Show Sponsor: SoFi Student Loan Refinancing
- The national student loan debt is currently at $1.2 trillion!
- How did we get here? The cost of college is rising, yet the wages for college graduates have been decreasing.
- Why the rise in private student loans? Back in the day, when tuition wasn’t so high, federal Loans could cover all or most of college costs. Today that is not the case. Four years at a public university could add up to over $100,000! Private companies are stepping in to pick up the slack.
- Disadvantage of private loans- Most inflexible regarding repayment options. These loans are not eligible for federal repayment programs.
- Private loans are credit based. As a result, around 93% of all student loans are co-signed by a parent/grand parent. If a student goes past due, parents have to step in and help make payments (typically dipping into retirement.) If they don’t have the money, then default is the only option- potentially ruining credit for everyone involved.
- Federal loans are more flexible in terms of repayment options due to regulations. The downside is that these loans NEVER EVER go away. Why? The Feds give you many and plenty of chances to keep up your payments. Some federal repayment options include:
- Income based repayment (IBR)- Allows you to negotiate payment to 15% of disposable income. (Calculate disposable income by looking at your tax return from the prior year. Go to the very bottom of the return under the “adjusted gross income” line. Take that number and subtract 150% of the poverty level for a family of your size. Include your spouse, children who live with you and anyone else you for which provide more than 50% of their care on an annualized basis.) The amount of the payment will adjust up and down annually based on your income. Your payment can actually drop to $0 and still be in repayment!
- NOTE: Most people think that you need an income to qualify for IBR and if unemployed, typically ask for “forbearance.” Instead, apply for IBR to get your payments reduced to $0 and start the clock on potential forgiveness benefits. If you are in this program for 25 years a.k.a “Obama Student Loan Forgiveness Program”, your loans are COMPLETELY FORGIVEN!
- IBR Tip: When you come out of school, you get a 6 month grace period before you must begin repayment on your students. The smart thing to do would be to waive that grace period (must do it in writing) and begin repayment under IBR at $0. If you start IBR right away, you don’t have to adjust your IBR amount until the next 12 months. For example, if you graduate college in May of 2016, you would start IBR in June 2016 at $0. You don’t re-certify until June 2017, but the 25 year clock running on forgiveness should you need it. You are also buying yourself an extra 6 months of no payments!
- Pay as You Earn (PAYE) & Revised PAYE
- NOTE: Under IBR-You are negatively amortizing, meaning you are paying less than the interest that accrues on your loan. With smaller payments, you are effectively paying less of the principle and interest on the loan and increasing. This could increase forgiveness amount on your loan if you take advantage of this option. You could get a 1099 for which you owe taxes (in rare cases you may be exempt due to insolvency.Insolvency according to the IRS definition means your assets do not exceed your liabilities i.e. “if I sold all my stuff, I couldn’t pay my debts.”)
- Exception to 25 year forgiveness rule- if you are in IBR (or any income dependent repayment program) and you are employed full-time by federal, state, municipal or a 501c3 (non for profit) at the end of 10 years (not 25), the unpaid balance of your federal loans is forgiven with no tax implications- as long as you make 120 on-time payments (late =20 days.) These 120 payments don’t need to be consecutive or with the same employer.
- Beware of scams. Companies will promote the “Obama Student Loan Forgiveness Program” and try to charge you to take advantage of these programs. They are free and many can be applied for online.
- Consolidation- Federal process whereby U.S. Department of Education will combine all your loans into one loan. This is helpful if you are in default. You can consolidate your way out of default (only once, however.) Note, credit doesn’t matter for consolidation (only Parent Plus loans are credit based.) Keep in mind that only federal student loans are eligible for consolidation.
- Refinance: You can refinance your private student loans (this is credit based.) You can take federal loans and refinance them along with your private loans, however. Downside- there are no flexible re-payment options, no forgiveness, VA discharge, disability discharge, etc.
- Private loans are subject to statue of limitations- A limitation of the amount of time a lender has to file a lawsuit against you in the event that you go into default. The timelines for the limitation are individual to each state.
- If you are in default for private student loans- don’t do anything. You can restart the clock if you try to start paying or negotiating with private lender! Jay recommends that you stockpile money in case you get sued. (You may have to bring some money to the table one day to settle the loan.)
- Don’t go into default to avoid repayment- There are many credit implications and problems to this approach. Only use this route if it’s absolutely necessary!
- Jay says get into IBR ASAP to set your payments at zero dollars for Fed loans. For private loans, sit down and figure out how you can budget to make the payments.
- If you have loans from a college- Statute of limitations applies here as well. If you don’t pay them what you owe, know that the college is not obligated to provide any you information around school verification, transcripts, etc.
- Philosophical conclusion- We need to work together to ensure that we are educating ourselves and children on what they are getting into regarding student loans. Also, there is a societal responsibility to to help solve this massive issue in both public and private sectors.
Favorite Principle of Increase
- Better to be good than it is to be right.
Jay S. Fleischman Contact Information
- Offers services through his “Hire Me” link- will analyze loan situation to get you on the right track
- Legal representation is offered on in New York and California; outside of these regions, Jay could provide referrals through his network