Understanding Student Loans - PowerPoint Presentation

Slide1

Understanding Student Loansfor Finance Professionals

2017 Personal Finance Seminar for

Professionals, University of Maryland Extension

Charles W. Pruett

Assistant Dean for Financial Aid

Georgetown University Law Center

Slide2

Our Topics for Today

Types of Student Loans

Interest Rates

Repayment Plans including Income-Driven Loan Repayment (IDR)

Public Service Loan Repayment (PSLF)

Loan Repayment Strategies

Slide3

Understanding Student Loans –Common Loan Types

Primary types of loans currently offered to undergraduates:

Federal Subsidized Stafford

Federal Unsubsidized Stafford

Federal Perkins Loan (program is

sunsetting

)

Private Loans (

may

challenge further education goals)

Parent Federal PLUS loans

Primary types of loans currently offered to

graduate students:

Unsubsidized Stafford

Graduate PLUS

Graduate Private Loans (often marketed on a career-path basis)

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Understanding Student Loans – Federal Interest Rates

I

nterest rates are for Stafford and PLUS loans “Variable/Fixed”

Interest rates are set each year based upon 10-year Treasuries for loans borrowed on/after July 1

Once set, the interest rate is fixed for the life of the loan

There have been numerous other calculations of interest rates in the past

Only simple thing – Perkins Loans are/were always 5%

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Current Federal Loan Rates and Fees

Source for this and

and

following

slide: studentaid.ed.gov/

sa

/types/loans/interest-rates

Slide6

Historic Federal Loan Rates

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In Sum, Strategy is a Must!

A current law student, when including

undergraduate debt, could graduate with…

15 different federal loans

from four different programs

with 15 different interest rates

What could possibly go wrong?

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Understanding Student Loans – What’s the Initial Monthly Payment?

Borrower with $150k in debt at an average 6.5%

What’s Missing? The Borrowers AGI.

$75,000

Plan

Calculation Method

Amount

10-Year Level

120 Monthly

$1,703

25-Year Level

300 Monthly

$1,013

Extended/Graduated

300 Months, interest only to start, increases every 2 years

$979

Income-Based (IBR)

15% of Post-Protection

AGI

$550

Pay As You Earn

10% of Post-Protection

AGI

$370

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Quick and Dirty IDR Information

Eligibility for the various plans is determined by WHEN the loans were borrowed

Payments are determined by AGI and family size

Payments are between 10-15% of post-protection AGI

If pursuing PSLF, IDR repayment is required

If the borrower is married, the method of tax filing (married or separate)is important

IDR plans provide for TAXABLE forgiveness after 20-25 years

For a default option, Pay As You Earn (PAYE) is generally considered the best

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Quick and Dirty IDR Calculations

Item

Additional Information

Result

Adjusted Gross Income

From 1040

$75,000

Less Personal Protection

150% of Poverty

Guidelines

(just use $18,000)

-$18,000

Less Family

Size Protection

(two

add’l

in example)

150% of Poverty

Guidelines

(just use $6,000 per

add’l

member)

-$12,000

Base for Calculation

Math

it like you mean it!

$45,000

IBR

15% of Base

$6,750

per year

$562/mo

PAYE 10% of Base

$4,500 per year

$375/mo

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Understanding Student Loans – Public Service Loan Forgiveness

Eligible federal loans are forgiven TAX FREE if the borrower has made…

…120 Payments…

Do not have to be consecutive

…While under an eligible repayment plan…

IDR plans and level 10-year repayment

…While working for an eligible employer.

Federal, state, local or tribal government

Non-profit 501(c)(3)

LIMITED exceptions

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Understanding Student Loans – PSLF Eligible Loans

All student-borrowed student loans are

e

ligible

IF

they are “Direct” loans

Federal Direct Subsidized Stafford

Federal Direct Unsubsidized Stafford

Federal Direct Graduate PLUS

Other student-borrowed federal student loans are eligible

IF

consolidated to the Federal Direct Consolidation Loan Program

Federal Parent PLUS loans are NOT eligible

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A Counselor’s Role – To Provide Perspective & Help Create a Strategy

Students are legitimately concerned about debt, almost to the exclusion of more pressing issues

Everyone has a different money psychology and different stressors, but encouraging students to consider the following has been helpful:

Savings and Retirement

Home

Purchasing

Family Plans and Life Experiences

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The cart and the horse – which situation would you prefer?

This?

Or This?

