Checklist Analyze your client s circumstances Inventory the federal loans Inventory the private loans

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1 37 million Americans have student loans Comprehensive Student Loan Training Series August trillion dollars in outstanding student loan debt: $1,000,000,000,000 Private Student $150 billion is outstanding private student loan debt Student $864 billion is outstanding federal student loan debt Checklist Analyze your client s circumstances Inventory the federal loans Inventory the private loans Identify the needs of your client Evaluating where his or her student loans fit into the bigger financial picture Establishing an affordable monthly payment Minimizing the total cost of debt over time Restoring eligibility for federal student aid Improving credit record Determine and explain your client s options Discharge and cancellation Consolidation Repayment options Curing default (if necessary) Potential for forgiveness Tax considerations Develop an appropriate strategy and establish next steps Learning objectives inventory and identify student loans evaluate forbearance, deferment, discharge, and cancellation identify when consolidation makes sense distinguish Standard, Extended, and Graduated repayment calculate the benefits of income-driven student loan repayment plans assess school-based, state, employer and profession specific Loan Repayment Assistance Programs define qualifying employment, eligible loans, qualifying repayment plans, and required documentation for Public Service Loan Forgiveness recognize tax considerations related to student loan programs understand the causes and consequences of student loan default explain options and procedures for curing student loan default Anatomy of a student loan TYPE STATUS TERMS 1

2 TYPE STATUS TERMS or private FFEL or Direct Sub or unsub Perkins Parent PLUS Grad PLUS Consolidation Deferment Forbearance Grace Repayment Delinquent Default Statutes Regulations Administrative guidance Promissory note Collections rules student loans Private student loans Private student loans Commercial loans, private loans, alternative loans, school as lender, state loans Terms based on credit Lack borrower protections Often variable interest rates with no cap Lack flexible repayment terms annualcreditreport.com Where to find the information about your client s private student loans 1. Credit report 2. Servicer records 3. Promissory note 4. Client interview 2

3 Private student loans More to ask about your client s private student loans Is there a co-signer? Are you a co-signer? If yes, who is the primary obligor: Do you have copies of your loan agreements? lf no, have you requested copies? If yes, describe: Do you have online accounts to view your account information? Were you at least l8 years old when you signed the loan documents? student loans, government loans, guaranteed loans, Stafford loans These details matter: student loans Reading and interpreting the client s record in the National Student Loan Data System Type Status Current Balance $ Balance upon entering repayment $ Disbursement date Current Interest Rate Current Monthly payment Servicer (and/or collector) Lender or private FFEL or Direct Subsidized or Unsubsidized Parent PLUS Grad PLUS Consolidation Perkins, etc. Deferment, forbearance, grace, repayment, delinquent, default, etc. Month, Day, Year % (Fixed or Variable) $ (Repayment Plan) Online account interface Might or might not be the same 3

4 Type If it s on NSLDS, it s federal If and only if it says Direct it is Direct Private If it s on the credit report but not on NSLDS, it s private Get the promissory note Status NSLDS codes Credit report, servicer records Current Balance NSLDS and servicer records Credit report, servicer records Balance upon entering repayment Disbursement date Current Interest Rate Current Monthly payment Servicer (and/or collector) Lender NSLDS NSLDS Month, Day, Year NSLDS % (Fixed or Variable) Servicer records $ (Repayment Plan) NSLDS Online account interface Might or might not be the same Promissory note Promissory note Servicer records, Promissory note Servicer records Credit report, servicer records Credit report What to ask your clients with federal student loans Are you a veteran? Are you disabled? Did you experience problems with the school(s) you attended? If yes, did the school close while you were attending or around the time you attended? Did you have a high school diploma or GED when you enrolled? If no, were you given an admission test? Did you withdraw from school prior to completion? If yes, did you receive a refund? Do you have reason to believe any of these loans are not your loans or that you did not sign for them? Before July 2010 Perkins FFEL Consolidation Parent PLUS Student Grad PLUS Subsidized Stafford Unsubsidized Stafford Direct Student Since July 2010 Student Direct FFEL Direct 4

5 FFEL FFEL Stafford Direct Stafford Evaluating consolidation It a int what it used ta be Direct Consolidation Loan Before 2006, federal loans had variable interest rates What s up with interest rates? Since 2006, new federal loans are at fixed interest rates set by Congress Beginning July 1, 2013, federal student loan interest rates are tied to the market Private student loan interest rates are based on creditworthiness and are nearly always more expensive Rates for subsidized loans and unsubsidized loans to undergraduate students are: 10-year Treasury rate plus 2.05 percentage points (presently 4.66 percent), capped at 8.25 percent. Rates for unsubsidized loans to graduate students are: 10-year Treasury rate plus 3.60 percentage points (presently 6.21 percent), capped at 9.50 percent Rates for GradPLUS and Parent PLUS loans are: 10-year Treasury rate plus 4.60 percentage points, (presently 7.21 percent) capped at percent Direct Consolidation Loan interest rates Fixed interest rates based on the weighted average of the underlying loans Capped at 8.25 percent for consolidation loans borrowed before July 1, 2013 For loans borrowed on or after July 1, 2013, there is no cap So consolidation isn t really about improving interest rates 5

