Financial Planning Considerations in Student Loan Management Justin Kribs, MS, CFP, Manager Student Financial Planning and Wellness at Oregon Health & Science University Program at OHSU Currently 1 of 2 Certified Financial Planners nationally that works for a university as a full time counselor for students and alumni. This is a campus wide program with a broad focus. Over 1,000 appointments with more than 950 unique students/alumni since starting the program in October of 2012. Program limitations: No recommendations of company specific insurance products. No investments. No taxes. No third party referrals. No financial aid. Overview of today s agenda. 1
Agenda Focus on Planning Current State of Borrowing Snapshot of a Future Client Three Basic Steps to Understanding Student Loans A Case Study Scenario Managing Goals and Expectations The Value Added Proposition Setting the tone We are going to be flying at 30,000 feet, so some details have been omitted for sake of time. 2
The issues of rising costs, reduced public support, and student debt are not simply personal problems for students but a public issue that should be discussed more widely and profoundly than is currently the case 1. Focus on Planning You cannot treat student loans like other forms of debt. It simply isn't just principal and interest: An individual s mix of loans can have multiple options for: Loan discharge Loan forgiveness Repayment flexibility Tax free repayment 3
Current State of Affairs: Debt Levels Debt Levels According to recent numbers the amount of student loans currently outstanding is above $1 trillion with 40% of that amount owed by Graduate Students 2. Student debt only trails mortgage debt in the total amount outstanding. An increasing number of individuals over 40 are still in debt several years after first attending college 3. Roughly 6-million Gen-X households still owe student debt 3. Of course what is also unique of Student debt is that it is uncollateralized debt. 4
Reported Average Indebtedness for Graduate Students in 2012 4 The Average as a Monthly Payment Loan Amount w. est. 6.00% loan rate Standard Payment Total Payment after 10 years Extended Payment Total payment after 25 years $160,000 $1,776.33 $213,159.36 $1,030.88 $309,264.67 $140,000 $1,554.29 $186,514.44 $902.02 $270,606.59 $60,000 $666.12 $79,934.76 $386.58 $115,974.25 $55,000 $610.61 $73,273.53 $354.37 $106,309.73 $40,000 $444.08 $53,289.84 $257.72 $77,316.17 What the terms mean: Standard 10 year repayment plan. Extended 25 year repayment plan. 5
Reported Average Indebtedness for Medical Graduate Students As reported on the AAMC Debt Fact Cards. Reported Average Indebtedness for Dental Graduate Students As reported by the ADEA 5. 6
The Average Doesn't Tell the Whole Story There are several omissions that you need to keep in perspective when you look at the previous data points. The averages typically do not include: Accrued interest Private loans Service obligation loans Loans not accrued while at that institution Lastly, the average is the average AT graduation. What is often missing in these portrayals of student debt is an explanation of what the federal government and colleges are doing to give student loan debtors the personal finance knowledge and skills that they need to safely and responsibly manage their debt 6. 7
How will millennials handle their sandwich generation? Step 1: Understand the Portfolio 8
Where to Find Information NSLDS: https://www.nslds.ed.gov/npas/index.htm Annual Credit Report Borrowers school for institutional loans: Financial Aid Office Business Office 9
Clicking on this button will download a.txt file of all of their federal loan information. 10
Step 2: Understand the Details of Each Loan Loan Types: Direct Loans Current Rates Rate Caps Annual Limits Subsidized 4.29% 8.25% Unsubsidized - Undergrad Unsubsidized - Graduate 4.29% 8.25% $12,500 5.84% 9.50% $20,500 Graduate Student $40,500 Medical/Dental Student GRAD PLUS 6.84% 10.50% Unlimited 11
Loan Types: Other Federal Current Rates Annual Limits Need based? Perkins Loans (Subsidized) Health Professions Loans (Subsidized) Primary Care Loan 5.00% $5,500 Undergraduate $8,000 Graduate Yes 5.00% Varies Yes 5.00% Varies No, but the financial aid office determines how much a person can get. Loan Types: Private & Institutional Loans Loan Type Payment Rate Caps Annual Limits Private Fixed/variable Varies Varies Needs to be a verified amount. Institutional (College provided private loans) Varies Varies The school will set their own limits on these loans. 12
Interest and Federal Loans Rates on loans are fixed/variable. Interest on federal student loans is simple interest that accrues on a daily basis. Interest is not capitalized (or added to) a student s loan until 6 months after the student has either: Graduated Dropped out Ceases to be enrolled half time Interest and Federal Loans Cont. Interest will also capitalize every time there is a change in repayment status. Some examples are: Change in repayment plan. Change in forbearance or deferment status. 13
Annual Interest Accrual Step 3: Understand the Repayment Options. 14
