Good afternoon, everyone, and thank you for joining us today at Consolidated Credit’s monthly webinar—Free Yourself from Student Loans, Don’t Let College Costs from Long Ago Ruin Your Future.
Again, thank you for joining and if you don’t mind, if you could quickly—those that are joining and just logging on—if you could go to the handouts section of the webinar. And please retrieve the items that we have there for you in the handouts section. You can either print those items or you can download them.
So, we’re going to go ahead and get started with Free Yourself from Student Loans.
In some ways, student loans are the cruelest form of personal debt. You took out these loans so you could get a great education and launch a lucrative career. You just wanted to take care of yourself and your family. Ironically, the cost of that education is now keeping you from the financial independence you were looking for.
The sad truth is, even before the pandemic, student loans were already being called a crisis. Why? Because we collectively owe more than one trillion dollars on all the student loans out there. It’s one of the largest forms of debt we owe as individuals.
In fact, we owe more on our student loans than we do on all the credit cards out there. Next to mortgages, this is the biggest category of personal debt. And if you think back to the Great Recession, you remember that a mortgage crisis caused that. So this is serious stuff.
Of course, when you talk about a trillion dollars, it’s hard to even grasp the number. So how about these numbers? 40 million American adults owe student loans, with 6 million owing more than $50,000. So basically, almost a fifth of the country is making student loan payments, and millions of them are struggling. Add a pandemic on top of that, and you can see how dire the problem is.
These are the reasons why you’ve been hearing President Biden talk about student loan forgiveness. It’s a complicated topic, and we’ll dive into it in a moment. But know this: What’s being proposed right now, even if it happens, won’t solve the problem. It’ll just ease some of the symptoms.
92% of all student loans are federally backed
We also need to be clear about something: We’re talking about federal student loans today. Not private student loans. Federal student loans are backed by the government and come with all the programs and protections we’re going to talk about in just a moment, including forgiveness. Thankfully, more than 9 in 10 loans are federally backed.
The truth behind student loan forgiveness
So let’s talk about what “student loan forgiveness” really means. And it means different things to different people. What we’d all LIKE it to mean is: No more student loan payments! Because we’re wiping your balances from the books! But of course, nothing financial is that simple.
There are actually two kinds of student loan forgiveness, broadly speaking. The first kind hasn’t really happened yet, but if it does, it will be sudden. It might not be a lot, though. The second kind already exists, but it takes a long time, and it’s a little complicated, but it’s quite powerful. OK, now that I’ve totally confused you, let’s break those down.
The first is the political kind. You might’ve heard about this in the news. President Biden has been talking about this for a while now — ever since he was on the campaign trail, actually. He’s even signed a couple of executive orders to forgive certain, specific kinds of student loans.
The second kind of student loan forgiveness is more established. It’s been around for a decade. But it requires some work. Still, the payoff can be huge. This kind of student loan forgiveness is what we’ll talk about now since it’s something you can control. Let’s face it, there’s no telling what the president and Congress will actually do, and when they’ll actually do it.
The Public Service Loan Forgiveness program
Can you really get your hefty student loan balances forgiven? The answer is, “Yes, but…” The Public Service Loan Forgiveness program – PSLF, for short – offers federal student loan forgiveness if you work in a qualified profession. What are those professions? You can be a teacher, a nurse, a police officer, a librarian, a social worker, and many other things. What they all have in common is that they do some public good. So if you work for a for-profit business, you don’t qualify, even if you’re doing a lot of noble work in your community.
If you work in one of those professions, you’ve cleared the first hurdle. Unfortunately, there are more. The qualification process is long, complicated and (worst of all) not guaranteed. And you need to make 120 regular qualified payments first – that’s 10 years’ worth. But if you do qualify, you could get out of student loan debt for less than you originally borrowed.
Now I know what you’re probably thinking. I need to make payments for a decade before my loans are forgiven? Is it really worth the hassle and the long timeline? Well, depending on your specific circumstances, you can save up to $24,000. There’s just one more complicating factor I need to mention.
To qualify for student loan forgiveness from the federal government, you need to enroll in one of their existing student loan relief programs. Many people have heard that the federal government offers help to those struggling to make their payments, but they don’t quite grasp all the details. And no wonder, because it can get a little complicated. So let’s break it down for you.
Federal student loan relief programs
One question we get asked a lot is, “What’s the catch? Why would the government help me pay off student loans it saddled me with?” Well, remember those scary numbers we started off with today? Remember the one trillion dollars in total student loan debt in this country? Well, the federal government knows that if you can’t pay it back, they’re on the hook for those losses. And besides, if you can’t pay back your student loans, you won’t be able to buy a home and pay property taxes and be a productive member of society.
