Topic 6: Student Loans
Questions to Think About:
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What are the types or sources of student loans?
What’s the difference between a subsidized and unsubsidized student loan? Who is
eligible?
What can be done to manage repayment?
What happens if student loans are delinquent or in default?
What can be done to get back on track if the loan is delinquent or in default?
Can all or part of the loans be forgiven or canceled? How?
Is there any help for repayment of loans?
Learning Objectives:
•
•
•
•
Understand the differences between federal student loans and private student loans
Understand what debtor options are available if a debtor is delinquent or in default
on a student loan
Understand the requirements for having all or part of a student loan balance be
forgiven or canceled
Understand the programs available to assist in the repayment of student loan
principal or interest
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1
STUDENT LOANS
Student loans may be available through the federal government, private institutions,
educational institutions or a combination of two or all three. Non-student loans such as a
personal loan, or an asset based loan like a mortgage or home-equity loan may also be
a source of funds for education.
Sometimes the repayment of a loan given to a student is guaranteed by a parent or
other and in some instances, the loan is given to the parent who then uses it to pay for
the student’s education.
Types of Student Loans
1.
Federal student loans: guaranteed or funded by the federal
government
a. Government guaranteed or insured loans – offered through financial
institutions
i.
Family Federal Education Loans (FFEL) – not given after
June 30, 2010
•
Stafford loans, (formerly Guaranteed Student Loans or
GSLs or Federal Insured Student Loans (FISLs) –fixed
rates
 Undergraduate
 Graduate
 Subsidized or unsubsidized, i.e. interest paid by
government while in school
•
PLUS loans (loans to parents of undergrads or to
graduate students), SLS loans, or
•
Consolidation loans
ii.
Perkins loans (covered later)
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1. Prior to June 30, 2010, the federal government did not make student loans directly
available. Instead, the federal government guaranteed student loans that were made by
banks, credit unions and other institutions. In the event that a student or his loan
guarantor defaulted, the government paid the institution, and then the government
would take collection action against the borrower and/or guarantor. Now the federal
government provides loans directly to the borrower.
There are several types of direct federal loans that became available beginning July 1,
2010:
1. Stafford Loan
2. Direct Plus Loan and
3. Direct Consolidation Loans
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Stafford Loans
Types of Student Loans cont’d
b.
Federal Direct Loans
i.
Direct Stafford loan (can be subsidized or unsubsidized)
•
Undergraduate - lifetime limit : $31,000
(subsidized and unsubsidized loans )
•
Graduate- lifetime limit :$138,500 (unsubsidized
loans only; graduate students are not eligible for
subsidized loans as of July 1, 2012.)
•
Subsidized loans – no interest accrues while
undergrad attending school; based on need
•
Unsubsidized loans – interest accrues from date of
disbursements; not based on need ;can defer
payment for up to 6 mos. after graduation
•
1% loan fee
•
Subsidized interest rate for 2012/2013 –
3.4%;unsubsidized: 6.8%
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1. Graduate students are not eligible for subsidized Stafford loans beginning July1,
2012.
2. The interest on unsubsidized Stafford loans begins to accrue as of the date that the
loan is disbursed. In the case of undergraduate subsidized loans, no interest accrues
while the undergraduate is in school.
Note: Students and their families may want to consider not borrowing the maximum
amounts made available to them through loans. Calculations of amounts that can be
borrowed may include the costs of books and other expenses which the student can
earn or obtain from a source which does not accrue interest. It’s tempting to have
access to this cash, but it’s important to think through the consequences of borrowing
more than needed. This is especially important in the case of loans where the interest
begins to accrue upon disbursement of the funds.
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DIRECT PLUS LOAN
Types of Student Loans – Federal Direct Loans cont’d
ii.
Direct PLUS loan:
•
•
•
•
•
•
•
iii.
Loan from U.S. Department of Education to graduate or
professional degree students and parents of dependent
undergraduate students
Borrower may not have “adverse” credit history , if so, will
require “Sponsor”
Maximum loan amount is student’s cost of attendance
(determined by the school) minus any other financial aid
received.
