My Eyes Glaze Over. This used to be the trademark teenage response to all things dull and boring. Such as math, french literature, and especially money issues. Today’s approximation for MEGO would be “meh”.
So as I thought about making a video to explain the difference between Federal Direct subsidized and unsubsidized student loans….guess what happened…yep MEGO!
BUT WAIT! If you, dear reader, are in the hunt for more college money, you must understand student loans. Why? Because when college bills are looming, it may be that there is no choice but to take out some student loans.
If you were offered subsidized loans and unsubsidized student loans in your college’s financial aid award letter, then it’s time to know the difference between these loans. You’ll need to know how to use their attributes strategically.
Most importantly use these Federal Direct subsidized and unsubsidized student loans FIRST (they have certain dollar amount limits) before considering any private student loans.
These are the best student loans you can get. Here’s why:
Federal Direct student loans offer the best repayment programs. Watch some of my other videos on this subject for more info.
Here is an example:
Really, after all this, you could not be blamed for drifting into MEGO and thinking about cute puppy videos.
The Consumer Financial Protection Bureau wants to make you smarter about your student loan repayment options. Basically the message is: We at the CFPB can’t solve all the student loan servicing problems, so you’re going to have to do it yourself. Here’s the best interactive learning tool we have, now please use it wisely.
Thus the Repay Student Debt Tool was created…and released to almost no fanfare. So here’s a little video to explain it. Warning to the legal community: there are some handy dandy DIY lawyer letters included in the Repay Student Debt Tool. Enjoy!
If you run all the scenarios on this decision-tree-formatted program, you WILL be smarter than the average loan servicer. Face it, you clearly have some college education, evidenced by your ownership of some amount of student debt. Plus, you are really motivated to keep yourself out of the mess you’ve been hearing your friends complain about.
The Consumer Financial Protection Bureau (CFPB) has been fielding thousands of these complaints at their Student Loan Ombudsman office.
Here are some of them:
Borrowers were being told either mis-leading or completely wrong information about repayment programs that they were eligible for and which could keep them out of default.
Borrowers attempting to pay down some of their loans early had payments applied to the wrong loan.
Borrowers making partial payments sometimes found the loan servicers were applying the money in such a way as to maximize late fees.
When borrower’s accounts got transferred from one loan servicer to another, as often happens, there was no notification, causing payments to be lost or misapplied.
Even if the borrower’s account remained at the same loan servicer, the borrower could get conflicting answers from different agents. Information that could have been helpful was lost in the shuffle.
There were complaints about lost paperwork, processing errors, and missing billing statements. And on and on…
Meanwhile, the student loan debt problem in the U.S. has gotten so bad that a large percentage of student debt holders were no longer participating in our economy in the form of purchasing homes, autos or major appliances.
To make matters worse, borrowers desperate to get help with their student loan problems started looking outside the realm of unhelpful student loan servicers. And who popped up to fill that need? You guessed it, student debt relief scamsters! (snark follows) “Why yes, just give us an up-front fee and we’ll straighten out all your problems. We’ll sign you up for repayment programs which, oh never mind, are provided completely free to federal student loan borrowers by the Department of Education. And if you act right now, you can get all your federal student loans consolidated into one tidy lower interest private loan! We just won’t mention the fact that you will lose all the rights, protections, privileges and possible forgiveness offered to federal student borrowers.” Scamsters just gotta scam.
So who can we blame for this whole student loan mess and the downright broken student loan repayment system? (Warning: rant ahead!)
Well, the original sin was the creation of the student loan system. This made it easy for completely inexperienced young people to get their hands on staggering amounts of money for college and lifestyle.
As soon as the educational industrial complex got wind of this endless stream of federal cash, the taps were turned to full-on, and rusted in place that way. Thus commenced tuition increases, huge building programs, bulging budgets for staff, researchers, and every kind of amenity for students.
Of course the interest on the loans (to be repayed by the same inexperienced students after graduation) was creating a huge profit for the banks that were issuing the federal loans. The Department of Education (DOE) took notice of this phenomenon and by 2010 took back control of these loans and all the interest.
Right about that time, it became clear that the economy was in a stall and debt-saddled young people weren’t able to buy houses or start families. But, hey, the DOE was doing just fine, thank you. By 2013, the DOE was clearing nearly $40 billion dollars a year in student debt interest.
Along came the most costly of the new repayment programs. The White House ordered up PAYE, the Pay As You Earn repayment plan. This plan would essentially be an interest only gift for low and moderate income recent grads. Original loan amounts would begin disappearing from the DOE coffers and continue through year 20 of repayment. Bad for the DOE’s bottom line.
This very same agency of the U.S. government, the DOE, was also charged with hiring the loan servicers to collect payments from student loan borrowers. The attempt to hire quality servicing companies with well-trained employees has been half-hearted… and that’s being generous. One could be suspicious that all the troubles borrowers have experienced with student loan servicers was an attempt to bring in more revenue in late fees resulting from screw-ups and bad customer service.
But that would be a conspiracy theory…I’ll cast my vote for the stupidity theory instead!
A young friend of mine just graduated from college and, even has a brand new well-paying job! And that’s not all, he’s newly married! What a lucky guy!
What’s not lucky is that he has student loans. In just 6 months he’ll be out of his grace period and will have to start paying those loans back.
