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.

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.

Before and During College: Summer Can Be Used To Reduce College Costs

Spring semester ends soon. After finals, many students will use the summer to cut their college costs. The payoff for doing so can be huge!

Lot’s of employers need student employees to help manage increased summer activity levels. Others look to student workers to fill in for regular employees on summer vacation.

Over the last 4 years — from the summer after high school graduation through the summer before his senior year — Jack banked about $2,000 a year from his summer IMG_6029jobs. This allowed him to forgo the $2,000 per year in Federal Direct Unsubsidized Loan he would otherwise have needed to borrow for the costs of attending his university. It cut the principal and interest he’ll pay each month on his student loans by a third. It’ll also reduce the total amount he repays on those loans under the “standard” 10-year repayment plan by a whopping $11,200. That’s a darned healthy bite out of Jack’s borrowing costs.

IMG_6030Another cost saver is attending summer school at a community college close to home so the student doesn’t incur expenses for room and board. This is particularly effective during the summers after student’s freshman and sophomore years, when they’re likely to pick up courses that’ll count toward degree requirements at their universities.

Jill took this approach. Over two summers, she completed a total of 15 credit hours at her local community college. Tuition and required fees there were $117 per credit hour, versus $321 per credit hour at the university Jill attended fall through spring.

In doing this, Jill reduced the number of semesters it took to fulfill her university degree requirements from eight to seven. This cut her costs at that institution by $4,825 in tuition and fees and by $5,220 in room and board. So for $1,760, Jill cut her costs by $10,045 — a net savings of $8,285.

And the good news is that this isn’t an either/or proposition. Summer work? Summer community college classes? Many students do both!

Jack and Jill still get lots of summer “down time.” They still get to see friends they missed while away at school. And they still get to eat that good home cooking and to be with family. But their summers are also highly productive, because they significantly reduce the cost of their degrees — and what’s not to like about that?

Looking for strategies to keep college more affordable? Feel free to contact College Affordability Solutions at collegeafford@gmail.com or (512) 366-5354.

Before College: Make Decisions Now That Will Minimize College Debt

Soon after the upcoming college commencement season you’ll begin hearing it. “Who got me into all this debt?” or “My school made me take out all those loans!”

There’s truth in this. College costs keep rising. Grants and scholarships aren’t keeping up. But two other parties also contribute to rising collegiate debt — the student and, often, his parents.

Is your student spending conservatively — e.g. buying used textbooks from an online discount bookstore, not buying all his textbooks but accessing some through the campus library’s ebook collection?

Many off-campus residences sell themselves as “high amenity” facilities. But they’re IMG_5814also high rent. Is living in a new high-rise with a rooftop pool and granite countertops really necessary? Can your student survive someplace that’s older, plainer, and less costly? Can he split rent with one or more roommates, eat out less often, put a brown bag lunch in his backpack and cook more meals at home?

Does he absolutely need an automobile at school? He’ll likely pay hundreds to put it in some remote, vandalism-prone parking lot. Instead, can he use campus shuttle buses and municipal transit lines? Can he share rides home?

Can he work part-time? Contrary to popular belief, students who work 10-14 hours per week while enrolled perform better academically than students who don’t work at all.

Parents? You probably think your Expected Family Contribution (EFC) is too high. But EFC is based on a reasonable assumption — that you’ll max out your own financial 20091030family5049resources before asking your neighbors to pay for financial aid to send your student to college.

So can you downsize your vacations; maybe even turn some into “staycations?” Can you get another few years out of your car? Do you really need to hire out the house cleaning or yard work? Or can you redirect such discretionary spending to support your student?

Most colleges offer the maximum loan amounts for which students are eligible. But your student need not accept all that debt. Minimize his costs and maximize your EFC, then reject any loan amount you don’t expect to need. If you miscalculate, what you turn down can be reinstated later.

Remember, students who borrow to live like professionals while in college often live like students while paying off their debts after college! Keep this from happening to your student by downsizing or rejecting loan offers now.

College Affordability Solutions helps families identify strategies for minimizing higher education debt. Contact us at collegeafford@gmail.com or (512) 366-5354 to learn more,

Before College: Shop Comparatively Using the Financial Aid Shopping Sheet

Many colleges have begun sending newly admitted undergraduates “award letters” showing the types and amounts of financial aid they can expect if they enroll in those schools. If your high school senior hasn’t already received such letters, they’ll probably start arriving in the next few weeks.

So dust off your calculator because, just as with any major purchase, the key to college affordability is comparative shopping.

Unfortunately, no two award letters are alike. Each uses its own unique layout and terminology. Few offer consumer information you need to know about institutions. This makes it difficult to compare schools based on affordability.

img_5222That’s why the U.S. Department of Education created the “financial aid shopping sheet.” Thousands of colleges send it with their award letters, making it easier to compare key numbers about them.

The shopping sheet’s left side shows each school’s cost of attendance — the college’s “sticker price” for the upcoming academic year.

Next comes the grants and scholarships your student is set to receive at that college for that academic year. These discount sticker price to determine the college’s “net price.”

Then comes other types of financial aid — work-study, loans — being offered to help your student pay the school’s net price.

The shopping sheet’s right side also has useful data. These include 6-year graduation rates at universities and 3-year graduation rates at community colleges. Such rates show how schools compare to similar institutions in getting undergraduates across the finish line.

The sheet also discloses the percentage of the school’s alumni repaying their federal student loans three years after beginning to do so — indicating how well the school prepares students for gainful employment.

Finally, you’ll see the median amount the college’s students borrow in federal loans, and their median monthly payments. This can give a rough sense of how much debt your student might be burdened with to attend that school.

Schools use shopping sheets on a voluntary basis, but beware of colleges that don’t provide them. Why are they trying to make it more difficult for you to compare them with other institutions? What don’t they want you to know about their aid offers or graduation and borrowing data?

You should select a college based on many factors, but the shopping sheet gives you useful, easy-to-compare affordability information for this all-important decision.

College Affordability Solutions conducts affordability analyses on institutions students are considering, whether or not those institutions provide shopping sheets. Call (512) 366-5354 or email collegeafford@gmail.com for more information.