Unfortunately, these relief programs are as easy to understand as your income taxes. Which means, they can get confusing. Like all government programs, these student loan efforts all have acronyms. The three we’ll talk about now are ICR, IBR, and PAYE. Let’s tackle them one by one.
Starting in alphabetical order, let’s talk briefly about the income-based repayment program, or IBR. If you have federal loans and can demonstrate a financial hardship, you qualify. Like the name implies, an IBR matches monthly payments to your income. It’s the government’s way of acknowledging that the salary you earn after you get a degree usually doesn’t exactly match the expense you incurred to get it.
For example, the program adjusts your monthly payments to your income and family size. If you have a lower income and a larger family, it reduces your student loan payment requirement. In general, enrollees spend between 10 percent to 15 percent of their take-home income to repay student loans under an IBR. This reduces the burden of student loan repayment on your budget.
But let’s be clear about what’s happening here. The federal government isn’t forgiving your loan. You still owe what you owe. You’re just paying less each month on that total loan. But here’s the catch: You pay interest on all your loans, and student loans are no different. So your interest is still accruing, because you’re paying less each month. Even the government acknowledges that this can increase total cost over the life of your loans. Still, it helps you greatly in the short term, so for many folks, it’s worth it.
Same thing goes for another program with a very similar-sounding name. Income-contingent repayment is a little different than income-based. While both an IBC and an ICR adjust your monthly payments based on your income, the ICR has a few important differences. Let’s take a look at those differences.
First of all, you don’t need to show any crushing financial problems to qualify. Remember, for an IBR, you need to show some hardship. In other words, you need to prove to the government that you simply don’t make enough or save enough to meet your obligations. ICRs don’t require this, so it saves you on paperwork and hassle.
But there’s a downside to ICRs. Unlike an IBR, an ICR doesn’t stop your monthly payments from increasing indefinitely along with your income. Also, while an IBR typically reduces your payments to 15 percent of your income, ICRs only go to 20 percent. How do you choose? We’ll get to that in a moment, but first we have a third program to review.
Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE)
Pay as You Earn is even better than an IBR at reducing monthly payments. It was updated and expanded a few years ago into yet another option called REPAYE – which stands for Revised Pay as You Earn – but the concepts are still the same. Your monthly payments are reduced to 10 percent of your discretionary income, and after 20 or 25 years, whatever balance is left is forgiven – and forgotten. You pay nothing more.
So what’s the difference between the two? They’re subtle but real. For instance, to qualify for PAYE, you must have a partial financial hardship. REPAYE? Anyone with qualifying student loan is eligible. Your spouse’s income doesn’t count in PAYE if you file separately, but it does in REPAYE. So what does all this mean? Generally speaking, PAYE is a better option for married borrowers when both spouses have an income. REPAYE is usually better for single borrowers and people who don’t qualify for PAYE. But in both cases, just like an ICR, if you get a new high-paying job or a big fat raise, your payments jump up along with that extra income.
Forbearance and deferment
There are two other options to ease your monthly student loan burden. Those are called forbearance and deferment. Neither of them are as complicated as the relief programs we just mentioned, but they’re also not as powerful or as permanent. Still, they can help you through a difficult time. So let’s explain them briefly.
What’s forbearance? You’ll be familiar with the concept if you’ve ever called your credit card company and begged to get a late fee removed. Yup, sometimes just asking works. In this case, your student loan servicer wants you to keep making payments, so sometimes they’ll give you a forbearance. That means you can temporarily stop paying your student loans. Basically, it’s like a hold button for your loan payments.
Problem is, you need a darn good reason for such incredible debt relief. Without one of these reasons applying to you, you can’t get a forbearance. These come in two types: discretionary and mandatory.
A “discretionary” forbearance requires your servicer’s permission. It’s totally up to them if you get it. And all of them have specific situations that must apply to you. For instance, if you can’t make your payments due to a change in jobs, a medical expense, or other financial difficulties, your servicer can decide to give you a forbearance.
Of course, the opposite of discretionary is mandatory. This means your servicer can’t deny you the forbearance if you qualify. What’s it take? If you’re on a medical internship or residency program, or if you’re in the National Guard and got activated by the governor, or if your payment is more than 20 percent of your monthly gross income – then you can get a mandatory forbearance. You’ll have to prove that to your servicer, but a little paperwork can save you thousands of dollars.
Whatever forbearance you qualify for, you can get up 12 months of making NO payments. In total, you can get three rounds of 12-month forbearances before you max out. That gives you plenty of time to get your financial life in order– but remember, you still owe the loan amount.
