Student LoanRepayment Strategies

William Kahler Director of Financial Aid

California Western School of Law

Know Your Loans

• Loan types, lenders, loan servicers• Loans can be sold to a different lender• Loans can also be “put”: sold to the

Department of Education• Information on your loans can be obtained

from the National Student Loan Data System: www.nslds.ed.gov

Tactics

• Postponement options– Deferment– Forbearance– Alignment Forbearance

• Repayment options– Standard– Extended, Graduated– Income-Based Repayment• Public Service Loan Forgiveness

Tactics

• Other tactics– Consolidation• Necessary for PSLF• Move from multiple lenders to a single lender

– Prepayment• Any student loan (federal or private) may be prepaid

without penalty

Postponement

• Grace period– Perkins loans: 9 months– Stafford loans: 6 months– PLUS loans: NONE, but can be aligned with

Stafford loan repayment start date (ask lender for alignment)

– If grace period is ever fully used, it goes away• Summer breaks okay, but more than six months of non-

enrollment or less-than-half-time enrollment removes grace period

Postponement

• Deferment– In-school (half-time or more)– Unemployment, up to 3 years– Economic Hardship

• Recently changed; harder to qualify for• Receiving public assistance, serving as Peace Corps volunteer, or

earning less than 150% of poverty line or less than monthly minimum wage (whichever is greater)

• Use IBR for high debt and low wages– Active duty military– Interest does not accrue on Perkins or Subsidized Stafford– Interest accrues on Unsubsidized Stafford or PLUS– Usually must apply with each lender

Postponement

• Forbearance– A temporary postponement or reduction of

payments because you are experiencing financial difficulty

– Up to 1 year at a time for up to 3 years– Interest always accrues– Usually must apply with each lender

Federal Consolidation Loan

• Helps simplify things by combining federal loans under one lender

• Allows FFEL and Perkins loans to qualify for Public Service Loan Forgiveness by taking out a Direct Consolidation Loan

• Not generally useful as a refinancing tool– Exception: can reduce PLUS from 8.5% to 8.25% if

no other loans included

Stafford, PLUS, and Consolidation Loan Repayment Options

• Standard (10 years)• Extended (12-30 years)– Warning! No PSLF

• Graduated (12-30 years with lower payments at first)– Warning! No PSLF

• Income Based Repayment– 15% over 150% poverty, or 10-year– 25-year forgiveness

Stafford, PLUS, and Consolidation LoanRepayment Non-Options

• Income-Contingent Repayment – Old Direct Loan-only version of IBR; no reason to use,

unless you don’t qualify for IBR at start of repayment (rare)

– 20% over poverty, or 12-year flat payment (higher payments than IBR)

– 25-year forgiveness• Income-Sensitive Repayment – Old FFEL-only version of IBR; no reason to use.– Warning! Not eligible for PSLF *and* must cover

interest

Income-Based Repayment

• Caps repayment at 15% of discretionary income– Or the Standard 10-year payment on the initial

balance when repayment began, whichever is lower

• Must have “Partial Financial Hardship” to qualify– PFH means: Initial IBR payment is less than Standard

10-year payment

• Remaining balance forgiven after 25 years.– IBR forgiveness is a taxable event under current law– HR 2492 seeks to change this; in committee, but…

Income-Based Repayment• Covers Federal Stafford, Federal Graduate PLUS,

and Federal Consolidation loans (both Direct and FFEL).

• Does not cover Federal Perkins loans. – However, Perkins can be consolidated into Federal

Consolidation loans, which are covered.– There are also Perkins-only forgiveness provisions for

certain jobs in teaching, family service agencies, law enforcement, armed forces, or other jobs.

• Does not cover private, state, or institutional loans.

Income-Based Repayment

• Replaces Economic Hardship deferment as method of avoiding payment during bar study period.– Economic Hardship definition no longer includes high

debt/low income (“20/220 rule”)– Anyone who would have qualified under 20/220 will

qualify for IBR– Under IBR, some payments may be necessary if

borrower earns enough income; this could reduce interest subsidy slightly

Income-Based RepaymentExample

• From your AGI, subtract 150% of the poverty level for your family size: 60000 – 16245 = 43755

• Take 15% of the remainder: 43755 x 0.15 = 6563. This amount is your annual maximum payment under IBR.

• Divide by 12 for monthly payment amount: 6563 / 12 = 547.

