Ask Jeni: Why Is My Loan Balance Increasing?

Ask Jeni: Why Is My Loan Balance Increasing?

by | Mar 12, 2018 | Ask Jeni

Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.

My student loan balance keeps increasing even though I’m making monthly payments under my income-driven repayment plan. What gives?

 

To answer this question we need to talk about negative amortization.

Negative amortization happens when your monthly loan payment isn’t big enough to cover the amount of interest that accrued on that month so your loan balance increases.

 

 

If you have federal loans negative amortization will only occur under income-driven repayment plans or in periods of deferment.

10 and 30 year standard repayment plans calculate a monthly payment that’s high enough to cover the monthly interest so you pay down that debt over the repayment term.

If you have private loans negative amortization can occur under any reduced-payment arrangement or payment pauses you set up with the private lender.

If you have a pre-determined repayment term i.e. 5,10, 15 year term you will pay off yoru loan balance in that time frame.

 

Let’s look at an example:

 

Jack borrowed $80,000 and has an average interest rate of 6.5% He makes $40,000 per year and is repaying under the Pay as You Earn (PAYE) plan.

 

According to the Federal Student Aid Repayment Estimator Jack’s monthly payments will start at $183 per month and end at $606 per month. He will continue to make those payments for 20 years until he qualifies for loan forgiveness. Jack will pay $86,596 and have $97,404 of his student loans forgiven.

 

 

What’s a borrower to do?

 

If you have federal student loans, continue to make your monthly income-driven payments on time.

This will keep your loan in good standing and enable you to get the remaining balance of student loans forgiven.

Income-driven repayment plans and loan forgiveness are designed to protect borrowers from student loan debt situations like this that produce negative amortization. Income-driven loan forgiveness is one of the federal loan benefits that helps borrowers out in a scenario like this one.

 

If you have a mix of federal and private student loans you’ll want to aggressively tackle your private student loans.

Your private student loans are likely the highest interest loans you have and aren’t eligible for any loan forgiveness. You’ll want to eliminate them as quickly as you can afford. Be sure to continue making your monthly federal student loan payments under an income-driven repayment plan.

Ask Jeni: Why Is My Loan Balance Increasing?

Ask Jeni: Are Income Share Agreements Better Than Student Loans?

by | Mar 12, 2018 | Ask Jeni

Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.

“I just heard about Income Share Agreements. How do I know if my daughter qualifies for this? She is a junior in high school. Is this better than taking out a student loan?”

 

Let’s start by defining what an income share agreement (ISA) is. ISA’s are contracts offered through the specific college or university the student will attend that offer upfront money to a student (similar to a loan).

 

The ISA organization will provide a borrower with a fixed amount of money in return for a percentage of their income for a fixed number of years. The terms of the ISA contract, percentage of income and duration of collection, are determined on a case by case basis.

 

Generally, the repayment amounts are capped at 2.5 times the original amount of money given to the student. ISA’s also have a minimum income threshold, meaning if a borrower makes less than a certain amount no payment will be collected.

 

ISA’s are typically offered to students when the estimated cost of attendance exceeds the funds available via federal student aid (like federal student loans, Pell Grants, etc) and scholarships. ISA’s are best-suited as an alternative to private and potentially parent PLUS loans.

 

The appeal of ISA’s

 

ISA’s put some accountability on the college or university to ensure a student’s financial success after graduation.

If the university wants to get paid at all they need to ensure the graduate makes more than the minimum threshold. The more financially successful the graduate, the more money the university will collect.

 

ISA’s provide a safety net to borrowers who don’t anticipate being able to get a high-paying job after graduation.

Higher education can have social value beyond the financial return on investment and some individuals choose to pursue their degree for that purpose. If a borrower is approaching a low-paying field ISA’s can lessen the crushing weight of the cost of their education.

 

The drawbacks of ISA’s

 

You could end up paying more than you would under an alternative loan option.

Let’s say Jane borrows $32,000 and get’s her degree in Early Childhood Education from Purdue (one of the universities offering ISA’s). Based on Purdue’s comparison tool under an ISA of 14.46% she would repay $52,196 while under a Parent PLUS loan she would repay $50,107. That means the ISA would cost $2,000 more than repayment under a Parent PLUS loan and she would be out of debt about four months sooner.

 

An ISA is not a good choice if your daughter plans to graduate with a high-paying job relative to her debt.

In this scenario it is almost certain she will pay more under an ISA than she would under an alternative loan type.

 

ISA’s are meant to protect borrowers from low income but if they’re combined with federal student loans they could increase the financial burden extensively.

The worst case scenario would be a borrower with federal student loans being repaid under an income-driven repayment plan and another amount under an ISA contract. The monthly payment for the federal loans and the ISA are calculated based on borrower income and don’t consider other monthly payments. So a borrower could have to repay $387 a month under their income-driven repayment plan and have to pay another $417 a month under their ISA contract which may not be affordable.