6 Yesterday s reasons to consolidate federal student loans To access lower monthly payments through longer repayment periods To group loans together with one lender or loan servicer But consolidating isn t the best way to lower payments anymore But the split servicing problem is mostly solved at this point Today s reasons to consolidate federal student loans To lock in a low fixed interest rate (but that only applies to people who haven t already consolidated old loans) To access more specific repayment or forgiveness provisions (if he or she qualifies for them) If he or she has pre variable interest rate federal loans (either FFEL or Direct) If he or she has pre FFEL loans Private consolidation loans are available for people who have really good credit But BEWARE of giving up important borrower protections and flexible repayment provisions that accompany federal student loans Comparing repayment plans Student Offer Many Repayment Options Standard Graduated Extended Repayment options depend on the type, status, and terms of the loan AND sometimes debt-to-income ratio Type of loan vs. private FFEL vs. Direct Income- Sensitive Income-Based Alternative Pay As You Earn Income- Contingent Status of loan Additional factors Consolidation, Parent PLUS, Perkins Grace Deferment Delinquent Default When loan was disbursed Amount of indebtedness Debt-to-income ratio 6

7 Repayment options: FFEL vs. Direct Standard FFEL and Direct loans Length of term depends upon balance FFEL Only Both FFEL & Direct Direct Only Graduated FFEL and Direct loans Income- Sensitive Standard Graduated IBR ICR PAYE Alternative Extended Length of term depends upon balance FFEL and Direct loans Must have more than $30,000 in outstanding loans *Special rules for Parent PLUS, Perkins, and Consolidation No outstanding balance on or before October 7, year term So-called Standard Repayment Plan Equal fixed monthly payments Graduated Repayment Plan Payments start low(ish) and increase every two years $50 monthly minimum Minimum payment is accrued interest 5-10 year repayment term 5-10 year repayment term BUT year standard repayment term for consolidation loans 39 Or year repayment term for Consolidation 40 Length of repayment term for standard & graduated repayment plans Extended Repayment Plan If the Total Education Indebtedness is At Least Less Than Maximum Number of Monthly Payments No outstanding balance on a FFEL or Direct Program loan on or before October 7, 1998 Must have more than $30,000 in outstanding FFEL or Direct $7,500 $10,000 $20,000 $40,000 $60,000 $7,500 $10,000 $20,000 $40,000 $60, (10 years) 144 (12 years) 180 (15 years) 240 (20 years) 300 (25 years) 360 (30 years) Choice of fixed or graduated monthly payments Minimum payment of $50 for Fixed Extended Maximum repayment period is 25 years 7

8 Adjusted Gross Income Steps for evaluating whether your client qualifies for an incomedriven repayment plan and which one Income driven repayment Income driven repayment options Income- Contingent Repayment Pay As You Earn Income- Based Repayment Income-Driven Repayment Plan Income-Contingent Repayment Payment Amount The lesser of: 20 percent of discretionary income, or what borrower would pay on a fixed payment over the course of 12 years, adjusted according to income Income-Based Repayment 15 percent of discretionary income, but never more than (for those who are not new borrowers* the 10-year Standard Repayment Plan amount on or after July 1, 2014) Pay As You Earn Plan (for those who are new borrowers on Oct 1, 2007 and borrowed on or after Oct 1, 2011) Income-Based Repayment (for those who are new borrowers* on or after July 1, 2014) 10 percent of discretionary income, but never more than the 10-year Standard Repayment Plan amount 10 percent of discretionary income, but never more than the 10-year Standard Repayment Plan amount Advantages of income-driven plans Affordable monthly payments Two possible paths to forgiveness: Possibility of forgiveness that is NOT tied to employment Occurs after making payments based on income for years (depending on the income driven repayment plan) IF a balance still remains at that point Possibility of forgiveness that IS tied to employment (Public Service Loan Forgiveness) Occurs after making 120 QUALIFYING payments over at least 10 years IF balance still remains at that point Who should consider choosing income-driven repayment Government and nonprofit employees High-debt graduate and professional borrowers Because they might benefit from Public Service Loan Forgiveness Because they might benefit from income driven forgiveness Borrowers with low income as compared to debt 8

