THE COMPLETE GUIDE TO UNDERSTANDING STUDENT LOANS
FEDERAL VS. PRIVATE
Federal student loans are funded by the federal government, while private student loans are funded by banks, schools, state agencies and other private institutions. When taking out a student loan, Federal loans offer many advantages over private loans. Federal loans come with various borrower protections, many of which are not available to private loan holders. Some of these exclusive federal loan protections include: (1) fixed (and typically lower) interest rates, (2) deferment and forbearance options, (3) eligibility for Income-Based Repayment plans and Public Service Loan Forgiveness, (4) option to consolidate multiple federal loans into a single Direct Consolidation Loan, which offers many benefits, (5) possibility of loan subsidization during a grace period, which is usually not offered for private loans, (6) etc.
There are two main federal student loan programs: (1) Federal Family Education Loan (FFEL) Program, and (2) Federal Direct Loan Program. Before it’s discontinuance in 2010, the FFEL Program issued loans from private banks and other lending institutions; yet, these loans were still considered federal because the government guaranteed them. Now that the FFEL Program is no longer in existence, all federal loans are issued directly by the U.S. Department of Education (DOE) under the Federal Direct Loan Program.
FEDERAL STUDENT LOAN TYPES
• Direct Subsidized Loans – in order to qualify the student must demonstrate financial need*; only undergraduate students are eligible
• Direct Unsubsidized Loans – available to undergraduate, graduate, and professional students; financial need* is not required
• Direct PLUS Loans – these loans help cover education expenses that are not covered by other financial aid; awarded to graduate students, professional students, and parents of dependent undergraduate students
• Direct Consolidation Loans – all of a borrower’s federal loans are combined into one single loan (one servicer); makes managing loan payments easier.
In addition to the Federal Direct Loans, there is also the Federal Perkins Loan Program, under which undergraduate and graduate students exhibiting exceptional financial need are awarded funds from the school they attend.
There are limits to how much one can borrow in federal student loans. Here is a brief overview: If you are an undergraduate student, you may be able to borrow as much as $5,500 per year in Perkins Loans, and a maximum of anywhere between $5,500 and $12,500 per year in Direct Subsidized and Unsubsidized loans depending on various factors. If you are a graduate student, you may be able to borrow as much as $8,000 per year in Perkins Loans, and as much as $20,500 per year in Direct Unsubsidized Loans.
Direct Subsidized Loans
Direct Subsidized Loans are available to undergraduate students who demonstrate financial need; the amount loaned is determined by the student’s school, and cannot be greater than the student’s financial need. The loan is said to be “subsidized” because the U.S. DOE pays the interest on the loan while the student is still in school at least half-time, during the student’s grace period, and during deferment.
The current interest rate on Direct Subsidized Loans issued between 7/1/13 and 7/1/14 is 3.86%; this rate will increase to 4.66% on loans issued between 7/1/14 and 7/1/15. These interest rates are fixed for the life of the loan.
Direct Unsubsidized Loans
are similar to Direct Subsidized Loans, except that the student is always responsible for paying his or her own interest at all times on this type of loan. Also, this type of loan is available to both undergraduate and graduate students, and the student does not need to demonstrate any financial need in order to qualify.
The current interest rate on Direct Unsubsidized Loans issued between 7/1/13 and 7/1/14 is 3.86% for undergraduate students and is 5.41% for graduate (or professional) students; this rate will increase for loans issued between 7/1/14 and 7/1/15 to 4.66% for undergraduate students and to 6.21% for graduate (or professional) students. These interest rates are fixed for the life of the loan.
Direct PLUS Loans
Direct PLUS Loans are available to graduate or professional students, as well as to parents of dependent undergraduate students. Students must be enrolled in school at least half-time and must be on track to earn a degree or certificate. A credit check is required to receive this type of loan (borrower cannot have an adverse credit history). PLUS Loans help students pay for education expenses that are not covered by other financial aid. These loans are awarded by the U.S. DOE through the Direct Loan Program.
The current interest rate on loans issued between 7/1/13 and 7/1/14 is 6.41%. The rate will increase to 7.21% on loans issued between 7/1/14 and 7/1/15.
Direct Consolidation Loans
A Direct Consolidation Loan is achieved when you combine multiple federal student loans into a single loan; this allows for just one monthly loan payment to one servicer, greatly simplifying the repayment process.
Consolidating your loans may allow you to reap some benefits, such as lowering your monthly payment amount, extending your repayment schedule, and achieving a single (and possibly lower) fixed interest rate. Consolidating your loans could also allow you to become eligible for repayment plans that you might not have been eligible for previously.
Before consolidating, make sure that it is the right option for you. Once you consolidate, any borrower benefits that you may have had on your loans will be gone forever. Make sure it is worth it to lose those benefits before you follow through with consolidation.
