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.
February 2016 – I challenged myself to do a video explaining Parent Plus Loans in under 3 minutes. Here it is:
In the process I learned something about this loan that makes it remarkable. There are features affecting Parent Plus Loans in the current structure of the Education Department’s loan repayment plans that could allow almost all low income families to send their children to college free or nearly free…no matter how high the cost of attendance. In fact, the higher the cost of attendance, the more families further up the income scale can participate!
Yup! Parents can legally borrow money to pay for their child’s college education UP TO the “Cost of Attendance” minus any scholarship or grant money their child receives for each year of undergraduate study.
Colleges: Let’s Just Make-up a Cost-Of-Attendance!
The cost of attendance is whatever the college says it is (!), and includes tuition and fees, room and board, books, personal supplies and travel. Students, on their own, can borrow subsidized and unsubsidized federal student loans up to certain limits each year of undergraduate study. The total amount is capped at $31,000. That’s not nearly enough for four years at most private non-profit institutions or larger state universities. It’s barely enough for smaller public colleges either, even if the student lives at home. Most students can borrow additional funds from private lenders, but the repayment terms are not nearly as good as Federal student loans.
“Adverse Credit” Is What We Say It Is!
Most parents are eligible to take out Parent Plus Loans to help their students. The only thing standing in the way of getting these loans is if the parent-applicant has “adverse credit” as revealed through a credit report.
After much negotiation, rule-makers recently came up with new definitions of “adverse credit” regarding Parent Plus Loans. Applicants will be considered to have an adverse credit history if he or she has debts greater than $2085 that are 90 or more days delinquent as of the date of the credit report, or any debts that have been placed in collection or charged off in the previous two years.
Some provisions for extenuating circumstances, like having large medical bills, are available. And, having a co-signer who is not the student and who does not have adverse credit, can overcome most obstacles to obtaining a Parent Plus loan.
Demand for Parent Plus loans has been rising steadily, barely dented by the new adverse credit rules. The harm caused to low and moderate income families by this loan has been rising as well. The trouble is that there are no limits in place regarding a parent’s ability to repay their Parent Plus loans. Credit counseling, which would help parents understand this loan, is either ineffective or unavailable. Or both.
Parents with very low incomes can and do borrow enormous amounts to pay for their child’s education. Interest rates for Parent Plus loans are currently at 6.84% for the 2015-16 school year. There is an origination fee of about 4% for each Parent Plus loan. Interest rates change for new loans every year according to a formula based on the 10-year Treasury yield. The Department of Education is the lender, and has an ever- increasing number of parent-borrowers in some stage of financial distress due to these loans.
Finally, The Secret Sauce… But, You Have To Dig For It!
Back in 2005, in an effort to unify the terms of income dependent repayment plans, the Department of Education made the Parent Plus loan eligible for one of the more borrower-friendly repayment plans through the transformative power of loan consolidation. But few parents know about this path to making their child’s college dreams come true (without wrecking the family’s finances). Here’s the scoop and it’s available for viewing on the Department of Education’s student loan website. https://studentaid.ed.gov/sa/repay-loans/understand/plans
Here’s a screen shot of the important part (lower right corner):
Borrowers of one or more Parent Plus loans can consolidate their loans into a Federal Direct Consolidation Loan in order to be eligible for the Income Contingent Repayment plan. This strategy applies only to those borrowers who started repayment in 2006 or later. It’s important to note that Parent Plus loans should not be consolidated with any other types of Federal loans. Doing so causes non-Parent Plus loans to lose their eligibility for more favorable repayment plans like IBR, PAYE and REPAYE. Federal Direct Consolidation is a free service offered by the Department of Education.
Under the Income Contingent Repayment plan, most borrowers get lower monthly payments (as compared to regular Parent Plus payments). These payments are determined by a formula which includes a percentage of the borrower’s adjusted gross income, the borrower’s family size, and the amount of the loan left to pay. Some very low-income borrowers could even end up with zero dollar monthly payments for the entire length of the loan!
