Transcript Loan Consolidation: Changing the Face of Entrance and Exit

Guiding Your Students Toward
Successful Repayment Strategies
Presented by:
Michele Colson
Sallie Mae
© 2008 Sallie Mae, Inc. All rights reserved
Agenda
• Student Debt Portfolios
• Repayment Options Review
– Additional Considerations
• Evaluating Financial Values and Skills
• Developing a Personal Repayment Strategy
• Knowing how to answer four key questions will lead
the way for student loan borrowers
–
–
–
–
What do I owe?
What are my options?
What are my goals and objectives?
What do I need to do to reach these?
© 2008 Sallie Mae, Inc. All rights reserved
Overview
• Debt levels continue to rise
– Federal and private loans
– Credit cards
• Students will receive direct marketing solicitations
from numerous lenders
– Offers may include Stafford, Grad PLUS, Consolidation, and
private loans
• Pressure on schools not to recommend one lender
over another
• Students need information!
© 2008 Sallie Mae, Inc. All rights reserved
Reminder
Today’s students have been taught that
consolidation is a good way to lock in a low
interest rate on their student loans and that
it is something they definitely should do.
But is this true?
© 2008 Sallie Mae, Inc. All rights reserved
Student Debt Portfolios
New Heights of Complexity
© 2007 Sallie Mae, Inc. All rights reserved
Loan Portfolio Complexity
• 2007-08 graduates’ debt portfolio may contain any
or all of the following:
– Federal Student Loans
•
•
•
•
•
Consolidation loan(s) with a fixed rate
Perkins loan(s) with a fixed rate
Stafford loan(s) with a variable rate
Stafford loan(s) with a fixed rate
Grad PLUS loan(s) with a fixed rate
– Private loan(s) with a variable rate
– Credit cards, likely with a variable rate
© 2008 Sallie Mae, Inc. All rights reserved
Loan Portfolio Complexity
• Increased portfolio complexity requires that students
have a solid understanding of the loans in their portfolios
– Debt types –
• Loans versus revolving credit
• Federal versus private loans
• Loan program
– Debt holder / servicer
– Interest rates –
• Actual interest rates
• Fixed versus variable
• Frequency of rate changes
© 2008 Sallie Mae, Inc. All rights reserved
Repayment Timeline Complexities
Grad PLUS and Most Existing Consolidation loans
OSD
FPDD
Stafford loans (unconsolidated) and DL “In-school” Consolidation loans
OSD
EOG
(6 month grace period)
FPDD
Perkins loans
OSD
(9 month grace period)
EOG
FPDD
Private loans
OSD (may or may not have a
grace period)
OSD – Out of School Date
EOG – End of Grace Period
FPDD – First Payment Due Date
 2007 Sallie Mae, Inc. All rights reserved.
EOG
FPDD
1.
2.
3.
Need to manage debt from
this time period forward
Make payments (Full or Interest-only)
Deferment (UNEM or HRD?)
