Taking More Time

In the advisor-client relationship student loans are taking up more and more time and due to the inherent complexities are creating some anxiety and confusion for all involved. Understanding the nuances of the federal student loan system and its loan repayment options are essential for all advisors, who serve clients that may struggle with understanding all the options. Advisors who understand the nuances of federal student loans have a good opportunity to not only impact their clients’ lives for the better, but at the same time grow their business by helping guide that component of clients’ finances. 

Recognize Various Loan Types 

Federal loans make up about 92% of all student loan debt, while private loans account for the remaining 8%. Federal loans are issued by the federal government and regulated by federal law setting interest, loan type, repayment plans and benefits. Information on an individual’s federal loans can be found at (NSLDS). On the other hand, private loans are issued by banks and other lending institutions. These financial institutions set interest, terms, and benefits. Information about these loans can be found annualcreditreport.com.

Loan Types are broken down into four different categories: Direct, FFEL, Graduate/Parent Plus, and Perkins loans. Depending on when your client went to college, you may see one or all these loan types. This can contribute to the confusion, since to maximize benefits, additional steps may need to be taken first. A good place to start your review is The Department of Education.

LoanBuddy Tip: Perkins loans are managed through the educational institution your client attended and are often overlooked because institution outsource the repayment of Perkins Plans. 

Get Clients into the Right Repayment Plan

Getting into the right repayment plan is generally where the confusion begins. To begin, there are two categories for repayment plan options: Debt/Balance Driven plans, and Income Driven plans. Within those two options are several different repayment plans. 

If you think these options are overwhelming, you are not alone. However, LoanBuddy can help you and your clients clearly see the impact. Loan Buddy automatically takes client data from NSLDS.gov and uses that data to create a student loan profile specific to that client. No more using estimates–the client profile details actual student loan debt, available repayment plans and forgiveness options, in a format that is easy to understand. 

These include, Income-Driven Repayment Plans like Pay As You Earn and Revised Pay As You Earn (REPAYE) as well as Public Service Loan Forgiveness (PSLF). Enrollment in these plans will reduce monthly payments and decrease the length of the loans significantly for a majority of Americans. These federal programs give options unlike any other form of debt and are beneficial for members of the military, first responders, public education employees and nonprofit organizations. These simple LoanBuddy graphs and reports allow advisors to track and guide client progress through the lifecycle of their loans with effective technology. 

LoanBuddy Tip: Clients can change plans as often as they want; however, accrued interest will be capitalized into the new repayment plan.

Leverage Client-specific Opportunities

Part of the work of being a financial counselor means you need to know your client’s goals and objectives relating to building wealth in all its forms, but you also need to be able to identify opportunities they can leverage to achieve those objectives. When it comes to loans, there are three opportunities that are a must know: Refinancing, Consolidation, and Public Service Loan Forgiveness!

Public Service Loan Forgiveness (PSLF) has stirred the conversation about student loan debt, and impact on individuals, our economy, and our nation. However, more than that, it turns out the process itself has led to 93% of applicants being denied for loan forgiveness under this federal program. Over 50% were denied for not completing forms accurately, another 25% not making the correct payment or being in the correct plan, and the rest was a combination of these things. LoanBuddy takes the worry out of that. PSLF Forms are auto populated, submitted, and remainder are sent.

There are two major reasons to use loan consolidation. The first reason is to convert FFEL & Perkins into the Direct Loan program in order to be eligible for PSLF. Secondly, depending on current interest rates, a client could leave the federal loan system, and select a private loan, at a lower rate. Although clients may save money, it is important to consider that they cannot reverse the consolidation, and they will not be eligible for any federal programs.

To help you and your clients evaluate that decision, Loan Buddy provides you access to Credible, via your advisor dashboard. With a few easy steps you can use this tool to help you identify potential offers and options to service your clients. If this sounds like useful technology to you, take the next step.

Next Steps: 

1. Learn more about LoanBuddy software and education courses.
2. AFCPE Members have access to a discount for LoanBuddy. Visit your AFCPE Member Dashboard for details or learn more about AFCPE Membership at www.afcpe.org/membership.

