by Repayable | Jan 29, 2018 | #Millenniallife, Loan Forgiveness
If you’re considering student loan forgiveness but the dubious PSLF news has you wondering if any forgiveness option is safe you’ll want to read this. Estimated read time 5 min.
PROSPER wants to eliminate time-based loan forgiveness for new borrowers, I haven’t heard of anyone who’s actually received PSLF, what is the deal with loan forgiveness? Is loan forgiveness for real or is the government going to pull the rug out from under borrowers? The proposals in the PROSPER Act and the news around PSLF might have you wondering if you’re on safe ground and if loan forgiveness is a secure option for getting rid of your student loan debt. Let’s take a look at the information we know about loan forgiveness.
PSLF and income-driven loan forgiveness
Public Service Loan Forgiveness (PSLF): Forgives remaining balance of student loans after a borrower makes 120 payments on a qualifying income-driven repayment plan while working for a qualifying employer. The loan amount forgiven is tax free.
Income-driven Loan Forgiveness: Forgives the remaining balance of student loans after a borrower makes payments on an income-driven plan for 20-25 years (depending on when loans originated). The loan amount forgiven is taxable.
Borrowers who qualify for these programs
PSLF: Borrowers employed in specific public-service jobs.
Income-driven Loan Forgiveness: Any borrower who makes payments on their income driven repayment plan for 20-25 years.
Estimated costs
PSLF: $23.7 billion dollars over the next decade.
Income-driven Loan Forgiveness: $74 billion over the next decade.
Security of Plans Based on Cost
PSLF: is an incredibly high cost plan that doesn’t cap the loan amount forgiven and covers a broad range of borrowers. The proposed PROSPER Act eliminates this plan for future borrowers. If you haven’t yet borrowed and are considering PSLF as a way to make your debt affordable look somewhere else. It’s unlikely this plan will survive in the long term. If you’re currently working toward PSLF you should be able to get loan forgiveness through PSLF.
Income-driven Loan Forgiveness: is another high cost loan forgiveness option. This option helps borrowers with the most need making it a plan that is better targeted than PSLF. However time-based loan forgiveness is also set to be eliminated for new borrowers under the PROSPER Act to be replaced with a plan that protects borrowers from negative amortization so they would pay no more than they would have under a 10 year standard repayment plan. Because this type of forgiveness is better targeted and allows the government to collect more of the original debt it’s more likely that this will survive in some form for future borrowers. If you’re a current borrower you will likely get loan forgiveness under this model.
So what’s a borrower to do?
Unfortunately the security of loan forgiveness options depend greatly on the desires of Congress. If you want to exert the control you have then you must talk to your representative and state senators. Tell them what your life looks like with loan forgiveness and tell them what it looks like without it. Borrowers have demonstrated they’re ready to speak up as evidenced by the fact that the student loan interest deduction and graduate school tuition waiver remained intact in the tax plan.
Find and contact your representative here.
Find and contact your senators here.
Borrowers counting on loan forgiveness need to continue to keep their loan in good standing by making payments on time each month. If you’re counting on PSLF, start submitting your certification of employment now and keep doing it annually.
Do you feel uncertain about loan forgiveness? Let me know in the comments below or on the Repayable Facebook Page.
Additional Resources
PSLF Budget Estimates
Income Driven Repayment Plan Budget Estimates
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by Repayable | Jan 22, 2018 | Money Matters, Refinancing
This post is about why I got a lower interest rate the second time I refinanced my student loans. This post is a reminder that if you didn’t get the best interest rate the first time you refinanced you can work on a few key areas and try again in a year or two.
Estimated read time ~4 min.
*Links to refinancing companies in this post are referral links which means I may get a referral bonus if you refinance your student loan through one of them. All the links (except CommonBond) also offer you a referral bonus when you use it! All the companies I link to are companies I have researched and trust or have used myself.*
I first refinanced $99,000 in June of 2016 and got a variable rate offer of 3.36%, my fixed rate offers were all over 1% higher so I decided to take a chance on the variable rate. Over the course of the next year the rate crept up to 4.1% so I decided it was time to refinance again.