Fixed interest rate of 7.9%
4% origination fee
For undergrads – repayment begins when disbursements
made (parents can request deferment while student in school
half-time or 6 months after enrolled at least half-time)
For grad students – repayment deferred while in school and
for 6 months after graduation
Direct consolidation loan (covered later)
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NOTE:
It is important to understand that if payments are deferred, i.e. payments can be delayed, that the
interest is accruing and is added to the principal of the loan, and is therefore increasing the amount
that is owed. In the interim, interest is also being accrued on the unpaid interest which is being added
to the principal. That is why the amount ultimately owed can be substantially higher than the amount
borrowed.
It’s advisable where possible to make payments on disbursed students loans while in school.
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Other types or sources of funding for education:
Types of Student Loans cont’d
2. Private student loans: non-federal loans, made by a lender
such as a bank, credit union, state agency, or a school
3. Non- student loans to the student or through parents
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FEDERAL DIRECT SUBSIDIZED STUDENT LOANS
Federal Direct Subsidized Loans - students with
financial need
1. Available to undergraduate students only ,with financial need.
2. School determines how much can be borrowed- amount may not
exceed financial need.
3 .U.S. Department of Education pays interest :
a. While student in school at least half-time, and
b. For the first six months after you leave school (referred to as a grace
period),
i.
For Direct Subsidized Loan first disbursed between July 1,
2012, and July 1, 2014, student responsible for paying any
interest accruing in grace period. If student does not pay the
interest that accrues during grace period, added to the
principal balance, and
c. During a period of deferment (a postponement of loan payments).
For subsidized loans disbursed beginning July
1, 2012 and up to June 30, 2014, only the
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interest accruing
while I the
student is in
school will be subsidized. The subsidy for the
6 months (grace period) after graduation,
continues to apply to loans disbursed before
July 1, 2012. What happens with loans
5
Topic 6 | July
Student
Loans is
| unknown.
disbursed beginning
1, 2014
FEDERAL DIRECT UNSUBSIDIZED STUDENT LOANS
Federal Direct Unsubsidized Loans:
1.
Available to undergraduate and graduate students; there is no
requirement to demonstrate financial need.
2.
School determines amount student can borrow by considering the
cost of attendance and other financial aid received
3.
Responsible for paying the interest during all periods.
a. If student does not pay interest while in school and during
grace periods, deferment or forbearance periods, interest will accrue
and is added to the principal amount of loan
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STUDENT LOAN FORGIVENESS
The outstanding balance on a federal direct student loan can be forgiven where the
borrower has worked for a qualified organization in a qualifying job position, for a ten year
period, and has made payments on time during that ten year period.
Public Loan Forgiveness Program for Federal Direct
Loans (a/k/a William Ford Direct Loans)
1. Applies only to federal direct loans
a. Does not apply to government guaranteed loan or Perkins loans
2. Qualified Employees
a. Federal, State or local full-time jobs OR
b. Non-profit full-time jobs – 501 (c)(3) OR
c. Certain full-time jobs at non-profits other than 501(c)(3)
i. EMTs
ii. Military
iii. Public service
iv. Public library
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Public Loan Forgiveness Program Federal Direct
Loans cont’d
v. School libraries
vi. Public service to elderly
vii. Public service to disabled
viii.Public interest law
3. Full-time jobs at unions, partisan political groups and religious
groups do not qualify
4. Must work ten years AND
5. Make payments on time for ten years
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I
Note:
If a loan is not a direct federal loan, for example, a guaranteed federal loan, the forgiveness
program may apply where the “non-direct” federal student loan can be consolidated into a
federal direct consolidation loan.
FEDERAL DIRECT CONSOLIDATION LOAN
A number of different federally guaranteed and federal direct loans can be consolidated
into one federal direct consolidation loan.
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1.
Federal Direct Consolidation Loans:
a. Most federal student loans, including the following, are eligible for
consolidation:*
i. Direct Subsidized Loans
ii. Direct Unsubsidized Loans
iii. Subsidized Federal Stafford Loans
iv. Unsubsidized Federal Stafford Loans
v. Direct PLUS Loans
vi. PLUS loans from the Federal Family Education Loan
(FFEL) Program
vii. Supplemental Loans for Students (SLS)
viii. Federal Perkins Loans
ix. Federal Nursing Loans
x. Health Education Assistance Loans
xi. Some existing consolidation loans
* http://studentaid.ed.gov/repay-loans/consolidation
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Federal Direct Consolidation Loans cont’d
2.
Federal loan interest rate will be weighted average of existing loans
3.