The consolidation process typically takes from 60 to 90 days. You should continue to make your payments on your individual loans until you have been notified that the consolidation process is complete.
Currently, the interest rate for a Direct Consolidation Loan is the weighted average of the interest rates on the individual loans being consolidated, rounded up to the nearest one-eighth of one percent. This rate is fixed and has no cap.
Only federal student loans are eligible for consolidation. The borrower must have at least one Federal Direct Loan or Federal Family Education Loan (FFEL) Program Loan and the loans must be in grace period or repayment. The borrower must also have graduated, left school, or dropped below half-time enrollment to qualify. The loans to be consolidated must not be in garnishment, and should amount to more than $20,000.
• The types of loans that may be consolidated include the following:
• Direct Subsidized & Unsubsidized Loans
• Stafford Loans – Subsidized and Unsubsidized*
• Direct PLUS Loans
• PLUS Loans – FFEL
• Perkins Loans*
• Nursing Loans
• Health Education Assistance Loans
• Supplemental Loans for Students (SLS)
• Some existing consolidation loans
* A Perkins Loan is a federal, fixed-rate, subsidized loan given to undergraduate and graduate students based on financial need. The school lends the funds, which are granted to them by the federal government. There are no origination or default fees on this type of loan.
* A Stafford Loan is a federal student loan, which may be subsidized or unsubsidized. Both forms of the Stafford loan require the borrower to fill out the Free Application for Federal Student Aid (FAFSA). Those who can show that they have financial need are able to receive a subsidized Stafford loan. Anyone is eligible for the unsubsidized Stafford loan. As of July 1, 2012, only undergraduate students are eligible to take out a subsidized Stafford loan; graduate and professional students are only eligible for the unsubsidized loan.
Once a Direct Consolidation Loan is completed, the borrower may be eligible to participate in various repayment plans that were not previously available to him or her. Some of these repayment programs include the following: (1) Income-Based Repayment (IBR), (2) Income-Contingent Repayment (ICR), (3) Pay As You Earn (PAYE), and Public Service Loan Forgiveness (PSLF). These options can provide a better alternative to the Standard (10 Year) Repayment Plan that is typically implemented for federal student loans.
Standard (10 Year) Repayment Plan
If you are making your monthly loan payments, and if you never exercised your option to choose a different repayment plan, then you are automatically assigned to the Standard Repayment Plan by your loan servicer. Under this plan, you will make monthly loan payments at a fixed amount of at least $50 for up to 10 years. In the case of Direct Consolidation Loans and FFEL Consolidation Loans, the repayment period could be greater or less than 10 years, depending on the borrower’s total education indebtedness (amount of the consolidation loan plus any other loans not included in the consolidation).
The benefit of the Standard Repayment Plan is that your loan will be paid off in the shortest period of time; therefore, you will pay less interest on the loan overall. The downside of this plan is that it requires slightly higher monthly payments, which may be difficult to afford for many borrowers.
Federal loans that are eligible for this program include: (1) Direct Subsidized and Unsubsidized Loans, (2) Subsidized and Unsubsidized Federal Stafford Loans, and (3) all PLUS Loans.
Income-Based Repayment (IBR)
As of October 1, 2007, there is an Old IBR Program and a New IBR Program. Borrowers who took out their first federal student loan on or before that date qualify for the Old IBR Program, while those who took out their loans afterwards qualify for the New IBR Program. The New IBR Program was initiated as a part of Obama’s 2010 Health Care and Education Reconciliation Act.
Under the Old IBR Program, the borrower’s monthly payments are capped at 15% of his or her discretionary income*, and is allowed a 25-year repayment period. Under the New IBR Program, the monthly payments are capped at 10% of discretionary income and the repayment period is 20 years. Under both programs, any loan amount left unpaid after the repayment period has ended will be forgiven by the federal government; however, the government may tax the leftover amount (unless eligible for PSLF). Regardless, the borrower will likely end up saving money under this program. To qualify for IBR one must demonstrate “partial financial hardship*.”
* Discretionary income is one’s income minus his home state’s poverty guidelines for family size.
* You would be considered to have “partial financial hardship” if the monthly amount you would be required to pay for the Standard (10-year) Plan is higher than the monthly amount you would be required to pay under the IBR plan.
Federal loans that are eligible for this program include: (1) Direct Subsidized and Unsubsidized Loans, (2) Subsidized and Unsubsidized Federal Stafford Loans, (3) all PLUS Loans made to students, and (4) Direct Consolidation Loans (without Parent PLUS Loans).