Start looking into refinancing again if your variable interest rate has crept up significantly and you’re currently a better refinancing candidate.
I used the rate estimators on all the refinancing company websites I was familiar with. That narrowed my playing field to three refinancing companies based on interest rates alone, Earnest, ELFI, and CommonBond. Unfortunately SoFi’s estimates were at least 1% higher than the rest. So I submitted formal applications to these three companies.
Use the rate estimators on multiple refinancing company websites to decide where to submit formal applications so you get the best interest rate.
After submitting formal applications I got approved for refinancing by all three companies and now had some leverage. At that time my loan was serviced through Earnest and when I was obtaining required documentation from them for the formal applications they told me to contact them if I got a more competitive rate. ELFI gave me the most competitive interest rate so I contacted Earnest to see what they could do. At first they said they couldn’t match the interest rate but later that day I was contacted and they offered to match the ELFI’s rate and I was able to refinance for a 3.37% fixed rate over a 5 year term.
If you’re already working with a refinancing company you like, use market competition to lower your interest rate.
So how did I get a lower interest rate just over a year later? It wasn’t because the market improved, in fact it had gotten slightly worse as evidenced by my increasing variable interest rate.
The second time I refinanced I owed $26,000 less on my student loan principal and owed less on my auto loan. I also had a slightly higher increase in my full-time salary. All this means my debt-to-income ratio looked much better than it did the year prior.
Over time your debt-to-income ratio will get better as you pay down your debt and as you increase your income.
By the second time I refinanced I had more assets too. My employer-sponsored 401K performed well and I continued to contribute and get my employer match so had an additional $20,000 in that account. Building my savings account was a big focus in 2017 so that account also had more cash.
Grow your assets. Making consistent contributions can increase your assets by tens of thousands of dollars.
Finally my credit score continued to improve based on responsible credit use and the age of my credit history. By the time I refinanced the second time my credit score was 783 which was around 50 points better than before. One thing that often plagues us young folks is the relative age of our credit history. I was a late comer when it came to credit cards so my history now is only about 7 years old. It’s not terrible but it’s also not even close to as long a history as say my parents have.
Continue responsible use of credit cards to improve your credit score. Keep your oldest account open if you have relatively “young” credit history.
Have you refinanced your student loans a second time? Are you considering refinancing for the first time? Let me know in the comments below or on the Repayable Facebook Page!
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by Repayable | Jan 15, 2018 | Refinancing
Today’s post is going to share the financial criteria that make you an ideal candidate for refinancing.
Estimated read time 4 minutes.
Oh student loan refinancing you’re so sexy. You promise to slash my interest rate and save me thousands of dollars. I can see the backpacking trip across Europe I can buy with that savings now. But behind that allure I wonder What are you hiding? Where’s the catch?
Here’s the catch. Refinancing is the best option for those with substantial financial security. And I’m not just talking about the ability to pay your bills every month. I’m talking standard adult level financial security. The kind that looks at your assets (hah! what assets, my education?) and liabilities (all your other debts) and your earning power and monthly cash flow.
Read on to see if you’re financially secure enough to refinance your student loans.
You have a high and predictable income.
How high? That’s a tricky question but essentially the higher the better. Refinancing companies are cherry picking safe investments so the higher your income the more likely you are to repay your debt. Think about this, the average income of someone refinancing through Earnest was over $130,000.
Refinancing companies also want to see predictable income, meaning they favor people who are employed and have a steady paycheck coming in. For your own sake you also need to have predictable income because a refinanced loan is a private loan and can lose much of the payment flexibility offered by federal loans.
You have a good to excellent credit score.
Most refinancing companies only refinance student loans for borrowers with credit scores over 680, some go down to 660. The better your credit score the better your interest rate.
You have some assets.
This doesn’t just mean something like a house. This includes your savings account and investment accounts such as a 401K or IRA. The more money you have in assets, the better you look to refinancing companies.
You’re ready to pay off your debt.
Refinancing shouldn’t be used to stretch out the length of your repayment term. A federal loan is more flexible and forgiving when it comes to unplanned financial problems. If you feel like you need a lower monthly payment, choosing a different federal repayment plan is a better option.