Guest Contributor: Loan Buddy: Loan Expertise—at your Fingertips!

The post What Every Financial Counselor Needs to Know About Student Debt! appeared first on AFCPE.

Types of Loans

Student loans fall into one of two buckets: federal and private loans.

Federal loans make-up about 92% of all student loan debt, while private loans account for the other 8%.

Federal loans are issued by the federal government and are regulated by federal law. These loans can be found on the National Student Loan Data System, or NSLDS, at https://nslds.ed.gov/nslds/nslds_SA/.

Private student loans are issued by banks and other lending institutions with repayment terms determined by the lender. These loans can be found on a borrower’s credit report.

Federal loans can be further broken down into four types of loans: Direct; FFEL; Parent Plus, and Perkins. FFEL loans were discontinued in 2010 and Perkins loans were discontinued in 2018, but advisors will see these types of loans on their client’s information. 

Repayment Plans

There are two broad categories of repayment plans: Balance-driven plans and Income-driven plans.

Balance-driven plans include fixed and graduated repayment plans. Clients can have a fixed payment for 10 or 25-years or a graduated plan that starts with a low payment that steps up every two years.

To help understand the various repayment types better, let’s consider a case study of Karen, who is single with no dependents. Karen has $50,000 in student loan debt at 6.2% interest. Her AGI is $40,000.

Income-driven plans include Pay As You Earn (PAYE), Income-Based Repayment (IBR), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). Under income-driven plans the payment is determined by the client’s AGI, their household size, and their discretionary income.

For most of the plans discretionary income is calculated by taking the client’s AGI and subtracting 150% of the poverty level for their family size. To continue using Karen’s example we will use her AGI or $40,000 and poverty level of $12,490.

The calculation looks like this:

• (AGI – (1.5 x federal poverty rate)) x %
• ($40,000 – (1.5 x $12,490)) x .1)
• ($40,000 – $18,737) x .1)
• $21,263 x .1
• $2,126

Karen’s discretionary income is $2,126 per year.

New IBR, PAYE, and REPAYE all have a payment of 10% of client’s discretionary income. Old IBR is 15%, and ICR is the lesser of a 12-year repayment plan or 20% of discretionary income. Not all loans qualify to use all plans, and the number of years clients will repay is based on the plan chosen and the types of loans included.

On all of these plans any amount remaining after the payment term ends will be forgiven and taxable as income in the year it is forgiven.

Let’s return to Karen’s scenario to see what the payment would look like under each of these plans:

Refinancing vs Consolidation

As students go through school they can pick up a number of student loans. Many students find themselves with 10-20 different loans with different interest rates. Borrowers can choose to consolidate or refinance their loans to simplify their loans.

Consolidation keeps the loans in the federal system and creates a single Direct Consolidation Loan. This allows older FFEL and Perkins loans to be converted to a Direct loan, opening up other repayment plans and Public Service Loan Forgiveness (see below for more information). 

Refinancing takes the loans out of the federal system and puts them into the private lending system. Borrowers who refinance often do so to lower their interest rates. Refinancing removes the options of Income-driven plans and forgiveness, and once refinancing is done it cannot be reversed.

Public Service Loan Forgiveness (PSLF)

PSLF allows employees who work in the public sector to have tax-free forgiveness of their loans after 120 on-time payments. The borrower must have qualifying loans, repayment plan, and employment.

Qualifying loans

Only Direct and Direct Consolidation loans qualify. Other loans, including FFEL and Perkins loans, need to be consolidated into a Direct Consolidation loan before they qualify.

Qualifying repayment plans

Qualifying repayment plans include IBR, PAYE, and REPAYE.

Qualifying employment

The borrower needs to work for the government at any level or a non-profit 501(c)3 organization. 

Let’s consider Karen again. Before making any payments on her undergraduate loans Karen goes to medical school, where she picks up another $200,000 in federal debt, for a total of $250,000. She will work as a resident at a non-profit hospital  for 5 years making $60,000, with a 3% increase each year, then she will get an attending position making $250,000, with a 3% increase each year. She is still single and has no plans to marry or have children. 

