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 1
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 Consolidation Direct or FFEL loans Must be in grace, repayment, or default Payments are fixed or graduated; up to 25 years to repay Range of 10 to 30 years, depending on repayment plan and/or total education loan debt 2
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 Direct loans Repayment (IBR) (effective 7/1/14) Income- Contingent Repayment (ICR) Income-Based Repayment (IBR) (prior to 7/1/14) Partial Financial Hardship Payment Calculation 10% of discretionary income 10% of discretionary income Direct loans All Lesser of: 12-year standard repayment schedule multiplied by income percentage factor or 20% of discretionary income Direct or FFEL loans Partial Financial Hardship 15% of discretionary income Forgiveness 20 years 20 years 25 years 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 Monthly payments may not be affordable for those with higher debt 3
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 Effective New Direct loan borrowers July 1, 2014 (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 consecutive years 4
Income-Based Repayment Remaining balance after 20 years of repayment will be forgiven Effective July 1, 2014 Drawbacks Must reapply each year Could pay more interest over time May pay taxes on amount forgiven Income-Based Repayment Direct and FFEL loan borrowers (excludes Parent Prior to July 1, 2014 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 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 5
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 repayment will be forgiven 6
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 7
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 Choosing the Right Plan for Success 8
Meet Rebecca Rebecca o Employment status pharmaceutical sales o Income $55,000 o Loan debt $35,000 federal; $25,000 private Which repayment option should Rebecca consider? Rebecca s Repayment Options Rebecca s repayment options o Standard repayment $402 o Private loan repayment $277 o Total monthly payment $679 o Graduated repayment $276 (years 1-2) o Private loan payment $277 o Total monthly payment $553 Rebecca s Repayment Options Rebecca s repayment options o Extended repayment $242 o Private loan repayment $277 o Total monthly payment $519 o Extended graduated repayment $201 (years 1-2) o Private loan repayment $277 o Total monthly payment $478 9
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 o Employment status art director o Income $48,000 o Loan debt $32,000 federal Which repayment option should Sam consider? Sam s Repayment Options Sam s repayment options o Standard repayment $368 o Graduated repayment $252 (years 1-2) o Extended repayment $222 o Extended graduated $184 (years 1-2) 10
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 o Employment status automotive retail sales o Income $28,000 o Loan debt $22,000 federal Which repayment option should Cliff consider? Cliff s Repayment Options Cliff s repayment options o Standard repayment $253 o Graduated repayment $146 (years 1-2) o Extended repayment not eligible o Extended graduated not eligible 11
Cliff s Repayment Options If Cliff meets the eligibility requirements, he could consider Pay As You Earn: o Initial monthly payment $90 o Amount paid by Cliff in 20 years $37,255 o 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 Cliff s Repayment Options If Cliff has loans prior to July 1,2014, he could consider IBR: o Initial monthly payment $135 o Final monthly payment $253 o Payments are no longer based on income in his 12 th year of IBR o Pays off his loan in 16.2 years of IBR o Amount 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 $39,413 Pay As You Earn $37,255 12
Meet Carla Borrower Carla o Employment status human resource manager o Income $89,000 o Loan debt $62,000 federal Which repayment option should Carla consider? Carla s Repayment Options Carla s repayment options o Standard repayment $713 o Graduated repayment $411 (years 1-2) o Extended repayment $430 o Extended graduated $351 (years 1-2) Carla s Repayment Options If Carla meets the eligibility requirements, she could consider Pay As You Earn: o Initial monthly payment $598 o Payments are no longer based on income in her 5 th year of IBR o Pays off her loan in 10.8 years of IBR o Amount paid by Carla in 10.8 years $89,007 *Assumes a 4% increase in Carla s income each year and a 3% annual increase in the poverty guidelines 13
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 o Employment status graphic designer o Income $35,000 o Loan debt $50,000 federal Which repayment option should Norm consider? Norm s Repayment Options Norm s repayment options o Standard repayment $575 o Graduated repayment $331 (years 1-2) o Extended repayment $347 o Extended graduated $283 (years 1-2) 14
Norm s Repayment Options If Norm meets the eligibility requirements, he could consider Pay As You Earn: o Initial monthly payment $148 o Amount of debt forgiven under Pay As You Earn $31,519 o Amount 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: o Initial monthly payment $222 o Final monthly payment $575 o Payments are no longer based on income in his 21 st year of IBR o 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 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 Income-based Repayment $100,925 15
Meet Lilith Borrower Lilith o Employment status employment lawyer o Income $88,000 o Loan debt $110,000 federal (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 o Standard repayment $722 o Graduated repayment $630 (years 1-2) o Extended repayment $768 Lilith s Repayment Options Total cost of Lilith s $110,000 consolidation loan Standard repayment $206,143 Graduated repayment $280,328 Extended repayment $230,612 16
Lilith s Repayment Options Lilith s repayment options o Standard repayment $1,265 o Graduated repayment $730 (years 1-2) o Extended repayment $763 o Extended graduated $623 (years 1-2) Lilith s Repayment Options If Lilith meets the eligibility requirements, she could consider Pay As You Earn: o Initial monthly payment $590 o Pays off her loan in 20 th year of Pay As You Earn o Amount of debt forgiven under Pay As You Earn $623 o Amount 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 Pay As You Earn $200,383 17
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 18
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 Any former students having trouble making their payments 19
Thanks for Attending Carol Swenson & Diane Borchardt cswenson@glhec.org dborchardt@glhec.org Great Lakes Senior Marketing Associates 20