If you have high interest private loans refinancing could be a good option because a lower interest rate could lower your monthly payments without extending the duration of your repayment.
Still interested in refinancing?
If you’ve answered these questions positively, you should start looking into refinancing. Every day you wait you’re racking up interest. Get started with these articles. If you’re not quite sure if refinancing is right for you send me an email jeni@repayable.org and we’ll talk through your student loans and find a repayment strategy that works for you.
Is Student Loan Refinancing Right For You?
How to Choose the Refinancing Benefits You Need
The Top Student Loan Refinancing Companies
How to Find the Best Refinancing Rates Fast
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by Repayable | Jan 8, 2018 | #Millenniallife, Advocacy, Loan Forgiveness
Today’s post provides insight on a few key pieces of the PROSPER Act introduced in the House in late 2017. Estimated read time ~5 min.
The PROSPER Act, short for Promoting Real Opportunity, Success and Prosperity through Education Reform, was introduced by Rep. Virginia Foxx (R-NC), chairwoman of the House Committee on Education and the Workforce, and Rep. Brett Guthrie (R-KY), chairman of the Higher Education and Workforce Development subcommittee late in 2017.
PROSPER is designed as a reform to the current system of higher education funding. Currently the law of the land is the Higher Education Act which has been in place since 1965. It’s fair to say that the landscape of higher education has changed significantly since then.
The Best of PROSPER:
Meaningful information for borrowers to make financially driven decisions about college.
No one wants to end up with a degree that assassinates their financial future. Completion rate, average debt of borrowers, and the average salary of graduates at 5 and 10 years for every college will give borrowers objective data to compare across different degrees and different universities. Ideally there would be salary information for graduates 1 year after graduation and job placement rates in the chosen field so borrowers could also assess how quickly they would get a job after graduation and if there are enough jobs to go around.
Simplified loan options.
There are six different types of federal loans under the current system. I definitely see the need to simplify them. PROSPER proposes a common sense split of one loan for undergraduates, one for graduate students, and one for parents. They call it ONE Loan although there are in fact three loans.
The Worst of PROSPER:
Elimination of a time-based loan forgiveness option.
Essentially PROSPER would protect borrowers from negative amortization (an increase in the principal balance of a loan caused by making payments that fail to cover the interest due) by limiting borrowers to paying no more than they would have under a 10 year standard repayment plan. The problem? You still have to pay off the entire principal of the loan. So if your education cost more than the income it provided you after college you’re stuck paying that loan pretty much indefinitely.
Why is this so problematic? With other types of debt, such as credit card debt, if you get in over your head that debt can be discharged through Chapter 7 bankruptcy. Student loan debt, not so much. A borrower has to die or become permanently disabled for federal loans to be discharged. So if a borrower gets in over their head with student loans under PROSPER… your debt will follow you around for-ev-er.
Graduate student loan changes.
PROSPER would set a cap on the loan amount available to graduate students without taking into account the cost of attendance. In addition PROSPER eliminates graduate students eligibility to participate in work study. Coupled together, these changes could limit the ability of an individual graduate student to financially support their graduate education.
The Things PROSPER Could Do Better:
Offer a time-based forgiveness option.
Even with responsible borrowing there is not enough readily accessible data for a student to accurately decide how much their degree is worth. Want to know the average debt of a graduate in your chosen field of study at your institute? Good luck finding that. Want to know job placement rate? You can probably find that. Want to know the average starting salary of graduates from your particular program? That information isn’t there. Add that to repeated tuition hikes and a system designed to keep students spending and it’s amazing anyone gets out without torching their future finances.
In addition to the majority of responsible borrowers the fact still remains that federal student loans give 18 year old borrowers access to tens of thousands of dollars a year so they can choose a career for the rest of their lives… give me a break! The pre-frontal cortex is the part of the brain responsible for planning and complex decision-making like anticipating long-term consequences. This part of the brain isn’t even fully developed until around age 25. So a borrower at age 18 is supposed to choose something they want to do forever and borrow responsibly. We shouldn’t be holding this decision making over someone’s head for a never-ending period of time.
