Financial Planning Series: Student Loans

September 8, 2016

The following are some steps you may want to take in analyzing your student loan. 

 

 

 

 

For more information, please visit www.studentloans.gov

 

 

  1. Determine the type of student loan

    1. Federal

      1. Direct loans- loans made directly to the student from the DOE, as opposed to indirect loans such as the FFEL program which ended in 2010.

      2. Subsidized/unsubsidized- the government pays your interest while in school for subsidized loans. Must demonstrate financial need to qualify.

      3. PLUS- for parents of a graduate or undergraduate student.

      4. Perkins- fixed interest rate of 5%, and are all subsidized. Must demonstrate financial need. Most likely not a good idea to consolidate.

      5. Stafford- may be subsidized or unsubsidized. Need based.

    2. Private- a non-federal loan issued by a lender such as a bank or credit union.

    3. Rates on federal loans

      1. Depend on your disbursement date

      2. Loans disbursed prior to 2006 have variable rates. Thereafter, the rate was fixed for the life of the loan depending on when disbursed.

      3. Since 2013, Congress tied the interest rate to financial market rates. As such, new loans have benefited greatly from the low interest rate environment.

      4. For example, prior to the interest rate declines following the financial crisis in 2008, a ‘direct subsidized loan’ issued in 2007 carries a rate of 6.8%.  This is in contrast to the now current rate of 3.76%.

  2. Consider consolidating your federal loans

    1. The Benefit- you will have one loan amount and payment. Further, you can stretch out the payment period to reduce the monthly amount. In the future, you can make extra payments to quickly pay down the balance with no penalty. Secondly, you can apply for one of the income-driven payment plans. https://studentloans.gov/myDirectLoan/index.action

    2. Step by step instructions

      1. Create your FSA ID

      2. Login to the National Student Loan Data System to view your loan details

        1. Use your FSA ID

        2. View the type of loans, balances, interest rate, and servicers.

      3. Their system will evaluate the loan type and indicate availability for consolidation.

      4. The interest rate will be the weighted average of your qualifying loans and be fixed for the life of the loan.

    3. You then select from the available payment options

    4. You will also apply for income driven payment options as discussed below

  3. Income Driven Repayment options

    1. https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

    2. Fact sheet: https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment.pdf

    3. Consolidation makes your FFEL loans (Stafford) eligible for repayment options, whereas if not consolidated, the FFEL loans are only eligible for the IBR plan.

    4. Depending on your income and family size, your estimated monthly payment will vary. Most federal loans are eligible for one of the income driven options.

    5. REPAYE and ICR are always based on income and family size, thus payment may exceed the standard repayment option payment.

  4. Public Service Loan Forgiveness Program

    1. After you have made 120 on-time qualifying monthly payments & while working full-time for a qualifying employer, the PSLF forgives the remaining balance on your direct loans.

    2. Started in 2007, to encourage graduates to work in public service.

    3. Qualification

      1. Employers that qualify

        1. Federal, state, local, or tribal government organization

        2. 501©(3) Not-for-profit

        3. Other not-for-profit organizations that provide emergency management, military service, public safety, law enforcement, public interest law services, early childhood education, public service for individuals with disabilities & elderly, public health, public education, public library services, other school based services.

      2. Full-time employment as deemed by employer of at least 30 hours per week, whichever is greater. More than one qualifying part-time job may meet the requirement.

    4. You must select from one of the following repayment methods:

      1. Income-driven repayment (REPAYE, PAYE, IBR, and ICR)

      2. 10-year standard repayment- though if you make your qualifying payments, there will be no balance at the end of the 10 year period.

    5. General Q&A

      1. The amount forgiven is not taxable

      2. Enrollment is surging as we enter the first 10-year period. As of the end of 2015, 295,000 were on track for forgiveness.

      3. Both parties have moved to change the program

        1. President Obama proposed capping the amount at $57,500

        2. Republicans have proposed eliminating

      4. If you have both Direct Loans and other types of federal student loans that you want to consolidate to take advantage of PSLF, it’s important to understand that if you consolidate your existing Direct Loans with the other loans, you will lose credit for any qualifying PSLF payments you made on your Direct Loans before they were consolidated.

      5. To see if you are on track, you can submit periodic documentation for a response from the program.

 

 

Cory Nakamura CFA, CFP®

Chief Investment Strategist and Financial Advisor

 

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