borrower is still in his grace period,
provide grace end date; ED will put application
on hold and start processing it within 45 days
of the grace period end date
Deferment, forbearance, discharge, and forgiveness options
Deferment
• A period of time during repayment in which the
borrower, upon meeting certain conditions, is not
required to make payments of loan principal
– Entitlements, but the borrower must meet eligibility criteria and
cannot exceed time limitations
– Interest subsidy for subsidized loans, but the borrower is still
liable for all interest that accrues on an unsubsidized loan
– There are many deferments available to borrowers of any loan
type, such as in-school, economic hardship, unemployment,
military
Forbearance
• A period of time during which the borrower is permitted
to temporarily cease making payments or reduce the
amount of the payments
– Generally not entitlements
– The borrower is liable for all interest that accrues on the loans,
even subsidized loans
– May be the quickest and easiest option, but not a long-term
solution
Loan discharge
• Discharge release the borrower from all or a portion of
their loan obligation
• Generally due to circumstances beyond the borrower's
control
• Types of FFEL and Direct Loan discharges
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Total and Permanent Disability
Death
Unpaid Refund
False certification by the school
False certification due to identity theft
Closed School
Parents and spouses of September 11, 2001, victims
Bankruptcy
Loan forgiveness
• Forgiveness also releases the borrower from all or a
portion of your loan obligation
• Generally due to employment in a public service field
• FFEL/Direct Loan forgiveness programs available for:
– Teachers
– Public service
Options after default
What is default?
• Occurs after 270 days of delinquency
• During delinquency—and even for a short time after default—
many entities (lender, servicer, guarantor, school) are
attempting to contact the borrower by phone, mail, email,
etc. to resolve the delinquency
• Many times a delinquent borrower cannot be located
Consequences of default
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Acceleration
Loss of Title IV aid eligibility
Collection costs, attorney’s fees
Negative credit reporting
Loss of deferment, forbearance, and traditional
repayment plans
Consequences of default
• Forced collections:
– Administrative wage garnishment
– Loss of eligibility for other federal loans (VA, HUD/FHA)
– Treasury offset program (income tax refunds, Social Security
benefits)
No statute of limitations for
enforceability!
How can you resolve a defaulted student loan?
• Pay the defaulted loan in full or over time
• Make satisfactory repayment arrangements
– One-time option
– Restores Title IV eligibility
• Rehabilitate the defaulted loan
– One-time option
– Removes default from credit report
• Consolidate the defaulted loan
• Receive a discharge on the defaulted loan
Resources
• Helpful resources
– www.nslds.ed.gov: view your student loan portfolio
– www.loanconsolidation.ed.gov: apply for a Consolidation loan
– https://studentloans.gov/myDirectLoan/repaymentEstimatorLog
inRedirect.action: repayment estimator
– http://studentaid.ed.gov/PORTALSWebApp/students/english/PS
F.jsp#: Public Service Loan Forgiveness FAQs
– https://myeddebt.com: ED’s Debt Resolution Group
– https://www.tgslc.org/borrwers/default/: TG’s “Handling
Default” page
© 2014 Texas Guaranteed Student Loan Corporation
To order additional copies, or to request permission to reproduce any of the
information provided, please call TG Communications at (800) 252-9743.