What are his options?
The first thing he might want to consider is consolidating his loans.
Let’s say his loans are all federal direct loans and that some are subsidized and some aren’t. These loans were made in different school years for different amounts and at different interest rates.
So, even though he’ll probably have his loans grouped with one servicer by his lender (the U.S. Education Department), keeping up with all those different loans requires a lot of attentiveness. Mistakes can easily be made by the borrower. Or even by the servicer…shocking, right?
Consolidate Student Loans and Stay Organized
Consolidating his loans would give my young friend a far simpler repayment picture. His interest rates would be averaged and weighted into a rate nearly the same as if he had kept them all separate. Not only that, but he would gain access to at least one of the new affordable repayment plans.
Consolidate Student Loans and Get Affordable Payments
So far, the very newest repayment plan is not quite finalized, but is nearly certain to be available in December of 2015. It’s called the Revised Pay As You Earn plan, or REPAYE for short. My friend would be eligible for REPAYE and it might keep his payments down enough for he and his wife to save for their first house, and to start a family.
He would have been eligible for REPAYE’s more borrower-friendly older cousin, the PAYE plan, IF he had not gotten that well-paying job right out of college. Thanks to his new paycheck, he will not be poor enough in comparison to his student debt to get on the PAYE plan. Moreover, the ratio of wealth to debt for my friend gets even worse under REPAYE because the fed’s calculation of HIS income will include his wife’s income as well. Who knew he should have borrowed more? Just kidding!
But, no matter! Getting your student loan payment down to 10% of your JOINT discretionary income is still a wonderful thing! And, since my friend only has undergraduate loans, any remaining balance will be forgiven after 20 years. The forgiven amount could be taxable that year as income, but it’s likely this tax threat could be gone in the future, thanks to congressional efforts.
If my friend decides to consolidate all his student loans into a single Federal Direct Student Loan for simplicity’s sake and then decides to enter the REPAYE plan, he will have to understand one important fact. As a participant in the plan, he is obligated to send in a form which verifies his family’s joint income EVERY SINGLE YEAR. If he forgets the verification form, he will be placed in an alternate version of the REPAYE plan until he is jolted awake by the higher payments!
The new REPAYE plan will allow many more borrowers to get affordable payments as well, no matter when they got their loans and no matter how much money they earn. The older borrowers will need to get some of their “non-direct” federal loans, such as FFEL, consolidated into Federal Direct Consolidation loans. The biggest thing for older borrowers to remember is that Parent Plus loans cannot be included in these new Federal Direct Consolidation loans. And, even if an earlier consolidation loan paid off a Parent Plus loan, then that consolidation loan is considered “tainted”. It cannot be included in the borrower’s new Federal Direct Consolidation loan, whose purpose it is to access the REPAYE plan.
So you might be wondering why this latest round of cleverly acronym’d student loan repayment plans has come to be a dinner party topic. Here it is: REPAYE clamps down on the excesses of PAYE. Simple as that.
People had begun to game the system. Doctors, lawyers and other high student loan borrowers figured out that they could combine the generous features of PAYE with the Public Service Loan Forgiveness program (PSLF). In 2017, the first of many lucky borrowers will have hundreds of thousands of student loan debt forgiven. The forgiven amounts will not be taxed.
All this system-gaming has given colleges the idea that they can raise their tuitions to match the benefits of the PAYE plan and PSLF program. Taxpayers will be on the hook for the ever-spiraling debt and tuition crisis at private non-profit colleges AND to some degree at public universities.
The cry has gone up to politicians and higher education policy-makers: Put the brakes on PAYE! So REPAYE was invented, and here we are on the brink of it’s implementation.
We can only hope that this time they got it right. I’m taking bets starting now! Who’s in?
Now that the President has decreed a new “Student Aid Bill of Rights”, the ship of state will turn slowly toward a better way for student borrowers to manage all their loans through one portal. A new centralized complaint system will give more borrowers the ability to resolve disputes with loan servicers and debt collection agencies.
Thanks to the National Consumer Law Center and it’s Student Loan Borrower Assistance project, a prototype of this new system exists now. Watch this video to get a guided tour of how the Student Loan Borrower Assistance (.org) website links the pieces of the new system together.
If I was asked to magically build a new system to get student loan help, I would create the new loan management portal using the building blocks provided by the the National Student Loan Data System. Currently, this system provides credentialed visitors with access to all their Federal student loan information. However, the visitor cannot find information about his/her private student loans. This is the next important task. But it’s just too hard to think about compiling private student loan information, so my magic wand would just “Make It So”!
As for the centralized complaint reporting piece of the new “Student Aid Bill of Rights”, I would just (poof!) combine the best parts of the two existing Student Loan Ombudsman offices. The Department of Education now handles complaint arbitration for Federal student loan disputes. The Consumer Financial Protection Bureau’s Student Loan Ombudsman office makes a specialty of resolving private student loan disputes. Cue the magic MixMaster!
And finally, just like the Student Loan Borrower Assistance website, I would have a whole list of free legal help right there on the new centralized complaint system website. Hey, not every student loan complaint can be resolved in a tidy fashion. What’s more, the rule against discharging student loan debt through bankruptcy looks like it’s on the table for revision. New bankruptcy rules will produce a tsunami of borrowers who will need legal guidance. Or a fairy godmother!