Extends period for payment (interest accrues for extended period)
for 30 years
4.
Loans consolidated must have the same names, example: Loan # 1
in student name only and Loan #2 is in name of student and parent
cannot be consolidated
5. If able to consolidated Federal Family Education Loan or Perkins
Loans under a Federal Direct Consolidation Loan then:
a. Payments made under new loan qualify for Public Loan
Forgiveness Program for William Ford Direct Federal Loan
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Topic 6 | Student Loans |
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Note:
If a loan is consolidated under a new federal direct consolidation loan, the ten year
period required for the forgiveness begins to run with the first payment under the new
consolidated loan. While that means the borrower may not get credit for the years
worked prior to the start of the new consolidated loan, it also means that if the borrower
had been delinquent or in default on the old loan, he can get a new start and have a
balance forgiven after working in a qualified position at a qualified organization and
making on-time payments for ten years going forward.
PERKINS LOANS
Perkins loans are available to very low income students and are made through
educational institutions using a combination of funds from the federal government and
its own funds. The institutions therefore often have different criteria for forgiveness of
debt.
Perkins Loans
1. Low-interest loan for under-graduate or graduate students with very low
incomes – “exceptional need,” US Citizen; permanent resident, other
eligible status
2. Formerly :National Direct Student Loans, and before that, National
Defense Student Loans.
3. Federal government guarantees repayment of Perkins loans
4. Lender is school with a combination of federal and school funds, not a
bank or the government (funds provided by government to school)
a. Loans available contingent on funds available
5. Interest rate: 5%
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Perkins Loans cont’d
5. Loan amounts:
a. Under grade: $5,500 per year up to a total of $27,500;
b. Graduate or professional school: $8,000 per year up to $60,000
including amounts borrowed as an undergraduate
6.
Repayment: 9 month grace period after graduation
7. Loan cancellation eligibility (may be all or a percentage over period of
time):
a. Full-time teaching at a low-income school, or for teaching in certain
subject areas or deferment for these qualifying teaching services
(elementary or secondary school)
b. Military service
c. Nursing
d. Law enforcement
e. Peace Corps, Vista and other volunteer programs
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Note:
Perkins loans have a 9 month grace period after graduation for payments to begin.
There may be different rules for loan forgiveness or cancellation, for example there may
be a portion cancelled for each year of service in a position designated by the
educational institution which provided the loan.
Perkins Loans Cancellation cont’d
f. Firefighters
g. Public defender
h. Librarian
i. Tribal College faculty
j. Pre-K service provider (e.g. Head Start)
k. Total/Permanent Disability
l. Death
m. Spouse of 9/11 public servant (fire fighter, police, military or
public safety personnel) who died or became permanently and totally
disabled in 9/11 attacks at : WTC, Pentagon, on board American Airlines
flights 11 and 77 and United Airlines flights 93 and 175; applies to loans
owed on 9/11 and still owed on the day cancellation is requested.
n. May be others
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Note:
Under the Perkins Loans, the debt is cancelled upon the death of the borrower. That is
not the case with respect to other student loans, where a guarantor will have to pay the
debt even after the student’s death.
For Perkins Loans, there are also two specific programs for debt forgiveness when the
borrower works for the National Institutes of Health, or if after completing law school,
works as a public interest attorney, or for a not-for-profit organization.
Perkins Loans cancellation cont’d
2. National Institutes of Health Perkins Forgiveness Program
a. Up to $35,000/year of student loan debt for US citizens who are
conducting clinical medical research.
3. Law School Perkins Loan Forgiveness
a. Service in public interest or non-profit positions
(http://www.equaljusticeworks.org)
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FEDERAL AGENCY STUDENT LOAN REPAYMENT ASSISTANCE
Some federal agencies will assist employees in repaying student loans. These are not
loan forgiveness programs.
Federal Agency Student Loan Repayment Program:
1. Federal agencies make payments of up to $10k per year directly to
employees up to a maximum of $60k
2. Amount included in taxable income
3. Loans covered include:
a. Federal Family Education Loans (FFEL)
b. Subsidized and unsubsidized Federal Stafford Loans
c. Federal Consolidation Loans
d. William D. Ford Direct Loan Program (Direct Loans)
e. Direct PLUS Loans
f. Direct subsidized and unsubsidized Consolidation Loans
g. Federal Perkins Loan Program
h. Others
4. Resource: US Office of Personnel Management
https://www.opm.gov/flsa/oca/pay/StudentLoan/HTML/QandAs.asp#loan
-eligible
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Note:
Payments received by the employee are taxable.