 

My final advice

 

ISA’s aren’t competitive compared to the federal student aid available to borrowers but can be competitive when compared with private student loans.

If your daughter is considering a degree that doesn’t have strong job prospects and may offer a lower income an ISA can be a reasonable strategy to “top off” her available federal student aid.

However, I would argue that needing “top off” funds of any kind (Parent PLUS, private student loans, or an ISA) is a major red flag that directs a borrower to seek out a lower cost alternative, find scholarships, or ensure the job prospects for that degree pay well enough on graduation to repay her debt.

 

 

 

Ask Jeni: Why Is My Loan Balance Increasing?

Ask Jeni: Does My Wife Qualify for Loan Forgiveness Even Though Our Household Income is High?

by | Feb 25, 2018 | Ask Jeni, Loan Forgiveness, Refinancing

Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.

My household income is about $230,000. I have $50,000 in student loan debt and my wife has $20,000. Would my wife be a good candidate for student loan forgiveness? She makes about $25,000 per year. Are there any options for my debt? We both have federal loans.

 

Let’s start out by looking at student loan forgiveness for your wife. By herself, your wife is an excellent candidate for income-driven student loan forgiveness. That means she would make payments under an income-driven plan for 20-25 years and the remaining balance would be forgiven.

 

However, how you file your taxes will determine whether only her income is considered or if your total household income is considered. If you file as “married filing jointly” your household income will be considered when determining the income-driven monthly payment. If you file as “married filing separately” then her income alone will be considered. Married filing separately doesn’t qualify for the same tax incentives as “married filing jointly” so be sure to talk with a tax preparer or accountant about which option makes the most sense for your financial situation.

 

What about the options for your student loan debt? Given your income of $205,000 a year or so $50,000 in student loan debt should be very maneagable. It gives you a debt-to-income ratio of 0.25:1 which is excellent. Your ideal loan options will depend on your personal goals.

 

Without knowing the specifics of your financial situation I can’t know for certain but it’s unlikely you will have any loan balance to be forgiven after 20-25 years of income-driven payments. You can use the Repayment Estimator on the Federal Student Aid (FSA) website to see how much interest you pay under different repayment plans and how long your repayment term is.

 

If you’re looking to get out of debt quickly you may be a good candidate for student loan refinancing. I don’t know about other debts such as a mortgage, car, etc but your student loan debt-to-income ratio is excellent and you have high personal income. If you also have an excellent credit score you have a lot of the characteristics refinancing companies are looking for.

 

Refinancing is a good option if your current interest rate is high and you can significantly lower it. For example I refinanced my federal loans from their 6.67% interest rate to a fixed rate of 3.37% this move will save me nearly $20,000 over the life of my loans. When you refinance your student loans your loans become private loans and lose their federal student loan benefits.

 

I’ve written a lot about refinancing so check out these posts if you’re considering it:

How to Choose the Student Loan Benefits You Need

Is Refinancing Right for You?

How to Find the Best Refinancing Rates Fast

 

A higher monthly payment will also help you pay less interest. If you have flexibility in your household budget you can make extra monthly payments, making sure to instruct your loan servicer to direct them to principal. You can also choose a more aggressive repayment plan so your required monthly payment will be higher. If you want to get out of debt fast, paying aggressively on your student loans will minimize the interest you’ll pay and save you money.

Ask Jeni: Why Is My Loan Balance Increasing?

Ask Jeni: How Does my Employer Student Loan Contribution Benefit Me If I’m Eligible for PSLF

by | Feb 12, 2018 | Ask Jeni

Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.

I work for a non-profit, making me eligible for student loan forgiveness after 10 years. Since the employer [student loan] contribution goes towards my principal, how can this benefit me if my loans are going to be forgiven?

 

The biggest way your employer contribution helps you out in this situation is that it acts as a back-up plan. Because the benefit continues to lower your student loan principal you’ll end up with a lower balance if you become ineligible for Public Service Loan Forgiveness (PSLF). You’ll also have a lower loan balance if PSLF is eliminated by a Congressional budget vote.

 

One common way borrowers become ineligible for PSLF is by dropping below full-time. Full-time is as defined by the employer or 30 hours per week, whichever is more.

 

Failing to submit the necessary income information required to renew your income-drive repayment plan on time doesn’t technically make a borrower ineligible but it can mean you’ll pay a higher monthly amount (on the 10 year standard repayment plan) until you renew it. Failing to renew your income-driven plan can also lead to making ineligible payments on a 30 year standard repayment plan or other non-qualified plan. Key point here is to submit your income information on time to renew your income-driven repayment plan.

 

The final way a borrower can become ineligible is by switching jobs and working in non public service work. Although if that scenario applied you may no longer be getting the student loan repayment benefit.

 

If we look at the common good, this will benefit your fellow borrowers. There will be more PSLF funding available for borrowers like you who are counting on loan forgiveness because the employer contribution will decrease the final balance of your loan that gets forgiven after 120 eligible payments.