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If Dollars are the ONLY Concern……then Tame the Interest Beast

Federal loan consolidation used to be a means to take advantage of interest rate variability – NO LONGER TRUE

Changing the form of the debt, e.g., home equity loan may be a good choice, but options are lost

Private lenders are offering consolidation choices, often in conjunction with employers, that will convert higher-cost federal loan debt to lower cost private education loan debt

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Private Student Loan Consolidation

Private loan consolidation is neither good for all nor bad for all but it is…

A one-way door

An exchange of flexibility for a lower cost as options lost include:

Public Service Loan Forgiveness (PSLF)

IDR plans

Statutory deferment and forbearance offerings

20 or 25-year forgiveness

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Hurdles to Cross Prior to Consolidating Student Loans with a Private Lender

HURDLE ONE

- Borrower has a clear picture of both the career path and “

forecastable

” life events

If the career path include government and/or non-profit employment, PSLF must be included in the analysis

If changes in family size are in the near future, payment flexibility may be more valuable

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Hurdles to Cross Prior to Consolidating Student Loans with a Private Lender

HURDLE TWO

– Borrower has cash reserves (in addition to emergency savings) to cover the required monthly payments for six months.

Unlike federal loans, private consolidation loans have far fewer repayment amount and forbearance options – borrower must build an extra cushion

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If private consolidation is not the right choice right now, then staying in the

federal loan

p

rogram

means

smarter repayment

is the goal, not faster repayment…

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IDR – The Right Answer for Everyone?

With the creation of the IDR plans, Congress and the Department of Education created tools for success

Used correctly, tools can make great things, when incorrectly used, you can lose a finger!

Goal should never be to simply pay less, but to

pay smart

Graduates can stabilize financially and then turn on the fire hose to repay

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Everyone Has a Strategy

When considering use of IDR, a graduate should consider:

Career path and typical income growth trajectory

Family changes that may increase or decrease payment ability

Possibility of increased interest costs weighed against other financial benefits

Selecting IDR is not a “forever decision”, rather an assessment of the current situation and projected future

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IDR Allows Borrowers the Opportunity to get Money in the Bank

Graduates frequently do not have adequate savings for lean times.

First goal should be to get emergency savings established to become good financial citizens

46% of Americans do not have sufficient resources to cover a $400 expense (2016 Federal Reserve Report)

Can’t ask Uncle Sam for prepayments back, but he will happily accept early payoff later.

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IDR Allows Smarter Repayment – A Basic Vanilla Calculation

A graduate has 2 loans @ $25K each, one @ 6.8% one at 5.8%

AGI is $55,000, PAYE payment is approx $308, normal 10-year is $562.

By selecting PAYE and redirecting difference to the worst loan, the graduate can save over $1,600 in interest and finish months

earlier

It is BOTH smarter and FASTER!

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IDR Helps to Boost Early Retirement Contributions

Graduate’s most important asset is their age

The earlier the contributions start, the more meaningful the result – few want to work forever – do you?

The tax advantage of retirement contributions means that $100 of prepayment on a loan could be $150 actually invested

Would you rather save interest of $7 (7% on $100) or earn $13.50 (9% on $150)?

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IDR Can Help with Home Purchasing

Many graduates have been told that they can’t buy a home due to debt, but..

IDR can make home purchasing possible with a lower monthly required loan payment

With low mortgage rates, in many areas buying is significantly cheaper than renting

Resulting in the irony that home buyers could actually pay their loans FASTER!

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Common Counseling Misunderstandings

Sometimes a student wants to be in repayment or is encouraged to be in repayment (e.g. mortgage qualification)

In general, federal student loans can’t be forced into repayment

IF the borrower is still in school AND

The loan(s) in question never entered repayment previously

Graduate PLUS loans can be forced AS LONG AS the loan is fully disbursed

In any event, this requires constant monitoring by the student

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Common Counseling Misunderstandings

Don’t pay interest while in school for federal student loans

Interest does not capitalize until AFTER graduation AND the borrower enters repayment

IF the borrower can pay interest while in school, then too much was borrowed in the first place

If a borrower has too much funding that semester, then it should be returned through the school

For up to 120 days, it backs off the interest and origination fees

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How Finance Professionals Can Help Student Loan Borrowers

Developing a Student Debt Strategy is not merely a numbers proposition - just as with almost every other financial issue, the borrower’s life plans drive the strategy

Mistakes based on numbers alone can be costly and life-changing

Things change CONSTANTLY, double check both your and the borrower’s understanding

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Thank you for sharing your time with me today!

Q & A

pruettc@law.georgetown.edu