Loan forgiveness is not a get-out-of-jail free card, it’s the responsible thing to do in a system of higher education that’s becoming increasingly treacherous to navigate.
Offer stronger incentives for colleges to control costs and demonstrate outcomes.
PROSPER could directly tie a college’s access to federal funding based on borrower outcomes. If specific institutions and programs of study fail to demonstrate appropriate debt-to-income ratios, the government could lower funding to those institutions.
Why am I proposing taking money away? Because this prevents predatory programs from racking up debt for borrowers without keeping the promise of higher income through higher education. This steers borrowers away from these types of programs because they won’t be able to access funding. Right now college tuition is on an indefinite upward trend. At some point all degrees will be priced out of affordability. Tying federal funding to something like a debt-income-ratio motivates colleges to lower costs to reduce the debt portion of the ratio. Right now there is no motivation for colleges to lower costs.
A Controversial Stance on Public Service Loan Forgiveness (PSLF):
I’m not opposed to the elimination of PSLF in the long term.
A large percentage of borrowers attracted to this program are not who PSLF was intended for. PSLF has attracted many high income high debt borrowers with the means to repay their loans regardless of a loan forgiveness option. Borrowers like myself, a pharmacist, can save tens of thousands through PSLF but can afford, albeit with modest additional financial pressure, to repay the full balance of our loans without loan forgiveness. Loan forgiveness options encourage existing professional colleges (Pharmacy, Law, Medicine, etc) to continue to increase tuition. The lucrative tuition encourages for-profit institutions to open up which floods the job market with new graduates and drives down wages despite increasing the price tag of education.
I do think PSLF is the right choice for a specific subset of borrowers whose public sector work has mediocre pay yet requires extensive education. To meet the needs of those individuals while preventing wasteful spending, PSLF needs stricter criteria so it can be applied only to borrowers who could not afford to work in the public sector without PSLF. Without limiting criteria I’m in favor of it’s elimination for the creation of a forgiveness program that reaches borrowers in true financial need.
I do think existing borrowers should be grandfathered in if they have made a reasonable number of qualifying payments on their loans. If we fail to grandfather those borrowers in they will get slapped with additional interest that has been accruing on their income-driven repayment plan because they made a decision based on the promise of loan forgiveness that wasn’t kept.
What else is in PROSPER?
There are a lot of updates in PROSPER that weren’t the focus of this post. If you want to learn more about what’s in PROSPER check out this post on US News and the PROSPER Act summary put together by the House.
What do you think?
I would love to hear your thoughts on this topic share them in the comments below or on the Repayable Facebook Page.
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by Repayable | Jan 2, 2018 | Ask Jeni, Money Matters
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’ve heard about two different ways to pay for my loans called avalanche and snowball. How do I decide which one to use? Which one would save me more money?
Avalanche and snowball methods are two different approaches for repaying your debt that guide which loans you apply extra payments to based on loan size and interest rate.
If you have only one loan these principles don’t apply. If you are only making the minimum payment each month, the loan servicer directs how that payment is divided among your existing loans.
The avalanche method is the strategy of applying your extra payment to the highest interest loan first so you can pay the least amount of interest.
The snowball method is about applying your extra payment to the smallest loans first, regardless of their interest rates, so you can build on that momentum to tackle larger loans.
From a purely numerical standpoint the avalanche method will save you more money.
Here’s an example to highlight the differences. John Doe has three student loans. He has an extra $150 each month to pay down his student loans.
| $5,000 |
4.54 % |
| $15,000 |
6.8% |
| $25,000 |
5.5% |
Under the Avalanche method John Doe would apply his extra payments to his $15,000 loan first because it has the highest interest, followed by the $25,000 loan, and finishing with the $5,000 loan.
Under the Snowball method he would apply his extra payments to the $5,000 loan first because it’s the smallest, followed by the $15,000 loan, and finishing with the $25,000 loan.
If your primary concern is to save the most money, apply your extra payments to the highest interest loans first.
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