Forbearance
Repayment Options
Federal Student Loans
© 2007 Sallie Mae, Inc. All rights reserved
Repayment Options
• Repayment options for Federal student loans
– Repayment plans
– Postponement options
© 2008 Sallie Mae, Inc. All rights reserved
Repayment Plans
• Four choices of repayment plans
–
–
–
–
Standard
Graduated
Extended
Income-based (either income-sensitive or income- contingent)
• Structure of repayment plan may vary slightly between
FFEL and DL, and among FFEL lenders
• Each plan has advantages and disadvantages
• Can typically switch plans at least annually, if needed
© 2008 Sallie Mae, Inc. All rights reserved
Standard Repayment
• Monthly payment amount remains substantially the
same over the repayment term
• Most commonly selected repayment plan
• Automatically selected if borrower doesn’t choose a
different plan
• Typically the lowest overall cost
• Monthly payment amount is often the highest in
comparison to other repayment plans
© 2008 Sallie Mae, Inc. All rights reserved
Graduated Repayment
• Monthly payment amount is scheduled to change
(usually increased) at one or more pre-determined
intervals over the repayment term
• Reduced initial monthly payments
• Higher overall interest cost due to lower initial
payment amount
• Later payment tiers can become unaffordable if
income does not substantially increase
© 2008 Sallie Mae, Inc. All rights reserved
Extended Repayment
• Repayment plan offering a 25 year repayment term
– Could be structured as a standard schedule, graduated
schedule, or choice of either
• Only available to “new borrowers” with no outstanding
debt in that loan program (FFELP or DL, as appropriate)
prior to October 7, 1998
– FFELP loans: Total FFELP debt must exceed $30,000
– DL loans: Total DL debt must exceed $30,000
• Reduced monthly payments due to 25-year term
• The 25-year repayment term often results in higher total
repayment costs
• Not all borrowers will qualify for this repayment plan
© 2008 Sallie Mae, Inc. All rights reserved
Income - Related Repayment
• Income-Sensitive Repayment (FFEL Program)
– Borrower’s income is taken into consideration
– Payment must cover accruing interest
• Income-Contingent Repayment (DL Program)
– Specific formula based on outstanding amount of Direct Loans, family
size, and adjusted gross income (AGI)
• AGI includes borrower’s and spouse’s income
– Amount not repaid after 25 years of repayment is cancelled
• Cancelled amount is taxable under current law
– Not available on PLUS loans
• Alternative Repayment (DL Program)
– Technically not an “income-based” program
– Schedule is negotiated with Secretary of Education
• Income-Based Repayment (FFEL & DL Program)
– Coming in July 2009
© 2008 Sallie Mae, Inc. All rights reserved
Postponement Options
• Postponement options for Federal student loans
– Deferment
– Forbearance
• Postponement options may either eliminate or
reduce the required monthly payment
© 2008 Sallie Mae, Inc. All rights reserved
Deferment
• A period of time in which an eligible borrower is not
required to make payments of loan principal
– Government pays interest on subsidized loans, and subsidized
portion of consolidation loan
– Unsubsidized interest may be paid by the borrower
– Unpaid interest can be capitalized
• Common deferments
–
–
–
–
Enrolled at least half-time
Unemployed
Economic hardship
Military service
© 2008 Sallie Mae, Inc. All rights reserved
Forbearance
• A period of time during which the borrower is permitted
to temporarily make reduced or no payments
– Some are entitlements for qualifying borrowers; others are
granted at the lender’s discretion
• Cannot exceed one year at a time
• Borrower is responsible for all interest that accrues
– Unpaid interest can be capitalized
• Borrower should consult with lender on whether use of
forbearance will affect eligibility for incentive benefits
© 2008 Sallie Mae, Inc. All rights reserved
Additional Considerations
Other Items Affecting Repayment Strategies
© 2007 Sallie Mae, Inc. All rights reserved
Consolidation
• A consolidation loan is another option for managing
student loan debt
• Consolidation loan is a new loan
– Repays loans included in consolidation
– Typically eliminates all or nearly all terms and benefits applicable
to those loans included in the consolidation
– Usually offers a longer repayment term that can reduce monthly
payments but often results in higher total repayment costs
• Consolidation may be available through both federal and
private programs
© 2008 Sallie Mae, Inc. All rights reserved
Consolidation
• Private loans cannot be included in a federal
consolidation loan
• Federal loans can be included in a private
consolidation loan
– Doing so results in loss of all federal benefits:
•
•
•
•
•
Fixed interest rate
Interest subsidy
Repayment plans
Postponement options
Cancellation benefits
• Some lenders may offer both private and federal
consolidation with a combined billing option
© 2008 Sallie Mae, Inc. All rights reserved
Consolidation Interest Rate
• Federal Consolidation
– Fixed interest rate*
• Weighted average, rounded up to nearest 1/8th percent
• Maximum rate of 8.25%
• Private Consolidation
– Varies by lender, but typically a variable interest rate
• Variable rate may adjust annually, quarterly, or monthly
• Consult with lender on actual rate and interest rate formula
* Special rules apply to federal consolidation loan that include HEAL loans.