 

What your employer contribution won’t do.

 

Your employer contribution won’t make you eligible for PSLF any faster. You can only make one eligible student loan payment each month. That means the 120 payments required to receive PSLF can’t be reached any faster than 10 years. The extra monthly payments made by your employer are just extra payments that don’t speed up your duration of repayment until forgiveness.

Ask Jeni: Why Is My Loan Balance Increasing?

Ask Jeni: Should I take out a Home Equity Loan to Pay Off my Student Loans Faster?

by | Feb 8, 2018 | Ask Jeni

Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.

 

Is the 4.75% interest rate on my student loans compounded daily? Is it best to take out a home equity loan at 6% to pay them off more quickly / pay down half based on how the interest is calculated?

You owe some amount of student loans at a 4.75% interest rate. You are able to secure a home equity loan at a 6% interest rate. You want to know if the home equity loan would help you save money.
To answer your question I’m going to assume your 4.75% student loan interest rate is fixed (meaning it doesn’t increase or decrease with the market).
Interest on student loans does accrue daily. Some home equity loans also accrue interest daily but others accrue monthly. In order to worry about compounding interest on your student loan your payments would have to be less than the amount of interest that accrues between payments. Typically this means your monthly payment is less than the amount of interest that accrues each month.
Let’s look at your interest cost with both options. Interest is calculated according to the daily simple interest formula (loan balance X  interest rate)/ 365 .
Let’s say you owe $40,000 in student loan debt.
At your current rate of 4.75% you will accrue about $5.21 of interest daily or about $160 each month.
At an interest rate of 6% you will accrue about $6.58 of interest daily or about $200 each month.
It doesn’t add up financially to take out a higher interest loan to repay your student loans that have the lower interest rate. If you have federal student loans, paying them off with a home equity loan will shift your debt to a lender that likely doesn’t offer income-based repayment options, loan forgiveness, or other federal student loan benefits.
Let’s assume you aren’t making any payments and the student loan interest compounds on itself daily at a rate of 4.75% and the home equity loan compounds on itself monthly at a rate of 6%. Your balance after one year of the 4.75% interest rate would be $41,945. At a 6% interest rate your end of the year balance would be $42,467.
Any way you slice it the 6% interest rate is going to cost you more money. Stick with your 4.75% interest rate!
Ask Jeni: Why Is My Loan Balance Increasing?

Ask Jeni: Student Loan Consolidation

by | Feb 1, 2018 | Ask Jeni

Ask Jeni is brought to you in partnership with tuition.io, a company dedicated to helping the best companies free their employees from student loan debt.

I need help consolidating my student loans. How should I go about that?

Most borrowers have many individual student loans when they graduate because universities disperse aid multiple times per year (typically each semester) and there are multiple types of federal student loans (most commonly subsidized and unsubsidized). A borrower who went to four years of undergraduate college could have 16 separate loans. What a mess!

 

Why consolidate?

Simplification. A Direct Consolidation Loan simplifies a borrowers many federal student loans into one big student loan with one fixed interest rate.

Longer repayment term. Direct Consolidation Loans are eligible for a 30 year repayment term if they’re over $30,000

 

What consolidation doesn’t give you.

A lower interest rate. The interest rate on a Direct Consolidation Loan is the weighted average of the interest rates on your current student loans. If you’re looking to get a lower interest rate you will need to refinance. 

Consolidation of private loans. A Direct Consolidation Loan is only an option for federal student loans, it can’t be used to consolidate private student loans.

 

What you may lose when you consolidate.

Interest rate discounts. You may lose interest rate discounts given to you after you made a specific number of on-time payments and from setting up automatic monthly payments.

Progress toward loan forgiveness. If your loan forgiveness program requires a certain number of payments to be made consolidating your loans can wipe out your progress. Let’s use Public Service Loan Forgiveness (PSLF) as an example. Let’s say a borrower has made 12 eligible monthly payments and decides to consolidate all their loans. They will have to start over making 120 payments.

Alternatives to Consolidation

If your goal is to simplify your loans and lower your interest rate than you will need to refinance. Refinancing is an option to consider if you have good to excellent credit and a good debt-to-income ratio. You can refinance both federal and private student loans and can choose which loans you want to refinance. When you refinance, all your individual loans are combined into one refinanced loan with one interest rate determined by your refinancing application. This option can reduce your interest rate but also comes with risks. All refinanced loans are now private and lose federal benefits including income-based repayment options and eligibility for loan forgiveness.

How to Consolidate

Submit an application through studentloans.gov. The application can be completed and submitted online or you can do it the old-fashioned way and mail it. After you’ve applied, the loan servicer you chose will be your new point of contact for anything consolidation-related. Be sure to continue making payments on your existing loans with your current servicer until you’re notified by your Consolidation loan servicer that your old loans have been paid off.

 

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