Transcript M
LOAN REPAYMENT STRATEGIES Understanding the Unique Nature of Federal Student Loans Module 1 Jeffrey Hanson Education Services Tulane University Majority of students … 2 … now graduate with an EDUCATIONAL MORTGAGE Copyright © 2013 by Law School Admission Council, Inc. What do you think? 3 Should you pay the interest as it is accruing in school? Should you pay off your federal student loans as fast as possible? Should you refinance your federal loans with a private loan to get a better rate? Doing so may not be best … 4 … you need to make “informed” decisions when managing repayment! Did you know? Interest is accruing as SIMPLE interest! 5 Interest starts accruing on unsubsidized student loans when funds are disbursed, but it is NOT compounding! In other words, you are not paying interest on the accruing interest while you are in school. Accruing interest will capitalize when loans enter/re-enter repayment (e.g., six months after graduation). Therefore, paying the accruing interest while you are in school is not the best use of your funds financially. If you have the funds, it is better to reduce the amount you are borrowing rather than paying the accruing interest. It is the principal balance that is accruing interest while you are in school—not the interest itself. Interest Capitalization Unsubsidized Loans 6 What is capitalization? Unpaid interest is added to the principal loan balance Once capitalized, interest starts accruing on the new higher loan balance (i.e., interest starts accruing on that capitalized interest)—thus, total debt increases When is interest capitalized? When loan first enter repayment (after grace period) OR When loan re-enters repayment after a continuous period of deferment and/or forbearance Federal student loans are flexible and safe … 7 You should never have to miss a payment or default Payments can always be less than 15% of your AGI Flexible payment options exist including income-driven repayment (IDR) plans that can limit debt-to-income ratio impacts Debt should be gone within 25 years or less Payment relief options exist that provide financial “safety nets” Portion of debt could be forgiven if not fully repaid No penalty for prepayments Can always pay extra or make payments when not due to reduce total interest paid and get debt paid off more quickly if that is your goal Your “educational mortgage” should not prevent you from: Pursuing your desired career Achieving your financial goals What should you do? 8 Consider: Choosing the repayment plan that offers the LOWEST scheduled monthly payment Why? This provides maximum cash flow flexibility so that you can: Maximize amount you are prepaying in a targeted way at your most expensive debt (e.g., private student loans) AND/OR Allocate “extra cash” for other purposes (e.g., investing and saving for the future) Financially, you’re not boxed into a corner! 9 Federal Student Loans: Provide flexible repayment options including the incomedriven repayment plans that can accommodate changes in your circumstances. As such, consider leveraging this flexibility when planning for repayment so that you can: Successfully repay your federal student loans Achieve your professional, financial and personal goals more quickly For more information … 10 Contact your loan servicer(s) Online resources: Federal student loans: StudentAid.gov Federal student loan repayment: StudentLoans.gov Opportunities to learn more … 11 Check out all the loan repayment modules: Planning for Student Loan Repayment Developing Your Student Loan Repayment Timeline Exploring the Student Loan Repayment Plans Choosing Your Student Loan Payment Plan Understanding the IncomeDriven Repayment Plans Understanding Student Loan Consolidation Estimating Your Monthly Student Loan Payments Public Service Loan Forgiveness Taking Stock of Your Student Loan Portfolio BE STRATEGIC: Take Charge of Loan Repayment! Jeffrey Hanson Education Services Tulane University