The repayment period for ICR is 25 years. At that time any remaining principal and interest balance would be forgiven. However, today’s rules would tax the forgiven amount at the borrowers future tax rate.
Bonus! – Meaningful Use Of Public Service Loan Forgiveness
Also, under the Income Contingent Repayment plan, former Parent Plus borrowers with new Federal Direct Consolidation loans can take full advantage of the Public Service Loan Forgiveness program. Parent-borrowers working in public service jobs may be able to get a substantial portion of their loans forgiven in as little as 10 years with no tax consequences.
Oh, And Let’s Throw In “Married-Filing-Separately”!
In 2012, President Obama mandated that the ICR plan would no longer require married borrowers to declare the income of both spouses, as long as the parent-borrower files taxes separately. That move by the President made the Parent Plus loan even more flexible when consolidated into the ICR plan.
The Hazard Of Omission
Some education writers and experts may opine that the Parent Plus loan is a hazard for borrowers. Well yes, it will continue to be a hazard if the Education Department doesn’t tell everyone about the repayment plan that can potentially help so many borrowers.
Why not advertise the heck out of it? The Parent Plus consolidation-to-ICR feature is not a mistake. It was put there to help parent-borrowers, wasn’t it? Surely those who negotiated this feature knew they had designed a way for low-income families to send their children to the same colleges as wealthier families. Right?
But, even if these parent-borrowers do get a taxpayer-funded deal for their children, they are not going to have an easy journey. For 25 years they will have to make on-time payments, follow the rules carefully, keep every scrap of paperwork, and stay on top of any changes. What’s more, they will have to be their own experts and advocates in the face of recalcitrant loan servicers.
Not many people have this level of discipline. I know I would slip up who-knows-how many-times during a quarter century of payments. And it’s well known that loan servicers can trip borrowers up at any moment for no good reason.
So, here is a list of several things that could happen if word gets out about the Parent Plus loan being almost a free ticket to college for low income students. For this list I am putting my mind on the “free-range” setting, which is good for a laugh or two. Mull these over:
1. The private loan industry would be crushed. Sorry about that! (Not!)
2. Private non-profit colleges would be less (or not at all) motivated to use their endowments to help low-income students. No more grants and scholarships, just go get a Parent Plus loan!
3. More low-income students would feel empowered to apply to top colleges. Colleges would find it easy to admit well-qualified students from across the socio-economic spectrum (no strain on the endowment funds!).What a concept!
4. Colleges of all types would accelerate increases in their stated costs of attendance, but wealthier families would force a reversal of this trend. At least for top-ranked schools.
5. The Department of Education would become permanently linked with the IRS. For a preview of this, see the President’s new College Scorecard. Eventually, all Parent Plus borrowers would have their loan payments automatically deducted from their paychecks or tax refunds thus reducing mistakes and the need for interaction with loan servicers.
Sound far fetched? Maybe.
But seriously, could the Parent Plus Loan be the pathway to universal low-cost college in America? And is that even a good thing?
Let me know what you think by commenting below this post. Or, contact me at TheCollegeMoneyMom@gmail.com
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!
Is this the last you’ll hear about student debt repayment? Don’t bet on it! The politicians must have their say and so shall I. Before I start my rant, please watch my video so you’ll be up to speed.
So, this new REPAYE plan will allow millions more student loan borrowers to have much lower monthly payments and get the remainder of their loan balances forgiven in a few decades. Now these poor borrowers can get on with their lives, start families and buy houses. Good for the economy, right?
Well, not so much. Actually, this REPAYE plan and all income-based repayment plans which include forgiveness, simply shift the burden of ever-more-costly higher education to the taxpayers and remove the risk from the students and institutions. So no one has any incentive to control costs or reduce borrowing. Not a good idea!
As I write this blog post, the news is awash with Hillary Clinton’s “College Compact” proposal. More burden-shifting! Even if she does get elected, I cannot see how this gets enacted. Spoiler alert: the proposal gets hacked to death by the Republican congress.