© 2008 Sallie Mae, Inc. All rights reserved
Incentive Benefits
• Incentive benefits can reduce loan costs
– Interest rate reductions
– Fee rebate
– Principal rebate
• Optional, not an entitlement
• Expect some type of eligibility requirements
• Incentive benefit only has value if earned
– Understand requirements to qualify
– Understand disqualification criteria
© 2008 Sallie Mae, Inc. All rights reserved
Assess Your “Average” Student
Take a moment to note the options your “average”
student will likely consider first.
© 2008 Sallie Mae, Inc. All rights reserved
Financial Skills
Personal Goals Can Affect Strategy
© 2007 Sallie Mae, Inc. All rights reserved
FAO As Trusted Advisor
• Students look to your office for guidance
• Proactively reaching out reaffirms your position as
trusted advisor
• Offer factual information with consideration for personal
goals and values
• Educate your students early and continuously
Information empowers each student to
make sound fiscal decisions impacting
financial wellness for years down the road
© 2008 Sallie Mae, Inc. All rights reserved
Personal Values and Skills
• Be careful about not imposing your values and
objectives into someone else’s strategy
• Each student will have his or her own preferences and
skill-level for managing the student loan preference
• Help students identify their own values, financial skills,
and goals
– These will lead to a successful, personal strategy
© 2008 Sallie Mae, Inc. All rights reserved
Debt Management
• Repayment Strategy
– Choose a repayment strategy to meet personal financial goals
– Choose a repayment strategy for today and tomorrow
– Evaluate all influencing factors
•
•
•
•
Monthly budget
Current and future salary expectations
Financial management skills
Personal spending and repayment patterns
© 2008 Sallie Mae, Inc. All rights reserved
General Tips
• Repayment behavior controls how quickly and
inexpensively a loan will be repaid
• To avoid delinquency and minimize costs, select option
with highest monthly payments that can be reasonably
afforded
• Federal student loans have no prepay penalties
– Can minimize the “required” monthly payment amount but can
pay more when budget permits
– Can pay more on a monthly, quarterly, or annual basis, or even
as an individual lump sum amount
• Can use federal loan repayment strategies as a means
for achieving goals on non-federal debts, then focus later
on the federal debts
© 2008 Sallie Mae, Inc. All rights reserved
Identifying Goals and Values
• Prioritize goals
• Use “leading questions” if needed
• Goals for our discussion
–
–
–
–
–
–
–
Minimize total interest costs
Aggressively repay higher interest rate loans
Minimize monthly payment (short-term)
Minimize monthly payment (long-term)
Minimize payments to multiple companies
Manage private loan repayment
Manage credit card repayment
© 2008 Sallie Mae, Inc. All rights reserved
Repayment Success
Developing a Personal Strategy
© 2007 Sallie Mae, Inc. All rights reserved
Common Goals
•
•
•
•
•
•
•
Minimize total interest costs
Minimize monthly payment (short-term)
Minimize monthly payment (long-term)
Minimize payments to multiple companies
Pay higher interest rate loans quickly
Manage private loan repayment
Manage credit card repayment
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• Do you know what your scheduled monthly payments
will be?
Associated Goal(s):
All
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• Are you going to be ready to make payments as they
become due, or will you need to reduce or even
postpone payments?
– If the student will not be ready for payments, explore whether
payments need to be reduced or postponed, consider asking
why, and discuss how long repayment relief is needed.
Associated Goal(s):
Minimize monthly payments (short term)
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• Are your loans with different lenders or servicers?
– If yes: Will it be difficult for you to manage making payments to
different places?
Associated Goal(s):
Minimize payments to multiple companies
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• Do you need to reduce your monthly payment amount?
– If yes: Do you understand that reducing your monthly payment
will ultimately result in higher interest costs?
