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.

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.

During College: Pell Grants Can Help Pay for Summer School 2017

Got an undergraduate who could benefit from summer school? Did she receive a Federal Pell Grant in the fall/spring? If so, here’s good news — Pell Grants will be available this summer!

Undergraduates who earn bachelor’s degrees in 4 years or less borrow 35% less in student loans, so this presents an opportunity for your student to speed her time to degree and reduce her college debt.

A new law funding the government through September includes an exception toIMG_6269 rules prohibiting Pell Grants for most summer students. So summer Pell recipients may get up to the same amount they received for a single semester or quarter earlier this academic year.

Summer Pell Grants rules are due by July 1, so we’ll have to wait for the actual terms and conditions of these grants. Also, Pell funds may not be available until early July, so your student should contact the financial aid office to explore short-term options (emergency loans, payment plans, etc.) for covering summer expenses until then.

Other things to remember about Pell and summer school . . .

Enrollment Status: To receive federal student aid for which she’s eligible, including Pell, your student must be a regular student in an eligible program of study. So she probably needs to take summer classes at the institution where she’s pursuing her degree, not at a community college as a “transient” student.

Grant Amount: Pell amounts are based on enrollment status — i.e. undergraduates enrolled full-time (generally 12 or more hours) get 100% of what they qualify for; students enrolled three-quarter time get 75%; half-timers get 50%; and those enrolled less-than-half-time get 25%.

IMG_6270Summer Costs and Other Summer Aid: Make sure your student avoids the trap of enrolling in summer courses but lacking sufficient funds to finish them despite her Pell Grant. The aid office’s website displays summer costs. Check out whether your student can get federal loans or other aid for summer — many Pell recipients use up their annual loan eligibility during fall/spring and some schools award all their work-study and state/institutional aid during fall/spring. Have your student call the aid office to see what’s available for summer.

This Summer Only: Summer Pell is currently available for 2017 only. Whether it’s there for future summers depends on what Congress does.

Affordable summer enrollment where she’s getting her degree may benefit your student more than summer employment or community college summer school. Check it out!

For strategies on getting the most out of the financial resources available to your student, contact College Affordability Solutions at collegeafford@gmail.com or (512) 366-5354.

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: “Late” and “Missed” are 4-Letter Words for Your Student Loans

If you graduated from college last spring after borrowing federal student loans, your loan servicer has already let you know the first of your monthly payment due dates. img_5066Chances are that date is this month.

This date is important. Pay on or before it and you’ll build a positive credit rating. Pay after it’s passed, or make no payment, and you’re immediately a delinquent borrower. Then your loan servicer may report your delinquency to the major credit bureaus right away (they must report it you when you’re 90 days delinquent). You’ll have an adverse credit history that’ll result in higher interest rates if you’re img_5065even able to borrow for a car or house; may stop you from renting an apartment or signing up for a cell phone or utilities; and could even stop you from getting a job.

As soon as you become delinquent, your loan servicer may also add collection costs equal to 18.5% of your debt to what you owe.

Fail to make any payment within 30 days of its due date and you’ll also pay a late fee equalling 6% of what you owe. Miss nine monthly payments in a row and you’re in default — at which point a government-hired collection agency will require you to repay your whole debt immediately. The government may also confiscate up to 15% of your salary and wages, your tax returns, and any money it owes you. It can also get permission from a judge to take real estate and other property you own. Finally, you’ll never be able to borrow another federal student loan while in default.

Fortunately, it’s easy to make your federal student loan payments on time. Enroll in an automatic debit plan and your payment will be deducted from your bank account on the same date every month. You’ll also reduce your interest rate by 0.25%.

If your monthly due date doesn’t work for you, contact your loan servicer and ask to change it. Do the same if you need to change your repayment plan to lower your required monthly month amount.

Need to postpone your payments for a while? You can do this without becoming delinquent. Contact your loan servicer and ask for a deferment or forbearance.

So don’t ever let yourself run late on your monthly payments or, worse yet, miss them altogether. Both produce nasty results, and they’re way too easy to avoid!

College Affordability Solutions has extensive experience with the ins and outs of student loan repayment. Call (512) 366-5354 or email collegeafford@gmail.com if you need confidential advice on managing your college debt.