Income-Contingent Repayment (ICR)
Under the ICR Program, the borrower’s monthly payment amount is capped at 20% of income (if married, spouse’s income will also be taken into account). This program also considers the total amount you owe in student loans when determining your repayment schedule, so monthly payments tend to be higher under ICR. As with the IBR Program, the federal government will forgive any loan amount left unpaid after 25 years of repayment. Additionally, borrowers under both programs may be eligible for PSLF if they work in public service (see more on this under Public Service Loan Forgiveness section).
Federal loans that are eligible for this program include: (1) Direct Subsidized and Unsubsidized Loans, (2) Direct PLUS Loans made to students (graduate or professional), and (3) Direct Consolidation Loans.
Pay As You Earn (PAYE)
The PAYE repayment option offers “new borrowers*” with “partial financial hardship*” the opportunity to make monthly payments that are capped at 10% of discretionary income. After making 20 years of qualifying monthly payments, the remaining unpaid loan balance will be forgiven by the federal government (although the borrower may have to pay income tax on the forgiven amount). Eligible Direct Loans for PAYE include: (1) Direct Subsidized and Unsubsidized Loans, (2) Direct PLUS Loans made to students (graduate or professional), and (3) Direct Consolidation Loans (without Parent PLUS Loans).
* New borrowers are those who have taken out their first federal student loan on or before October 1, 2007, and who have received a Direct Loan disbursement on or after October 1, 2011.
* You would be considered to have “partial financial hardship” if the monthly amount you would be required to pay for the Standard (10-year) Plan is higher than the monthly amount you would be required to pay under the PAYE repayment plan.
Graduated Repayment Plan
Under this plan, the borrower’s payments will start low and then increase every two years for up to 10 years. Federal loans that are eligible for this program include: (1) Direct Subsidized and Unsubsidized Loans, (2) Subsidized and Unsubsidized Federal Stafford Loans, and (3) all PLUS Loans.
Extended Repayment Plan
Under this plan, payments will either be fixed or graduated (start low and increase every two years); the borrower will have up to 25 years to pay off the loan(s). To be eligible it is required that the borrower must have taken out his first student loan as of October 7, 1998, and must have more than $30,000 in outstanding loans (this goes for both Direct Loans and FFEL Program loans). Federal loans that are eligible for this program include: (1) Direct Subsidized and Unsubsidized Loans, (2) Subsidized and Unsubsidized Federal Stafford Loans, and (3) all PLUS Loans.
Public Service Loan Forgiveness (PSLF)
In order to qualify for PSLF, it is required that the borrower must (1) work full-time* at a qualifying public service organization*, (2) be enrolled in a qualifying repayment plan*, (3) make 120 scheduled monthly payments—paid on time and in full—on his or her Direct Loans (only payments made after October 1, 2007 count towards this). The main purpose of this program is to increase the appeal of working in the public service sector.
* Full-time employment requires that the individual have worked an annual average of 30 hours per week, with some exceptions.
* Qualifying public service organizations include: federal, state or local government agencies, entities, or organizations, non-profit organizations that are tax-exempt by the IRS (Section 501(c)(3) of the Internal Revenue Code), as well as some non-profit organizations that not tax-exempt, depending on the services they provide.
* Qualifying repayment plans include IBR, ICR, PAYE, Standard (10 Year) Plan, as well as any other plan under which your monthly payments are greater than or equal to monthly payments required by the Standard (10 Year) Plan.
The 120 repayments will take at least 10 years to make; once you have completed this, you can submit the PSLF application for forgiveness on the remaining balance of your loans. There will be no income tax on the amount forgiven under PSLF. In order to optimize the amount of your loan(s) that will be forgiven, choose either the IBR or PAYE repayment options.
Only loans granted under the Federal Direct Loan Program, or other federal loans that have been consolidated into a Direct Consolidation Loan (except those including Parent PLUS Loans) are eligible for this program.
The most important thing to keep in mind is that there is no escaping the burden of student loan debt. You MUST make your monthly payments. Once you have graduated from college or dropped below half-time enrollment, you will begin making your payments. If you have a grace period*, you will begin making your payments once it has come to an end. Your loan servicer (or lender) will send you your loan repayment schedule with all of the information you will need to make the payments. Payments can typically be made online or via mail.
* A grace period gives students the chance to get a head start on their financial situations and to choose a repayment plan before they must start making their loan payments. The grace period will begin once a student has graduated, dropped below half-time enrollment, or dropped out of school; the grace period is usually 6 months long. Not all loans allow students to have a grace period; for most loans, interest accrues during the period.
Unable to Make Payments & hardship
If you are unable to afford your monthly payments, contact your loan servicer right away to see if you are eligible for a more affordable payment plan, or even deferment or forbearance.
If for some reason you fail to make a payment, your loan will initially become delinquent. Once the loan is delinquent for 90 days, your loan servicer will report it to the three major credit bureaus; this will have a negative impact on your credit score. Your loan will no longer be considered delinquent once you have made all of your payments to bring your loan up-to-date.
