After College: Should You Refinance Your Federal Student Loan Debt?

If you owe on federal student loans borrowed to pay for college, and especially if you watch late night TV commercials, you may be wondering what “refinancing” is and whether it’s the right thing for you?

When you “refinance” you borrow a private loan to pay off your federal loans, IMG_6807pledging to repay the new loan according to terms and conditions stated in its promissory note.

This sounds a lot like a Federal Direct Consolidation Loan but it’s not. Your new loan isn’t coming from the U.S. government so your rights and responsibilities on it are no longer based on laws governing federal student loans. Instead, the promissory note you’ll sign with your new lender defines your rights and responsibilities, and certain benefits and protections you now enjoy most likely won’t be available on your new, private, refinancing loan. Here are some key examples:

Interest Rates: Your federal student loan interest rates are generally fixed for the life of those loans. Refinancing lenders stress that their loans offer lower interest rates than you’re currently being charged — thereby lowering your monthly payments and saving you money in the long run. However, their promissory notes IMG_6803may allow their lenders to raise their interest rates later, perhaps many times.

Deferment and Forbearance: You may defer or forbear payment on your federal loans under certain conditions — returning to college, part-time employment, financial distress, etc. But such postponements may not be available once you refinance, or at least not available for the same circumstances.

Repayment Flexibility: When you owe the government, you get a 6-9 month grace period and the right to make payment under any of 7 different federal repayment plans that best meet your needs. Some of these plans will lower your monthly payments. Your grace period may not be the same on a refinancing loan, and refinancing lenders don’t usually offer you all the same repayment options.

Debt Cancellation, Discharge, and Forgiveness: Federal law creates opportunities through which your debt to the government may be cancelled, discharged, or forgiven. Understand none of these opportunities exist on refinancing loans.

How can you tell if a refinancing loan is good for you? Closely scrutinize its promissory note. If that note doesn’t explicitly guarantee benefits and protections you may need or want, don’t borrow it!

Looking for ways to make your college debts more manageable? Feel free to contact College Affordability Solutions for help.

After College: What Will My Monthly Student Loan Payments Be?

Congratulations! You’ve finished your bachelor’s degree and are about to begin your career. If you borrowed for college, you’ll soon wonder how much you’ll need to spend each month to repay your student loans.

IMG_6700The answer is . . . it depends! It depends on how much you’ll owe when your grace period ends, the combined interest rates on your loans, the student loan repayment plan you select and, under some plans, your earnings and family size. Consider, for example, a new bachelor’s degree recipient who borrowed the annual maximum in Federal Direct Loans during each of his 4 years in college which, when his grace period ends, will amount to a $28,187 debt at a combined interest rate of 4.2%. He just accepted a new $40,000 per year job:

Repayment Plan         Monthly Payment       Number of Payments    Total Amount Paid

Standard                      $276                               120                                     $33,086

Graduated                   $155                               155                                     $34,696

Extended                     This Borrower Not Eligible for This Repayment Plan

Income-Based            $274                                121                                     $33,097

income-Contingent   $202                                165                                     $35,787

Pay As You Earn       $183                                142                                     $36,849

Revised Pay As You Earn     $183                   133                                     $34,193

Want a precise projections of your monthly payment amounts? Open the government’s Federal Student Loan Estimator with your Federal Student Aid ID to IMG_6699get them. Different federal repayment plans have different eligibility criteria, so this’ll also help you identify plans for which you do and don’t qualify.

Such research will help you evaluate the repayment plans for which you’re eligible in preparation for the day you tell your student loan servicer the plan under which you want to begin repaying your loans. It’ll also help you know how much you’ll need to budget for your monthly student loan payments — at least during your first year of repayment.

It’s important to remember two things about loan repayment. In general, the longer your repayment period, the lower your monthly payments will be. But also, the longer your repayment period and lower your monthly payments, the more you pay on your college debt in the long run. So it’s usually best to pick the plan requiring the highest monthly payments you can afford.

Also remember — for federal student loans, you may change your repayment plan as necessary. So if your situation changes and the plan you’re using no longer fits your needs, you may always research and pick another loan repayment plan. This makes federal student loans preferable to most, if not all, institutional, private, and state student loans.

Speaking of non-federal loans, to discover how much you owe and your repayment plan options for them, you’ll need to check your lender website(s) and, maybe, call your lender(s).

Forewarned is forearmed so, no matter what type of student loans you have, start now to research what you owe and your options for repaying it!

Want help considering your repayment plan options? Feel free to contact College Affordability Solutions at collegeafford@gmail.com or (512) 366-5354.