– If yes: Do you need to reduce your payments for only a short
period of time, or do you need long-term payment reductions?
Associated Goal(s):
Minimize monthly payments (short term and long-term)
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• Do you intend to maintain a “hands on” approach with
your loans?
– Example: Do you plan on repaying your highest-rate loan quickly,
then your next highest-rate loan, and so forth, in order to minimize
your total interest costs?
– Explore further how the student wants to manage the debts so
you can identify appropriate options.
Associated Goal(s):
Minimize total interest costs
Aggressively repay higher interest rate loans
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• With credit cards, do you tend to pay just the minimum
balance, pay a little more that the minimum, or pay the
entire balance off within just a month or two?
Associated Goal(s):
Minimize total interest costs
Aggressively repay higher interest rate loans
Minimize monthly payments (short term and long-term)
Minimize payments to multiple companies
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• [For borrowers with variable rate loans] Are you
uncomfortable with having a variable-rate loan?
– If yes: Explore whether there are reasons for the discomfort, e.g.,
perhaps the student doesn’t realize there is a cap on the interest
rate.
Associated Goal(s):
All, plus an indicator of whether consolidation should be
a consideration within the strategy.
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• What benefits do you have on your current loans?
• What do you have to do to earn the benefits?
– Do you expect that you will be able to earn them?
Associated Goal(s):
Minimize total interest costs
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
• Do you have student loans at different interest rates?
• Did you borrow private student loans?
• What additional debts (other than student loans), such as
credit cards, do you have?
– What are the interest rates of those debts?
Associated Goal(s):
Minimize total interest costs
Aggressively repay higher interest rate loans
Manage private loan repayment
Manage credit card repayment
© 2008 Sallie Mae, Inc. All rights reserved
Sample Leading Questions
Take a moment to jot down any additional questions
that might be relevant to your students.
© 2008 Sallie Mae, Inc. All rights reserved
Prioritizing Goals
• Given the following possible financial goals, which are
the most important to you, and how would you rank
(prioritize) them?
–
–
–
–
–
–
–
Minimize total interest costs
Minimize monthly payment (short-term)
Minimize monthly payment (long-term)
Minimize payments to multiple companies
Pay higher interest rate loans quickly
Manage private loan repayment
Manage credit card repayment
© 2008 Sallie Mae, Inc. All rights reserved
Developing a Personal Repayment Strategy
IF YOUR
FINANCIAL
GOAL IS:
CONSIDER THESE REPAYMENT
STRATEGIES
IF YOUR
FINANCIAL
GOAL IS:
CONSIDER THESE REPAYMENT
STRATEGIES
Minimize total
repayment costs
Select the repayment option with the highest monthly
payment and shortest repayment term that you can afford.
Pay off higher
interest rate
loans quickly
Make minimum payments on lower rate loans, adjusting
your repayment plan if needed, and make the highest
payments you can afford on higher rate loans.
Pay some or all of the accruing interest during periods in
which payments are not required.
Prepay loans with highest interest rates first.
Review postponement options* on lower rate loans to allow
you to make higher payments on your higher rate loans.
Ensure all required actions are taken to earn borrower
benefits, if available.
Do not consolidate higher rate loans, or consider
consolidating them separately from other loans.
Investigate loan forgiveness and cancellation options.
Consolidate variable rate loans when interest rates are low.
Minimize monthly
payment
(short-term)
Manage private
loan repayment
Pay some or all of the accruing interest during periods in
which payments are not required.
Assess the value of borrower benefits on your current loans
that you may lose by consolidating.
Consult your private loan lender to evaluate repayment
plans available.
Investigate deferment options* to temporarily reduce or
eliminate payments.
Consider reducing monthly payment amounts on federal
loans to pay down private loans more quickly.
Review graduated repayment plan options. You may be
allowed to choose the appropriate length of time that your
monthly payment is minimized.
Consider obtaining a private consolidation loan with the
lender of your federal consolidation or vice versa.