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STUDENT LOAN REPAYMENT PLANS BASED ON ABILITY TO PAY AND LOAN
BALANCE FORGIVENESS
There are three plans which may help to reduce the amount of the monthly payments
and then forgive the outstanding balance left after timely payments have been made for
the period required. They are:
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
Income Based Repayment Plans (IBR)
Income Contingent Repayment (ICRP) and
Pay As You Earn (PAYE)
Income based repayment plans (IBR)
1.
Pay 15% of discretionary income – loan balance is forgiven after 25
years
2.
For direct loans disbursed after October 1, 2011 – 10% of
discretionary income and loan balance forgiven after 20 years. This
new repayment and forgiveness program is known as :Pay as You
Earn (PAYE)
3.
Can apply for both direct loan forgiveness and income based
repayment
4.
PLUS loans for parents and Consolidation Loans that repaid PLUS
loans for parents—are not eligible for IBR.
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1. The loan balance under IBR is forgiven after 25 years for loans disbursed prior to
October 1, 2011. Even where proceeds are disbursed after October 1, 2011, the IBR
plan will be available if the student is not a new borrower.
2. Effective December 21, 2012, if a borrower’s funds were disbursed on or after
October 1, 2011, and the borrower is a new borrower after October 1, 2007 (had no
loans prior to October 1, 2007 or had loans but repaid them by October 1, 2007), the
loan will be forgiven after 20 years, and the borrower pays only 10% of his discretionary
income under a new program called PAYE.
NOTE:
If the borrower has a direct loan, and is eligible, he can apply for both the direct loan
forgiveness plan (loan forgiven after 10 years), while lowering monthly payments under
the IBR, ICRP or PAYE. Therefore, a larger balance could be forgiven after 10 years.
Topic 6 | Student Loans | 13
Loans eligible for IBR
1.
2.
3.
4.
5.
6.
7.
8.
Direct Subsidized Loans
Direct Unsubsidized
PLUS Loans made to graduate or professional students
Direct Consolidation Loans without underlying PLUS loans made to
parents
Subsidized Federal Stafford Loans
Unsubsidized Federal Stafford Loans
FFEL PLUS Loans made to graduate or professional students
FFEL Consolidation Loans without underlying PLUS loans made to
parents
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Note: PLUS loans to parents are not eligible.
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Eligibility for IBR
1. Partial financial hardship - monthly amount you would be required to
pay on federal student loans under a 10-year Standard Repayment is
higher than the monthly amount you would be required to repay under
IBR.
2. Your payment amount may increase or decrease each year based on
your income and family size
3. Once eligible, can continue even of financial circumstances disqualify
later
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Note:
Once a borrower qualifies for IBR, even if circumstances change so he would not be
eligible if being evaluated then, he will still be able to continue with the program.
Determining discretionary income for IBR– based on:
1. Income and family size; adjusted each year, based on changes to your
annual income and family size
2. Usually lower payment than plans
3. Never more than the 10-year standard repayment amount; and
4. Made over a period of 25 years.
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Topic 6 | Student Loans | 15
INCOME CONTINGENT REPAYMENT PLAN (ICRP)
Direct Loan Income Contingent Repayment (ICRP)
1.
2.
3.
Only for Direct Loan Program (includes Direct Loan consolidation
program)
Payment can be no higher than 20% of earnings above poverty
level-- if married, joint income counted calculating repayment amount
even if file taxes separately
Parent PLUS loans not eligible for repayment under ICR (or IBR or
PAYE)
a. Parent PLUS borrowers can consolidate the PLUS loans and then
choose ICR for the new Direct Consolidation loan.
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Note:
Parent PLUS Loans are not eligible for repayment under IBR, ICRP or PAYE. However,
if the loan is consolidated under a new Direct Consolidation Loan, there is an option to
pay under the ICR Plan.
Topic 6 | Student Loans | 16
Direct Loan Income Contingent Repayment (ICRP) cont’d
4.
Loan balance forgiven after 25 years
4.