Special Bulletin: Proposed Federal Budget Would Reportedly Makes Big Cuts in Programs for College Students and Graduates

The Washington Post reports it has received what a U.S. Education Department staff member described as “near final” documents showing the administration will IMG_6510recommend a 13.6% reduction in federal education spending next week. The budget proposal would reportedly affect federal financial assistance for college students as follows:

  • Child Care for Enrolled Parents: End a $15 million program helping to make child care affordable for low-income parents attending college.
  • Federal Direct Subsidized Loans: Make as yet unannounced cuts that could end this program, which currently serves financially needy students. If this happens, all federal loans for such students would be unsubsidized and begin compiling interest the day they are made — significantly increasing student borrowing costs.
  • Federal Pell Grants: Hold Pell Grants for the nation’s neediest undergraduates at their current levels ($606 to $5,920 for fall and spring combined). Due to inflation, this would decrease Pell’s future “purchasing power.” Some good news is that the budget would fund an extension of 2017’s summer Pell Grants in future years.
  • Federal Work-Study (FWS): Cut FWS funding by $490 million (almost half), significantly reducing federally subsidized on and off-campus jobs that financially needy students use to pay for college.
  • Income-Driven Repayment: Close down all current income-driven repayment plans available to federal college loan borrowers. These plans offer loan forgiveness for balances remaining after borrowers pay 10% to 20% of their incomes over 20 to 25 year periods. They would be replaced with a new income-driven option requiring payments equal to 12.5% of income and limiting loan forgiveness to balances still outstanding after 30 years of such payments.
  • Public Service Loan Forgiveness (PSLF): Eliminate PSLF, which offers tax-free debt cancellation on federal student loan balances owed by ex-students in public service jobs after 10 years of on-time payment. Over 550,000 federal, state, local, and nonprofit employees are already registered for PSLF. It’s not yet clear whether they or public servants not yet registered would be cut off from It.IMG_6511

Presidents propose federal budgets, but Congress ultimately decides them. So if you support or oppose any of these proposed cuts, call or write your U.S. representative and senators to tell them how you feel.

College Affordability Solutions will post more bulletins on this website as additional information becomes available.

After College: Use Your Grace Period Wisely

IMG_6400Hey college graduate, did you know they call it “commencement” because so many other things begin once you earn that degree? If you borrowed to pay college costs, your student loan “grace period” is one of those things.

A grace period is something the government gives so you have time to get your finances organized before you must start repaying your federal student loans. For Federal Direct Loans borrowed by students it goes for 6 full months from the day after you stop being enrolled half-time. It runs 9 full months from this date on Federal Perkins Loans.

Notice the reference to full months. For every loan you owe that hasn’t used up its entire 6 or 9 month grace period, you’ll get a full new grace period when you next drop below half-time.

Federal Direct Parent PLUS Loans don’t get grace periods but, working their loan servicers as listed in their National Student Loan Data System (NSLDS) records, parents can defer payment while their students are in school and for 6 months after the students for whom they borrowed drop to less-than-half-time.

A lot happens during your grace period . . .

  • Your loan servicer sends you notices about your first payment due date andIMG_6401 choosing your repayment plan options — stuff you really need to know. So keep your servicer apprised of any changes in your email and mailing addresses. You can find its contact information on NSLDS.
  • You’ll get these notices 60 or more days before your first payment due date. Use those 60 + days to set up a monthly budget including amounts for your loan payments.
  • Interest accumulates on any Federal Direct Unsubsidized Loans you have and, when your grace periods end, outstanding interest is capitalized — added to principal — inflating the amount on which future interest is charged.
  • Payments aren’t required during grace periods, but they’re not prohibited, either. Whenever you can afford to make a payment, send a note with it directing your servicer to apply it first to your outstanding unsubsidized loan interest. Anything left will be used to reduce your loan principal.
  • Institutional, private, and state student loans may or may not have grace periods of varying length. To check this out, review these loans’ promissory notes.

But no matter what loans you have, use your grace period wisely to prepare for making monthly payments on them when that period ends.

Need advice on managing your college debt? College Affordability Solutions has 40 years experience on this subject. Contact us at (512) 366-5354 or collegeafford@gmail.com if we can help you.

Special Bulletin: Federal Student Loans Will Be More Expensive in 2017-18

Published reports from Washington indicated that interest rates on Federal Direct IMG_6317Loans will be 0.69% higher for academic year 2017-18 than in 2016-17, making it more costly for students and their parents to borrow such loans.

Americans borrow more than $96 billion a year from the Federal Direct Loan Program. That’s almost 90% of all the loan dollars used to pay for college in the United States.