The real fix for the problem of spiraling college costs is to delink getting a degree or certificate from the need for student loans. So, just how can we do that? How about changing the delivery system. In fact, that’s already happening. The delivery system for higher education is morphing into a blend of on-line and classroom instruction. The cost for this delivery system could be far cheaper than the mess we have today. The delivery system for specific job training is also getting ready for prime time. It will be nothing like 1950’s style trade schools. Today’s jobs require students to have a solid grasp of math, science, reading and communications skills. Forward-thinking employers are already setting up schools to educate their future employees. Students will learn specific skills that allow them to transition to jobs immediately after graduation. Aspects of a broader education will be woven into the curriculum to prepare students for future managerial jobs. Or at least, that is the hoped-for outcome.
Education prognosticators say that a college education or job certification is a necessity the young person’s future, and for the future of our country. This education and training needs to be efficiently delivered and efficiently received by the students. To that end, many young people who are ready to take basic college courses as early as the beginning of high school can receive free higher education through dual enrollment. These are courses that can get students free college credits that transfer to their state’s four-year universities, making student loans much less necessary. Dual enrollment for both college courses and job certification should be free in all states. Many states are well on the way to this goal.
The student loan system should have been phased out years ago before it got out of control. But, there is big, BIG money involved, both for the government (6.7% average loan interest) and for the schools. Especially the for-profit schools. This big money is the source of the push-back against new less costly delivery systems for higher education.
With parents and students getting very worried about student loans, it’s only a matter of time before the student loan bubble deflates. New loan repayment programs like PAYE and REPAYE will continue to push the problem off onto future taxpayers. Sadly, those taxpayers could be the very students who are thinking about taking out student loans right now.
To them I say “Don’t do it…find another way! No more student loans!”.
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?
So the President is expanding and changing his favorite student loan repayment plan…Pay As You Earn…again!
PAYE, is an apt acronym for the Pay As You Earn plan. If you borrowed money from the government to attend college, you are going to PAYE, but maybe not as much as you expected.
If you are a taxpayer, you are going to PAYE for a portion of someone’s education, and maybe more than you expected.
And then there are the colleges and universities who will, as usual, plan their yearly tuition increases around the latest proposals to increase the availability of ever more liberal student loan repayment schemes. Maybe it IS time for a change.
Take a look at my video, in which I try to make PAYE more understandable!
As much as I’d like to see the PAYE plan help student borrowers, and it will, I’d also like to see if any of the proposed PAYE plan limitations will help to put the brakes on the insidious cycle of tuition creep.
For your enjoyment, I copied this right out of the Department of Education’s 2015 Proposed Budget:
The 2015 Budget proposes to extend Pay As You Earn (PAYE) to all student borrowers and reform the PAYE terms to ensure that program benefits are targeted to the neediest borrowers. The reforms also aim to safeguard the program for the future, including by protecting against institutional practices that may further increase student indebtedness. In addition, to simplify borrowers’ experience while reducing program complexity, PAYE would become the only income-driven repayment plan for borrowers who originate their first loan on or after July 1, 2015, which would allow for easier selection of a repayment plan. Students who borrowed their first loans prior to July 1, 2015, would continue to be able to select among the existing repayment plans (for plans for which they now qualify and for loans originated through their current course of study), in addition to the modified PAYE.
The Budget proposes additional changes to PAYE that include:
Eliminating the standard payment cap under PAYE so that high-income, high-balance borrowers pay an equitable share of their earnings as their income rises; (Listen up doctors, lawyers and dentists!)
Calculating payments for married borrowers filing separately on the combined household Adjusted Gross Income; (so the message is, don’t get married?)