Amount forgiven is taxable income
6. Loans disbursed after October 1, 2011 are PAYE Loans forgiven
after 20 years (if meet other eligibility requirements)
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NOTE:
Under the IBR, ICRP and PAYE plans the payments become manageable, but the
interest paid over the period will be higher because it takes longer to repay the debt. By
combining one of the plans with a Direct Loan Forgiveness program, not only will the
borrower lower monthly payments, but he can also have the outstanding balance
forgiven after ten years.
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ACTION STEPS FOR STUDENTS IN DANGER ON STUDENT LOANS
Action Steps for Debtors in Danger on Federal Student Loans:
1.
Delinquency: begins on the first day after missing
a. In first 15 days, lender must send at least one written notice or
collection letter.
b. Notify about Student Loan
2.
Default: delinquency continues for nine months-loan holder declares
borrower in default.
a. Special “default aversion” programs through guaranty
agencies to help
3.
Work with loan holder to postpone payments
a. Make sure who the loan servicer is: www.nslds.ed.gov
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1. It is important for the borrower to be in communication with the loan servicer before a
delinquency occurs if possible, and even more important before the loan is declared in
default after delinquency continues for nine months.
2. A borrower may be able to work out a postponement of payments or make partial
payments so he does not fall in delinquency or worse default.
Topic 6 | Student Loans | 18
Action Steps for Debtors in Danger on Federal Student Loans cont’d)
4.
Best to communicate in writing
a. Keep copies of records
b. Reference specific loan and loan number
c. State reasons clearly and concisely
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1. When dealing with loan servicers (government outsources the loan service activities)
it is advisable to do so in writing, just as if dealing with any other debt collector. Keep
notes, and the names and titles of the servicer, date, time and content of
communications. Follow up immediately in writing to confirm details of any agreements
made.
Action Steps for Debtors in Default on Federal Student Loans
1.
2.
3.
Consolidation OR
Rehabilitation
a. FFEL or Direct Loan rehabilitation- must make nine monthly
payments within 20 days of the due date during a period of 10
consecutive months
i. allows one month missed period
ii. Perkins loan: must make nine payments in a nine month
period
Once out of default, can qualify for deferrals, forbearance, income
based payments, etc.
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Topic 6 | Student Loans | 19
NOTE:
Even after becoming delinquent or defaulting, it is possible to get back on track through
consolidation or rehabilitation. Through either of these options, the borrower is deemed
out of default, and then can apply for deferrals, forbearance or an income based
payment plan which will make the payments more manageable.
Action Steps for Debtors in Default on Federal Student Loans
cont’d
4.
Once rehabilitated or consolidated – no longer shown as in
default on credit report, and no government actions, become
eligible again for other loans and Consolidation
5.
Compromise and Settlement with guaranty agency
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NOTE:
If a federally guaranteed loan is paid by an agency to the lending institution, where the
borrower has defaulted, there may still be an opportunity to compromise and settle with
the guarantying agency. This would allow the amount owed to be repaid under a plan
acceptable to the guaranty agency. However, in this case the loan will be reported as in
default and remain on the credit report for 7 years.
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PRIVATE STUDENT LOANS
Borrowers have the least protections in the case of inability to repay amounts as
agreed, delinquency and default where the student loans involved are loans from
private institutions.
Private student loans
1. No forgiveness program
2. Only options:
a. Bankruptcy discharge – extremely difficult
b. Renegotiate loans
c. Pay off loan (cash on hand or through a non-student loan if
credit and income allow)
3. Cannot consolidate with federal loans
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NOTE:
If there is a need to borrow to finance education, the student and his family should
exhaust all federal student loans available, and non-student loan options available such
as a personal loan, before taking private student loans.
Topic 6 | Student Loans | 21
Topic 6 Exercise #1
Directions:
Review the following scenario and tell us how you would counsel May.
Case Study
May completed her four year undergraduate degree from college two years ago. Since then,
she has only been able to find part-time work. She is having trouble paying her bills, even
though she is living at home.
She has two federal direct loans with monthly payments of $150 and $187. May also has a
private student loan with a monthly payment of $203. One of her part-time jobs will be ending in
a week, and she knows she cannot make the payments on the student loans due in three
weeks.
Topic 6 Exercise #2
Case Study
Assume that May from Exercise # 1 is a junior in high school. Her parents and she are
considering colleges, and thinking about how to finance May’s college education. Her parents
have no savings for her education. What advice would you give them to prepare them for what
lies ahead?
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