Here is how the various repayment plans will look for Karen:

In graph format the payments look like this:

You can see that IBR, PAYE, and REPAYE all have negative amortization for 5 years, then start to decrease after that.

PSLF requires careful planning, as one mistake can eliminate a borrower from being eligible for forgiveness.

Getting Help with Student Loans

Financial advisors should learn all they can about student loans or get help from someone with expertise in student loans.

Here are some resources that may be helpful:

• Student Loan Planning by Ryan Law on Amazon
• LoanBuddy software and education courses
• Heather Jarvis advisor services and education courses

AFCPE will also be launching a new Essentials course, College Finance Essentials, in 2020. Sign up for the Interest List and watch for more information coming soon! 

AFCPE Members also have access to a discount for LoanBuddy. Visit your AFCPE Member Dashboard for details or learn more about AFCPE Membership at www.afcpe.org/membership.

Guest Contributor: Ryan Law, CFP^®, AFC^®

The post Student Loan Essentials appeared first on AFCPE.

On Friday November 8, 2019 colleges and universities across the U.S. celebrated the 3^rd annual First-Generation College Celebration Day!¹ As a first-generation student who has worked with fellow first-generation students, I know there are many terms used in higher education whose meaning is not easily understood by every student and their family members. I would like to decode a few of those commonly used and often misunderstood financial aid acronyms.

FAFSA

This acronym stands for the Free Application for Federal Student Aid. Sometimes families make the false assumption that their student will not be eligible for aid and therefore never apply. You should always apply, just in case. For instance, the community college where I used to work required all student workers to apply for the FAFSA in order to apply for an on-campus job.

Beware: the official website is www.fafsa.gov – however, there are fake websites out there that charge you to apply for financial aid. But remember, the first word of the FAFSA acronym is FREE – you should never have to pay to apply for college financial aid!²

The opening date to begin filling out the FAFSA for the following academic year has moved from January 1^st up to October 1^st – for example, the application for the 2020-2021 academic year became available on October 1, 2019 rather than the former date, which would have been January 1, 2020. When this change to the application process was made, it included a change to which year’s taxes would be used when completing the FAFSA – for instance, the 2020-2021 FAFSA would have required your 2019 taxes (prior year), but it now requires your 2018 taxes (prior-prior year).³

Some families experience a job loss or loss of a financial contributor between tax years, altering their income from 2018 to 2019. If this is the case, you will still complete the FAFSA as required; but you can contact the financial aid office at your institution to provide documentation of the change that lowered your overall income. At the institution’s discretion, your information will be reviewed to be considered as a special circumstance and be eligible for aid that you would not have been eligible for using the prior-prior year’s taxes.⁴

EFC

This acronym stands for Estimated Family Contribution. This amount is a calculation generated by the information submitted in your FAFSA and is used by an institution to determine how much aid you are eligible to receive. It does not mean that this is the amount of money your family is expected to pay to the college for attendance.⁵

If you do not see the Pell Grant as a part of your financial aid package, you did not qualify for this form of federal financial aid. Depending on the institution a student attends, they may qualify for and subsequently be offered federal subsidized or unsubsidized loans, another type of federal financial aid, as a part of their financial aid award. It is your choice to accept or reject these loans, and you may choose the amount you would like to borrow – you are not required to accept the full amount(s) offered.⁶

COA

This acronym stands for Cost of Attendance. This number is calculated by colleges to estimate the cost of attending their institution for an academic year (fall and spring). The figure is generated to include tuition and fees along with an overall estimate of the cost of books and supplies, transportation, living expenses and miscellaneous expenses.⁷

The only definitive number in the calculation is the tuition and fees – everything else is an estimate. Depending on your major, you may pay considerably more for books and supplies than another student. If you live at home or off-campus, you may have lower living expenses than a student that lives on-campus. If you drive to school each day rather than living close enough to campus to be able to bike, walk, or ride public transportation, you may spend more on transportation expenses.

An important lesson is to always read the fine print and don’t ever be afraid to ask questions. Now that you know a few basic financial aid terms, the application process should be a little easier to understand.