Do NOT Avoid Your Student Loans!
Avoiding student loan payments is never a good idea. If you do, some very negative consequences will result. Consequences might include: (1) a constantly increasing debt burden (as interest accrues and due to high collection agency costs), (2) a decreasing credit score (making it difficult to borrow money in the future), and (3) default… which can lead to… (4) garnished wages (up to 15% of disposable income), (5) withholding of your tax refunds… the list goes on and on. It is possible that you will be sued, and if someone co-signed your loan for you, then they will be in just as much trouble as you. Save yourself and your loved ones the hassle and make sure to take responsibility for your student loans.
Student Loan Default
If you do not make monthly payments on your student loans for 270 days, then you are in default. If you are in default, get in touch with your loan servicer, lender, or the collection agency assigned to your loan account right away and ask them what you should do to improve the situation. You want to get out of default as soon as possible because it is a very expensive predicament to be in.
The moment your loan goes into default, the entire unpaid balance plus interest becomes due and payable. You can no longer receive deferment or forbearance, you will no longer qualify for other repayment plans, and you can no longer receive any additional federal student aid. A collection agency will be assigned to your loan account and they will do whatever they can to get the money owed. It is likely that your wages will be garnished* (15% of disposable pay), and that your tax refunds and Social Security benefit payments will be withheld to pay back the federal government. You will end up having even more debt due to the collection agency fees, and possible legal fees that you will encounter during this mess. Your credit score will be greatly affected when you go into default, making it difficult for you to take out a home mortgage, get a car loan, or even get a credit card. Your future career may even be affected, as you may not be allowed to renew a professional license or may be prohibited from enlisting in the Armed Forces. It can take years to recover from this situation – defaulted loans remain on credit history for up to 7 years after default is resolve – so try to avoid going into default at all costs.
* If your wages are to be garnished by the DOE or a guarantee agency, you will receive a 30-day notice offering you the right to a hearing. You will have 15 days to request a hearing once you have received the notice. The hearing will allow you to challenge the wage garnishment.
Curing Default: The first step is to get in touch with your loan servicer or the lender and make arrangements with them to repay the loan. We will help you deal with the servicer and negotiating favorable agreements on your behalf. You will be required to make six consecutive, full, voluntary, on-time* payments in order to become eligible for additional Title IV aid. * On-time means within 15 days of the due date
Once you have made 9 out of 10 consecutive payments (within 20 days of due date), you can apply for rehabilitation. Once you have received rehabilitation, you are no longer in default. When in rehabilitation, the monthly payment amount will be based on your (and your spouse’s) disposable income and his or her financial situation.
Loan Deferment and Forbearance
Are you having trouble making your monthly student loan payments? In certain situations, you may be able to receive a deferment or forbearance on your student loan(s); this can help you avoid default, which you want to do at all costs.
If you receive a deferment, you will not have to make loan payments (principal nor interest) during the period awarded to you. During the deferment period, interest will accrue, although you will not have to make the payment on it until after deferment has ended. If you have a Federal Perkins Loan, a Direct Subsidized Loan, and/or a Subsidized Federal Stafford Loan, then the government might make the accrued interest payment for you.
Even if you do not qualify for deferment, you may still be able to receive forbearance from your loan servicer. Forbearance allows you to stop or reduce monthly payments for up to a year; however, interest will continue to accrue during this period. There are two types of forbearance: (1) discretionary and (2) mandatory. A discretionary forbearance may be requested due to financial hardship and illness; in this case, your lender will decide whether you will receive forbearance or not. A mandatory forbearance must be granted by your lender if you meet certain eligibility criteria for forbearance.
Loan Forgiveness, Cancellation, and Discharge
Under certain circumstances, your loan(s) may be forgiven, cancelled or discharged:
• Total and Permanent Disability (TPD) Discharge
• Death Discharge
• Closed School Discharge
• False Certification of Student Eligibility or Unauthorized Payment Discharge
• Unpaid Refund Discharge
• Teacher Loan Forgiveness
• Public Service Loan Forgiveness
• Perkins Loan Cancellation and Discharge
At National Student Assist, we understand the total number of individuals with student loan debt is growing exponentially each year. The aggregate amount of student loan debt has surpassed $1.2 trillion and continues to skyrocket. This debt places a huge burden on students, graduates, and their families. If you're unable to make your monthly student loan payments and find yourself in default, or getting close to default, take action immediately and contact us. We may be able to help you avoid a number of misfortunes that result from defaulting on your loans, such as:
• Garnished wages
• Diminished credit score
• Withholding of tax returns
• Withholding of social security
• Suspension of professional license
• Removal of unemployment benefits
• Difficulty to obtain a car loan or mortgage loan
We can help you with your student loan debt!
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