Capping Public Service Loan Forgiveness (PSLF) at the aggregate loan limit for independent undergraduate students to protect against institutional practices that may further increase student indebtedness, while ensuring the program provides sufficient relief for students committed to public service; (the cap would be $57,500)
Establishing a 25-year forgiveness period for borrowers with balances above the aggregate loan limit for independent undergraduate students; (this is aimed at lower income borrowers who used the higher threshold PLUS loans).
Preventing payments made under non-income driven repayment plans from being applied toward PSLF to ensure that loan forgiveness is targeted to students with the greatest need; and
Capping the amount of interest that can accrue when a borrower’s monthly payment is insufficient to cover interest costs, to avoid ballooning loan balances. (Currently 10%)
If your eyes have not glazed over by all this budget stuff that really won’t take effect until early 2016, here are the contents of the “special sauce” that I mentioned in the video. The two big deals about the PAYE plan are that your monthly payments are kept low by a calculation of what 10% of your discretionary income would be according to your salary. This calculation of your payment can never be greater than what you would have paid if you had been using the Standard Repayment Plan. If the calculation shows that, in any year, your payment IS greater than the Standard plan, a loud buzzer goes off and you are OUT…yes, you are sent back to the hell of HUGE monthly payments! The message is: have a good accountant who will warn you and make sure you send in proof of your eligibility and family size each and every year. Because they will throw you out for forgetting that too!
Here’s the other big deal part of the special sauce: a 10% limit on capitalization for unpaid accrued interest! For those moderate non-doctor borrowers (60K to about 150K) that means that they will never find their loan amount ever gets bigger than 10% more than the amount they originally borrowed. There you have it. Special Sauce!
And now, having read the proposed new PAYE rules, you know why the doctors, lawyers, and dentists are going to be spitting fire at the Administration. You would too if you’d had to borrow $400,000 or more just to get through school, and then had to face a 6K a month payment for the next ten Standard Plan years
Student loan info is the new hot commodity among financial writers.
As students are going to college for the first time, or back to college for the second, third (or even tenth) year, the number of articles I see about the issue of student loan debt are multiplying faster than I can read them online. But when an exceptionally good article appears in a real live publication in my mailbox, it’s going to get my full attention. I might even read it twice…mostly while eating (low carb, of course!). This article appears in the Fall 2014 USAA magazine, Volume 50, Number 3. It’s title is “ Escaping the Shadow of College Debt”. Here is a link to read it online: >http://www.nxtbook.com/nxtbooks/pace/usaa_2014fall/#/12 . The article contains good stories about two women, who, for different reasons, got themselves into some serious student loan debt. It lays out the scope of the student loan problem and then engages the help of some of the heavy hitters in the college financial business, including Mark Kantrowitz of Edvisors Network and Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price”. It also gets a lot of great info from the very same website I use in this episode of The College Money Mom. This website is brought to you by the Consumer Financial Protection Bureau, a relatively new department of the U.S. government. So watch this episode to learn about the different kinds of student loans in a really easy to understand way! And, once you have this knowledge, you’ll be able to steer yourself, and others, out of harms’s way.
This week I am writing a script about repaying your student loans. This is for a few weeks from now. Needless to say, this is a stressful subject. So much to explain in under 3 minutes! It just makes me want to eat a giant bowl of PASTA! What’s a low carb College Money Mom to do? Why, cut up a spaghetti squash, of course! Voila! Low Carb Pasta!
You know you want some! Do this:
Cut a spaghetti squash in half. Scrape out the seeds and other goopy stuff, leaving the rind intact.
Cut it in quarters and put it in a microwaveable cooking bowl. Put in an inch or two of water. Cover and nuke for 10-12 minutes on high.
It’s done when you can poke a fork through the rind material and it starts to shred easily. Drain and put the pieces aside to cool a bit. When you can hold them comfortably, remove all the shreds of cooked rind. Guess what it looks like? Yup, spaghetti! Yay!
You can eat it plain or with spaghetti sauce. I like to add melted butter (real butter please), salt , a little garlic powder, and a generous crank of my favorite black pepper. Back to work now…see you on Youtube!