Here’s how the 2017-18 interest rates compare to interest rates for 2016-17:

Federal Direct SUBSIDIZED Loan                      4.45%                                     3.76%

Federal Direct UNSUBSIDIZED Loan                4.45%                                      4.45%

Federal Direct GRADUATE PLUS Loan             6.00%                                      5.31%

Federal Direct PARENT PLUS Loan                   7.00%                                      6.31%

IMG_6319It’s estimated that the new interest rates will result in a 2017-18 college freshman paying at least $80 more in interest than his 2016-17 counterpart (if both were to borrow the freshman Federal Direct Loan maximum of $3,500). So the new interest rates make it more important than ever to borrow conservatively — taking on as little debt as possible and minimizing the use of higher interest rate and unsubsidized loans.

Technical Stuff Worth Knowing

The new interest rates apply to loans whose first (or only) installments are disbursed to borrowers on/after July 1, 2017 but before July 1, 2018.

Federal Direct Loan interest rates are fixed, which means the rate for each loan first disbursed in a July 1-June 30 year remains the same from the date it’s first disbursed until the date it’s paid in full.

Federal Direct Loan interest rates aren’t set on a whim. Current law requires them to be raised or lowered based on the rate at which 10-year Treasury bills are sold at the last auction of such securities before June 1. Such Treasury bills sold for a higher rate this May than last May.

With 40 years experience in student loans, College Affordability Solutions can offer students and parents strategies for minimizing student loan indebtedness. Email collegeafford@gmail.com or call (512) 366-5354 for such assistance.

Special Bulletin: Status of IRS Data Retrieval Tool

A key tool used by students seeking financial aid borrowers applying for income-driven repayment plans on their federal student loans is still offline. However, a new government announcement outlines a schedule for getting it back up and running.

In March, the government shut down the IRS Data Retrieval Tool (DRT), expressing concerns about the need for extra system security. Here’s where things are now according to a recent status announcement from the U.S. Department of Education —

DRT in October for Student Financial Aid Applicants: For the next 5 months, students will need to keep finding and using recent federal tax returns for themselves and their parents in order to accurately complete their Free Applications for Federal Student Aid (FAFSAs). The government’s announcement says it’ll be October 1 when a new, more secure DRT will become available to them.

DRT on May 31 for Student Loan Borrowers: Parents and ex-students seeking to certify their eligibility for one of the 4 federal student loan income-driven repayment plans will again be able to access to the DRT beginning May 31, the announcement says. Until then, they’ll need to keep submitting alternative documentation when applying for these plans. Alternative documentation could be paper copies of their federal tax returns or pay stubs.

If and when more information about this problem becomes available, College Affordability Solutions will post another bulletin.

After College: Give a Graduation Gift Worth More Than It Costs

About 2 million undergraduates will receive their degrees this year. Almost 70% of them will graduate after having borrowed, on average, over $30,000.

That’s a lot for someone just beginning his adult life and career. But the worst thing is, it probably isn’t all the debt students owe at commencement. Most undergraduates must borrow Federal Direct Unsubsidized Loans — which begin accumulating interest the day they’re made — to supplement their Federal Direct Subsidized Loans and meet their college expenses.

This interest keeps accumulating during each student’s 6-month post-graduation grace period. Students may pay down interest while in school and their grace periods, but most can’t afford to do so. And when the grace periods ends, outstanding interest is capitalized — i.e. added to principal — inflating the principal amount on which future interest gets charged.

Let’s say you’re giving a graduation gift to a fairly typical student who’ll receive his bachelor’s degree later this month. He borrowed the maximum amount of subsidized and unsubsidized loan for each of his 4 years — not unusual given the financial need of students from even middle-income households. By commencement, he’ll owe $19,000 in subsidized loan principal and $8,000 in unsubsidized loan principal.

But when his grace period ends in November, he’ll also owe almost $1,500 more in accumulated unsubsidized loan interest. If all that gets capitalized, he’ll repay a total over $34,000 for the $27,000 he borrowed. And that’s if he uses a 10-year standard repayment plan — the repayment plan that yields the smallest total amount repaid.

This is where your gift comes in. Give your graduate money to pay down some of the interest accumulated on his unsubsidized debt. You’ll actually help him reduce the total amount he repays on his total college debt by more than what you give. Take a look . . .

IMG_6172

The easiest way to do this? Specify that he use your gift solely to pay down outstanding unsubsidized loan interest, which he can look up on the National Student Loan Data System, and send that amount to his loan servicer (also identifiable through NSLDS) with a note saying he wants it all applied to his unsubsidized debt. Your gift will immediately be applied to lower interest on that debt.

Not a “sexy” graduation gift, but it’ll provide value in excess of what it costs, and that’s not a bad deal for you or your student!

For more strategies to minimize what gets paid on student loans, contact College Affordability Solutions at collegeafford@gmail.com or (512) 366-5354.