Investigate forbearance options to temporarily reduce or
eliminate payments*.
Applying with a cosigner and/or improving your credit score
before consolidating private loans may result in better
interest rates.
Minimize monthly
payment
(long-term)
Pursue an extended repayment option if you are eligible.
Minimize payments
to multiple
companies
Consolidate eligible loans with a single lender.
Consolidate eligible loans to obtain maximum repayment
term.
Consider obtaining a private consolidation loan with the
lender of your federal loans (or vice versa).
 2007 Sallie Mae, Inc. All rights reserved.
Manage credit
card repayment
Consider reducing the monthly payment amounts on your
federal loans to focus on paying off your credit cards.
Stop or minimize the use of credit cards until your balance
is low enough to pay-in-full every month.
* Check with your lender to determine the potential effect that a deferment or forbearance
may have on your ability to qualify for borrower benefits.
Questions?
What do I owe?
What are my options?
What are my goals and
objectives?
What do I need to do to reach
“Running the Numbers”
Consolidation
Loans
Balance
Interest
Rate
Term
(years)
Monthly
Payment
Amount
Interest
Cost
Total
Repayment
Amount
Leave Loans Separate
Consol Loan 1
$70,000
4.750%
30
$366
$61,455
$131,455
Stafford Loan S1
$35,000
6.800%
10
$403
$13,334
$48,334
Stafford Loan S2
$35,000
6.800%
10
$403
$13,334
$48,334
Cumulative Total
$140,000
$1,172
$88,123
$228,123
Consolidate Only New Loans
Consol Loan 1
$70,000
4.750%
30
$366
$61,455
$131,455
Consol Loan 2 (S1 & S2)
$70,000
6.875%
30
$460
$95,546
$165,546
Cumulative Total
$140,000
$826
$157,001
$297,001
$829
$158,135
$298,135
Consolidate All Loans
Consol Loan 2 (All loans)
$140,000
5.875%
30
“Running the Numbers”
Consolidation and Extended Repayment Comparison
Loans
Balance
Interest
Rate
Term
(years)
Monthly
Payment
Amount
Interest
Cost
Total
Repayment
Amount
Leave Loans Separate
Consol Loan 1
$70,000
4.750%
25
$400
$49,725
$119,725
Stafford Loan S1
$35,000
6.800%
25
$243
$37,878
$72,878
Stafford Loan S2
$35,000
6.800%
25
$243
$37,878
$72,878
Cumulative Total
$140,000
$886
$125,480
$265,480
Consolidate Only New Loans
Consol Loan 1
$70,000
4.750%
25
$400
$49,725
$119,725
Consol Loan 2 (S1 & S2)
$70,000
6.875%
25
$490
$76,753
$146,753
Cumulative Total
$140,000
$890
$126,478
$266,478
$892
$127,406
$267,406
Consolidate All Loans
Consol Loan 2 (All loans)
$140,000
5.875%
25
Interest Rate Trends
Stafford and PLUS Variable Interest Rates,
July 1998 to Present
9.50%
8.99%
8.50%
7.94%
8.26%
8.02%
8.19%
7.72%
7.46%
7.50%
7.59%
6.86%
7.22%
7.14%
6.92%
6.79%
6.32%
5.99%
6.10%
6.50%
6.62%
6.54%
5.50%
5.39%
5.30%
4.86%
4.06%
3.46%
4.22%
4.17%
4.57%4.50%
4.70%
3.77%
3.42%
3.50%
3.37%
2.82%
PLUS Loans
1998
1999
2000
2001
2002
-99 Stafford
-00 Loans
-01in Repayment
- 02
- 03
2.50%
2003
- 04
2004
Stafford Loans in Grace
2008-09 rates estimated using March 31, 2008 auction at 1.47%
© 2008 Sallie Mae, Inc. All rights reserved
3.17%
2.77%
- 05
2005
- 06
2006
- 07
2007
- 08
2008
- 09
Financial Aid Award Year