Student Loans 101
Student Loans 101

The Basics

Most students attending college today rely on some type of loans to help pay for their education. And while there are many types of loans, most student loans are federal loans.

The good news about federal student loans is that there are many repayment plans and even borrowers that have defaulted on their loans have options to get out of default and back on their feet. Under some circumstances, borrowers may remain in good standing while making payments as low as $0. Some borrowers may even be able to cancel some or even all of the debt.

There are also private student loans which are made by private lending institutions. These loans are not backed by the federal government. Unlike federal loans, there are no interest rate limits and borrowers do not have the same range of flexibility in terms of repayment plans.

If a borrower does not know which type of loans they have, they should visit the National Student Loan Data System. If the borrower’s loan is a federal loan, it will be listed there. If it is not listed there, it is NOT a federal student loan.

Note: StudentLoanify only works with federal student loans. Our proprietary system will sync a borrower’s NSLDS data with our systems.

Repayment Plans

There are nine repayment plans for federal loans. Four are based on the balance of the loan. Five are based on the borrower’s income and family size. The availability of each plan for a particular borrower depends on several factors including the type of loans and their current status. Don’t worry…StudentLoanify’s analysis will tell you exactly which repayment plans a borrower is eligible for as well as the payments under those plans.

Balance-Based Repayment Plans

Balance based plans are exactly what someone expects when they borrower money. There is a definite term with definite payments and at the end, the borrower is expected to pay off the full balance of the loan. The four balance based repayment plans and their key characteristics are:

options  Standard (fixed monthly payments over a fixed term)
options  Graduated (payments start lower and increase every 2 years)
options  Extended (fixed monthly payments over longer term, balance must be greater than $30,000)
options  Extend Graduated (payments start lower and increase every 2 years, balance must be greater than $30,000)

Income-Driven Repayment Plans

Income-Driven Repayment plans are based on the income of the borrower (and sometimes the spouse too). The formulas for these payment plans ONLY look at the borrower’s income and family size. Expenses and amount of the loan are irrelevant. Payments can be as low as $0! If at the end of the repayment term, the borrower still has an outstanding balance, that balance will be forgiven. (Please consult with a tax expert as there may be tax consequences). The five Income-Driven Repayment plans and their key characteristics are:

options  REPAYE (10% discretionary income, eligible for forgiveness after 20-25 years)
options  PAYE (10% discretionary income, must be new borrower as of 10/1/07, eligible for forgiveness after 20 years)
options  IBR (15% discretionary income, eligible for forgiveness after 25 years)
options  IBR NEW (10% discretionary income, must be new borrower as of 7/1/14, eligible for forgiveness after 20 years)
options  ICR (20% discretionary income, eligible for forgiveness after 25 years)

Not all loans qualify for all plans but StudentLoanify will help borrowers understand for which plans they qualify, how to qualify and even prepare the applications needed. Just print, sign and send.

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A borrower is considered in default on their federal student loans if they haven’t made a scheduled payment for a period of at least 270 days (about 9 months). The consequences of defaulting on federal student loans can be dire with the federal government having extraordinary collection powers including administrative wage garnishment, offset of federal benefits and offset of federal tax returns. Not to mention the impact a default has on the borrower’s credit.
There are two ways to deal with a default – settle it or cure it.
If borrower can afford a lump sum payment, then settlement of the outstanding debt can be an option. However, borrowers should not expect heavy discounts. There are very strict guidelines for collector when settlement offers are made. Usually, the best deal one can hope for is 90% of the outstanding principal and interest.

If settlement through a lump sum payment isn’t a viable option, borrowers can either rehabilitate the defaulted loan(s) or consolidate them. To rehabilitate a defaulted loan, a borrower must make 9 “voluntary, reasonable and affordable monthly payments”. The nine payments must be made during a period of 10 consecutive months. Rehabilitation payments are usually 15% of a borrower’s discretionary income. Fees of up to 16% may be added to the balance. Once the rehabilitation is completed, borrower will be placed on their original repayment plan.

Another option if borrower has defaulted is to consolidate the loan(s) and select an Income-Driven Repayment plan (see Repayment Plan section for details). With a consolidation, the borrower is deemed to be out of default once the consolidation is completed. Borrower will also have the ability to select the new servicer and make only one payment for all of the loans consolidated. Fees of up to 18.5% will be added to the balance.

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Believe it or not, federal student loans can be forgiven. Yes, that’s right – forgiven! This means that after certain conditions are met, any remaining balance of the federal student loans will no longer be owed (although there may be tax consequences as a result of the forgiveness for some of the programs).

Generally, there are 2 types of forgiveness programs. First, any borrower on an Income-Driven Repayment plan will be eligible for forgiveness after 20 or 25 years of making payments (the time will depend on the plan).

Second, there are forgiveness programs available to teachers and public service employees. Full time teachers working at a qualifying school for 5 years may be eligible for forgiveness. The exact amount will depend on the grade levels and subjects taught. If the borrower is a high school teacher teaching STEM or a special education teacher at any grade level, the amount forgiven is $17,500. If the borrower is an elementary teacher or high school teacher that teaches a different subject, the amount of forgiveness is $5,000.

Public service employees are also eligible for loan forgiveness after 10 years. To be eligible, borrower has to meet 3 criteria:

options  Work for a qualified employer (government entity or non-profit)
options  Borrower’s loans must be Direct loans
options  Borrower must make 120 qualifying payment under a qualifying plan (Income-Driven Repayment plan)

As part of StudentLoanify’s program, we will help the borrower determine if they may be eligible for any of these forgiveness plans and provide borrower with the necessary applications and information to obtain the forgiveness.

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Private Loans

These days, there are many private student loan lenders offering to refinance student loans. These lenders purport to lower interest rates and payments and may be a very good option for some borrowers. But, borrowers should do their homework and understand that private student loans are a whole different animal from federal student loans. Once federal student loans are refinanced, borrowers will lose ALL of the flexibility that comes with federal loan programs such as:

options  Picking a repayment plan based on borrower’s income and family size;
options  Rescuing a loan if they default;
options  Discharging the loan because of disability; and
options  Qualifying for forgiveness of their loans.

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