9 Loan Type IBR Pay As You Earn ICR Direct Subsidized Eligible Eligible Eligible Direct Unsubsidized Eligible Eligible Eligible Direct PLUS made to graduate or Eligible Eligible Eligible professional students Direct PLUS made to parents Not eligible Not eligible Eligible if consolidated* Direct Consolidation that did not Eligible Eligible Eligible repay any PLUS loans made to parents Direct Consolidation that repaid Not eligible Not eligible Eligible if consolidated* PLUS loans made to parents Subsidized Stafford (from the Eligible Eligible if consolidated*eligible if consolidated* FFEL program) Unsubsidized Stafford (from Eligible Eligible if consolidated*eligible if consolidated* the FFEL program) FFEL PLUS made to graduate or Eligible Eligible if consolidated*eligible if consolidated* professional students FFEL PLUS made to parents Not eligible Not eligible Eligible if consolidated* FFEL Consolidation that did not repay Eligible Eligible if consolidated*eligible if consolidated* any PLUS loans made to parents FFEL Consolidation that repaid PLUS Not eligible Not eligible Eligible if consolidated* loans made to parents Perkins Eligible if consolidated* Eligible if consolidated*eligible if consolidated* ICR IBR PAYE Only Direct loans No Partial Financial Hardship required Not Parent PLUS BUT YES! Consolidation loans that repaid Parent PLUS FFEL and Direct loans Partial Financial Hardship required Not Parent PLUS NOT Consolidation loans that repaid Parent PLUS Only Direct Partial Financial Hardship required Not Parent PLUS NOT Consolidation loans that repaid Parent PLUS No balance on a federal loan as of Oct. 1, 2007 loan on or after Oct. 1, 2011 ICR IBR PAYE Interest and capitalization benefits accompany the income-driven plans No subsidy Annual interest capitalization 10% cap on interest capitalization 3 year subsidy No capitalization unless no PFH or leaves IBR No limit on amount of capitalization 3 year subsidy No capitalization unless no PFH or leaves PAYE 10% cap on interest capitalization Disadvantages of income-driven plans Negative amortization means lots of interest adds up Payments are based on AGI reported on tax returns so married people must sometimes trade off tax benefits for student loan benefits Possibility of substantial tax liability upon forgiveness Paperwork like you ve never seen Partial Financial Hardship Required debt to income ratio in order to qualify to choose IBR or PAYE Married student loan borrowers must choose: File taxes jointly and have monthly payment based on joint AGI and combined student debt, or File taxes separately and have monthly payment based on individual AGI and individual student debt 9

10 Disadvantages to a married filing separately tax status Tax rate is generally higher than it would be on a joint return. Cannot take the credit for child and dependent care expenses in most cases, and the amount that can be excluded from income under an employer's dependent care assistance program is limited. Cannot take the earned income credit. Cannot take the exclusion or credit for adoption expenses in most cases. Cannot take the education credits, including the deduction for student loan interest. Deductions for contributions to a traditional IRA are reduced or eliminated if income is more than a certain amount, and this amount is much lower for married individuals who file separately. Hunter and Juan-Carlos Gomez Juan-Carlos earns $45,000 as a police officer. His wife Hunter earns $60,000 as a veterinarian. Juan-Carlos and Hunter have no children. Juan-Carlos owes $25,000 on his eligible federal student loans Hunter owes $75,000 on her loans (Hunter owes 75 percent of the total marital student loan debt). Tax Filing Status Comparing Taxation Adjusted Gross Income Annual Tax Due Jointly $102,500 $14,439 $14,439 Separately Hers: $60,000 Difference His: Hers: $45,000 $9,401 His: $5,660 $15,061 Combined Annual Tax Due Filing jointly saves $622 on this year s tax payment. Tax Filing Status Jointly Separately Difference Monthly IBR Payment Hers: $743 (75% of total) Hers: $459 His: $248 (25% of total) Combined Monthly IBR Payment $991 $11,892 His: $272 $731 $8,772 Combined Annual IBR Payment Filing jointly Filing jointly requires $260 requires $3,120 more monthly in more annually in student loan student loan payments payments Although AGI is driven by federal tax return, family size is not. Community property Alternative Documentation of Income for married couples 10

11 Although AGI is driven by federal tax return, family size is not. This means that borrowers can count a spouse in your family size even if you choose to file separate tax returns. According to federal regulations, family size is determined by counting: The borrower The spouse Children if the children receive more than half their support from the borrower Other individuals if they (1) live with the borrower and (2) receive more than half their support from the borrower and will continue to receive this support for the year the borrower certifies family size. The word of the day is: TYPE Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. askheatherjarvis.com 11