In fact, under a forbearance, your interest charges continue to accrue. And because you’re not making payments, that means your overall loan debt increases. So you get some relief now, but later on, you’ll pay for it. But there’s another option that avoids some of this.
Now let’s talk about deferments. As you can already see, student loan jargon can get very particular and difficult. In this instance, a forbearance and a deferment are more similar than different. In fact, the only major difference is that with a deferment, you might not owe that accrual of interest we just talked about. Like a forbearance, you must have some pretty serious circumstances that prevent you from making those monthly payments – like, say, cancer treatment or a job layoff.
Now, this is just a rough overview of forbearances and deferments. You want to know how detailed it can get? Here’s a quote from the federal Student Aid website…
You may be eligible for a deferment on your federal student loan if you are a parent who received a Direct PLUS Loan or a FFEL PLUS Loan, while the student for whom you obtained the loan is enrolled at least half-time at an eligible college or career school, and for an additional six months after the student ceases to be enrolled at least half-time
But don’t worry, by the time we’re done, we’ll show you a path out of this wilderness. But first, we still have two more options to review.
Federal Direct Consolidation Loan
If you’ve ever used a debt consolidation loan to take care of credit card debt problems, you might think you understand how a Federal Direct Consolidation Loan works for student loan debt. But you’d be wrong. You use a Federal Direct Consolidation to consolidate federal student loan debt into one easy payment. But the loan structure, interest rate, and how you qualify varies greatly from other types of consolidation loans.
Consolidating debt is generally done to simplify debt repayment. If you have multiple individual debts to repay, it can get complicated to juggle all those bills within your budget. Consolidation reduces that down to just one bill, so debt is easier to manage. However, that’s not the only advantage of Federal Direct Consolidation Loans. In this case, taking out this type of loan provides an additional benefit that can be significant, depending on your situation. Namely, you can make defaulted federal student loan debt current. It’s an amazing benefit, and one worthy of a few minutes of your research.
Once again, it gets a little complicated, but it’s actually easy to apply. You do it through the federal website we mentioned earlier: StudentLoans.gov. And don’t forget that we’ll give you a phone number you can call. That’s coming in just a few minutes.
Finally, there’s refinancing. If you don’t want to deal with forbearances and deferments, and you’re not interested in the federal relief programs we just talked about, you have another option: refinancing your loans on your own.
When you refinance, you actually take out a new loan at a lower interest rate. This works best if you’re not cash-strapped and want to pay off your loans faster. That’s because you need a credit score high enough to qualify. Basically, you’re consolidating your federal student loans into one private loan for a lower interest rate. You can then plow your savings back into paying off the principal.
While not nearly as complex as the other options we’ve discussed here, it’s not a walk in the park, either. There are the three first steps you need to take. Start by figuring out how much you want to refinance. Then you need to record the balance and APR on those loans, so you can shop for a better deal.
When you find the best deal, apply. But remember, when you apply for any new loan, that results in a “hard inquiry” on your credit report. That can temporarily drop your credit score. It’s not a huge deal, but it’s worth mentioning – because if you apply for too many loans in too short a time, you could end up paying more. So for instance, you don’t want to refinance your student loans at the same time you apply for a new credit card and secure a new auto loan. All those inquiries, not to mention the new credit, could drop your score and raise your rates.
Is it worth all this? Yes
We just brushed the surface of all these options, so pursuing any one of them will take more time. Is it worth it? Most definitely yes. Anything is better than defaulting on your student loans, which is what happens when you don’t make payments for 270 days or more. That means your wages can be garnished, your credit score is trashed, and any future tax refunds and other federal benefits payments can be withheld. You don’t want to go down that road.
Do you need professional help?
Here’s a depressing statistic: According to the Government Accountability Office, 51 percent of all federal borrowers were eligible for the IBR program we mentioned earlier – yet, only 13 percent are actually participating in it. And the Department of Education even admits that their efforts to increase awareness about these federal relief programs is “incomplete” and “inconsistent.” That’s why you might consider hiring a professional.
Think of it like your taxes. If your income taxes become too complex, you can hire a CPA or tax preparer who not only saves you the time and aggravation, but can also find ways to save you money – hopefully more than enough to cover the cost of hiring them in the first place. That’s been happening more and more in the student loan world.
You can find those professionals online, but I’d first suggest you call Consolidated Credit. We’re one of the nation’s oldest and largest nonprofit credit counseling agencies. Our certified credit counselors will give you a free debt analysis. If you can’t make your student loan payments, you might not need any of these options we discussed today. We might be able to help you budget so you can make your finances work. But if not, we can point you to options for all kinds of debt. So give us a call, and THANK YOU for your time today.