Guest Contributor: Christina Gilroy, AFC® candidate

1. https://firstgen.naspa.org/engagement/2019-first-generation-college-celebration/2019-first-generation-college-celebration
2. https://studentaid.ed.gov/sa/types/scams
3. https://studentaid.ed.gov/sa/fafsa/deadlines
4. https://blog.ed.gov/2019/09/7-things-need-fill-2020-21-fafsa-form/
5. https://fafsa.ed.gov/help/fftoc01g.htm
6. https://studentaid.ed.gov/sa/types/loans
7. https://fafsa.ed.gov/help/costatt.htm

The post First-Gen Financial Aid Tips: Understanding Some Infamous Acronyms appeared first on AFCPE.

The road to zero – the path you’ll take to pay your federal student loans down to zero – takes strategy and planning.  To create a successful strategy, you will need to reflect on your personal, professional and financial goals as well as your current financial situation.

While it may seem overwhelming to get started, the steps below will walk you through what you need to know and guide you in creating a loan repayment strategy that works for you.

1.Know What You Owe

Before you can begin thinking about repayment options, you must first understand what you owe.  Retrieve your federal loan information online at the National Student Loan Data System (NSLDS), which is the U.S. Department of Education’s database for federal student aid. Pay attention to the types of loans you have, how much you owe on them and who will be servicing each of your loans. You may also have other debt—private education loans, credit cards, mortgage, etc.—that should also be considered as you make strategic decisions about your repayment plan.

2.Understand Your Options

Now that you’re aware of your outstanding debt, it’s time to talk options. Federal loan borrowers have a number of repayment plans available to them.  Choosing the right plan can have a long-term effect on your overall financial wellness, so it’s worth taking the time to compare all of your options. Some may require a higher monthly payment amount over shorter repayment term while others offer you the flexibility of lower monthly payments over a longer period of time (along with loan forgiveness). 

Debt-driven repayment plans calculate your monthly payment based on your total student loan debt, the interest rate on your loans and the length of your repayment term while income-driven repayment plans calculate that monthly payment based on your income, family size and state of residency.  

For more detailed information about the most common federal student loan repayment plans—including eligible loan types, eligibility requirements, repayment timeframes and more—download the Federal  Loan Repayment Plans at a Glance from AccessLex institute, a nonprofit organization. 

3.Define Your Strategy

Now that you have a solid understanding of your student loan debt and the options available, it’s time to create a repayment strategy that works for you. You may have borrowed the same amount as the person sitting next to you, but your repayment strategy will probably be different given your personal, professional and financial goals.

Start by asking yourself the following questions: 

• What types of student loans do you have? And when did you borrow those loans? – Some repayment plans are only available for specific types of loans borrowed at a specific time.
• Are you married or planning to get married in the next few years? – With some of the income-driven repayment plans, your tax filing status can affect how your monthly payment is calculated and whether your spouse’s income and education debt is considered.
• What are your career plans? – You may have additional options if you are considering public service work.
• What helps you sleep at night? – Are you debt-averse and want to pay off your loans in a short period of time? Are you worried that you won’t be able to afford your monthly payment?

The answers to these questions will help to guide you toward a repayment plan and strategy that works for you, your current situation and your future financial goals.  Don’t forget to do the math and use a loan repayment calculator for a complete picture of your repayment commitment and to see how those payments fit into your monthly budget. 

4.Set Yourself Up for Success

Regardless of which repayment plan you start with, remember you have choices.  Once you begin making payments, you don’t have to stay in the same repayment plan until your loans are paid off; you can actually change your repayment plan once a year if you’d like.

To ensure that you are setting yourself up for future success, review your repayment choices at strategic points along the way—such as with a change in job, salary, relationship status and/or family size.  At the very least, you should review your repayment strategy each year to make sure you are still on track to achieve your financial goals. If you’re not, consider your options and determine if you can get back on track with a different repayment plan.  

What is your strategy on your road to zero?

Guest Contributor: Jennifer M. Schott, AFC^®

January 09, 2018

The post On the Road to Zero, Strategy is Key appeared first on AFCPE.