6563

37192

16245

0

20000

40000

60000

$60,000 AGI, Single, Continental U.S. (2009)

150% ofPovertyLevel

85% ofremainder

15% ofremainder(annualpayment)

Public Service Loan Forgiveness

To be eligible for PSLF you must:– Make 120 of the right kind of payments– With the right kind of loan– While working in the right kind of job

Public Service Loan Forgiveness

• Make 120 of the right kind of payments– Income-Based Repayment (IBR)– Income-Contingent Repayment (ICR, IBR’s

generally inferior older cousin)– Standard 10-year– The wrong kind of payment: extended, graduated,

or income-SENSITIVE payments

Public Service Loan Forgiveness

• With the right kind of loan– Direct Loans Only (Stafford, Grad PLUS,

Consolidation under William D. Ford Direct Loan Program)

– FFEL loans (like those borrowed at CWSL) not eligible; neither are Perkins loans

– However, FFEL loans (including FFEL Stafford, FFEL PLUS, and FFEL Consolidation loans) and Perkins Loans can be consolidated into Direct Consolidation Loans.

Public Service Loan Forgiveness• While working in the right kind of job

– Full-time employee of a 501(c)(3)– Or a full-time federal, state, local, or tribal employee

• Includes AG, DA, PD, JAG, FBI, etc.– Or a full-time AmeriCorps or Peace Corps position– Or the job satisfies both parts of the following test:

• The employer is not "a business organized for profit, a labor union, a partisan political organization, or an organization engaged in religious activities, unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing"

• AND the employer provides any of the following public services: emergency management; military service; public safety; law enforcement; public interest law services; early childhood education; public service for individuals with disabilities and the elderly; public health; public education; public library services; and school library or other school-based services.

Public Service Loan Forgiveness

• Forgiven amounts not taxable under PSLF!

Different situations, Different strategies

• Aggressive: Pay down loans early (Standard repayment – or faster!)– Requires high income– Minimizes interest cost (no penalty for prepayment)– Not an option for some high balances

• Extended: stretch out flat payments over many years (Extended, Graduated)– Highest interest– Probably not the best option for federal loans

• IBR: Income Based Repayment– Caps payments based on your income– If balance remains after 25 years, forgiveness– Federal loans only; must consolidate Perkins– Can be more costly if income spikes

• PSLF: Public Service Loan Forgiveness– Under IBR, caps payments based on your income– Requires 10 years of full-time public service employment– If balance remains after 120 qualifying payments, forgiveness– Federal loans only; must consolidate FFEL loans and Perkins to Direct

• If circumstances change, consider changing strategies

Federal Loans only$180,000 debt

Repayment option Starting Monthly Payment (rounded)

Standard 10-year $2180

Extended 25-year $1380

Income Based Repayment ($100,000 AGI) $1050

Income Based Repayment ($60,000 AGI) $550

Income Based Repayment ($40,000 AGI) $300

Repayment graphAssumes 3% inflation, and 4% annual AGI increase

Total Payments$180,000 debt, 3% inflation, 4% annual AGI increase

Repayment Option Total Payments Total Forgiven

Standard 10-year $261,145 None

Extended 25-year $413,896 None

IBR, $60K starting salary $285,971 $248,127

PSLF, $60K starting salary $80,120 $242,425

Repayment graphAssumes 3% inflation, and 4% annual AGI increase

Total Payments$180,000 debt, 3% inflation, 4% annual AGI increase

Repayment Option Total Payments Total Forgiven

Standard 10-year $261,145 None

Extended 25-year $413,896 None

IBR, $60K starting, jumps to $120K in year 5

$422,443 (23 years) None

PSLF, $60K starting, jumps to $120K in year 5

$118,306 $116,117

Federal Loans only$60,000 debt

Repayment graphAssumes 3% inflation, and 4% annual salary increase

Total Payments$60,000 debt, 3% inflation, 4% annual AGI increase

Repayment Option Total Payments Total Forgiven

Standard 10-year $82,858 None

Extended 25-year $124,935 None

IBR, $60K starting AGI $87,459 (11.3 years) None

PSLF, $60K starting AGI $77,078 $9,924

Private Loans

Terms vary by loan. Generally:• No deferments, but a “grace period” and

forbearances are available• An extended repayment plan may be available• No federal consolidation. “Private

Consolidation” expensive and usually unhelpful.

Private Loans

• Private loans can’t be included in IBR, so total monthly payment = IBR payment + private loan payment

• Since private loans generally have variable rates, it is a good idea to prepay private loans as quickly as possible, while interest rates are low

For More Information

• IBRinfo.org• EqualJusticeWorks.org• Department of Education– Google: ed.gov IBR (for IBR information)– Google: ed.gov PSLF (for Public Service Loan

Forgiveness information)

• Finaid.org (for calculators and in-depth analysis)