We will Federal be making some corrections Repayment to the Journal of Financial options Planning article Income-Based Repayment and Loan Forgiveness: Implications on Student Loan Debt. Standard Repayments: Standard 10 Year Graduated 10 Year Extended 25 year Graduated 25 year Income Drive Repayment Plans: Income Contingent Repayment Income Based Repayment 1 Income Based Repayment 2 Pay As You Earn Federal FFEL and Direct Loans are eligible for these plans. Income driven repayment is not the same as income based repayment. You Can Not Combine Private Loans into a Federal Repayment Program Income Driven Repayment Income Driven Repayment Plans: Income Contingent Repayment FFEL & Direct Loans Income Based Repayment 1 FFEL & Direct Loans Income Based Repayment 2 Direct Loans Pay As You Earn Direct Loans 15
Income Driven Repayment Cont. Five Important Points: 1. Adjusted Gross Income 2. Standard Repayment 3. Family Size 4. Date of 1 st loan disbursement 5. Loan mix Income Driven Repayment Calculation: IBR1, IBR2, PAYE, REPAYE = X = Start w. Adjusted Gross Income 150% of Poverty Guideline for household Discretionary Income 10% 12 Monthly Household Payment IF this amount is LESS than the Standard Payment for the borrower s loans, then they are eligible for income driven repayment. 16
Loan Type IBR PLAN Pay As You Earn Income Contingent Direct Subsidized Loan Direct Unsubsidized Loan Direct GRAD PLUS Direct Parent PLUS Eligible Eligible Eligible Eligible Eligible Eligible Eligible Eligible Eligible Not Eligible Not Eligible Eligible if consolidated Loan Type IBR PLAN Pay As You Earn Income Contingent Direct Consolidation Loan w/o Parent Plus Direct Consolidation Loan w. Parent Plus Eligible Eligible Eligible Not Eligible Not Eligible Eligible 17
$100,000 in Loans I have $100,000 in loans Mix of loans Perkins loan payments are no less than $40/mo. regardless of balance. Balances are always set to be paid in full over a 10 year period of time or sooner. Institutional loans have payments and rates that are determined by the lending institution. They sometimes don t give students enough information prior to signing up. Since there is less than $30,000 in federal loans the borrower will most likely be limited to either the standard, or graduated standard, repayment program. The same lender can give each loan a different repayment term and interest rate. Lenders of private loans typically don t combine loans for a favorable repayment plan. 18
I have $100,000 in loans Federal Only Because this borrower only has federal loans they would be able to apply for any of the federal repayment programs assuming that they didn t take out their first loan until after October of 2007 (the cut off for PAYE). Depending on their job they may not have to repay their Perkins loans. Additionally, if they work in certain medical fields they could apply for: NHSC HRSA IHS MDLRP SLRP There is also the ability for Public Service Loan Forgiveness Public Service Loan Forgiveness Here are a few nuances that make up the public service loan forgiveness program. Administered by PHEAA 10 years (total, non-consecutive) of working for an eligible employer Full time (Average of 30 hours a week) W-2 Income Must have qualifying Direct Loans Must be on an eligible repayment plan ICR, IBR1, IBR2, PAYE, Standard Payments must be full and on time 1 Payment per month 19
I have $100,000 in loans can mean various different things. $100,000 in loans a few different ways Cont. The borrower has reduced their interest rates, but will they be able to afford the monthly payment? Do you plan to pay more later, or very little over time? You can assume that most borrowers would like to see their loans gone before school starts for their kids. Managing Goals and Expectations 20
Stages of Professional Development The Value Added Proposition 21
Understanding Your Client How eager are they to pay off loans when they also may want to (or need to): Build an emergency fund? Buy a house? Buy a practice? Save for education? Save for retirement? Understanding Your Client How do you/they see their situation changing over time? What is the cash flow situation? What is the employment situation? For profit/non-profit Employer loan forgiveness What is their tax situation? What is their tolerance for risk? 22
What is the Risk Management Strategy? Considering the tough restrictions with regards to student loans and bankruptcy, it is important that clients integrate a risk management strategy into their overall financial plan. Federal Loans have built in safety overrides: Income Driven Repayment Economic Forbearance (3 years total) Discharge for disability or death (taxable) What is the Risk Management Strategy? Be sure to consider the following individual risk management options when creating your debt reduction plan. Disability Liability Life 23
Thank You! Citations 1 Hill, A. T., & Suiter, M. C. (2014). Teaching about Personal. Social Education, 78(4), 189-191. 2 Delisle, J. (2014). The Graduate Student Debt Review: The State of Graduate Student Borrowing. 3 Boak, J (2015) http://www.usnews.com/news/business/articles/2015/10/05/student-debtsqueezing-parents-and-children-simultaneously. (2015, October 5). Retrieved October 10, 2015. 4 Delisle, J. (2014). The Graduate Student Debt Review: The State of Graduate Student Borrowing. 5 American Dental Education Association. (February 2015). ADEA Survey of Dental School Seniors, 2014 Graduating Class Tables Report. Washington, D.C.: Author. 6 Pelletier, J (2015) http://www.marketwatch.com/story/colleges-uncle-sam-owe-student-loanborrowers-an-education-2015-10-05. (2015, October 6). Retrieved October 10, 2015. 24