Student Loan Q&A with Champion Empowerment
CHAMPION EMPOWERMENT INSTITUTE
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I am a federal employee. If congress eliminates the Public Service Loan Forgiveness Program (PSLF), what other options do I have?
The terms of your existing Promissory Note are legal and binding with the exception of loan forgiveness. New legislation for the Higher Education Act is currently (December 2017) moving through the U.S. House of Representatives but has not gotten to the Senate and the PSLF benefit is not included in the new legislation that has been drafted by the House, although that may change before the final bill is completed. If you or any other students or voters believe this is an important benefit, please, reach out to your congressional representative in the U.S. House of Representatives and the U.S. Senate to ask them to support inclusion of this in the upcoming Amendment of the Higher Education Act of 1965.
Otherwise, reducing payments depends on your loan amount and income.
- If your income is high in comparison to your loan amount, you must pay a minimum of $600 a year ($50/month) and can ask for 10-20 years to repay your loan depending on your loan balance under the standard repayment schedule. Under this plan, your payments will remain the same each month. If you pay additional amounts to principal reduction, you can have your payments adjusted periodically (every 6-12 months) and the payments will go down because your principal balance will have been reduced at a faster rate than the standard amortization schedule if you had only made minimum payments. Just remember that extending the payment period may lower your payments but it also increases the amount of interest that you pay.
- If your income is lower in comparison to your loan amount, you may want to consider the Income-Driven Repayment (IDR) options where payments are based on a percent of your income. The IDR takes effort to manage because you must renew annually. Some plans include loan forgiveness after 20-25 years of payments which sounds great, but if any debt that may be treated like taxable income—in other words, your forgiven student loan debt is taxed and becomes a debt owed to the IRS that has no generous repayment schedules or rights to delay or reduce payments.
I am currently in school. Is it better to get multiple federal student loans or get one private loan for the whole school year?
Without knowing the terms and conditions of what you are being offered, this is difficult to answer. Generally, federal student loans have the most options for when you enter repayment because you have several repayment schedule choices, you have options to delay or reduce payments under certain circumstances, and you have loan forgiveness benefits when you qualify, for example, for certain teaching positions. When comparing, look at the interest rates and when it starts accruing, minimum payments, length of repayment (how many years do you have to repay), and if you have any rights to delay or reduce payments if you face adversities like periods of unemployment, medical leave, natural disasters, or financial hardships. Once you have all of this information, you can make an informed decision.
If you are on the Income-Based Repayment (IBR) plan, can you get kicked out of that plan if you start paying a lot more than the minimum payment?
No. Paying above the minimum payment amount required will not remove you from the IBR plan. If you make payments in excess of the minimum amount required, make a note on the check and payment coupon that the excess amount is for principal reduction so that you have legal recourse if the payment isn’t properly applied. (Write in check memo: “Please, apply additional payment to principal reduction.”) Remember that lenders make money on interest so they may apply it to future payments when they can—you need to ensure that your payments are applied how you want them to be applied.
When it comes to student loan forgiveness, did I make a mistake by consolidating all of my federal student loans with Navient?
The IDR plan includes loan forgiveness for all federal loan programs when the debt is not repaid in 20-25 years. But if any student loan debt is forgiven, the amount forgiven may be taxable; in other words, your student loan debt will go away and the taxes owed will be debt to the IRS and will not have generous repayment schedules or options to reduce or delay payments.
What is the best way to get out of student loan debt fast?
As with any debt, the more you pay, the faster the debt will be repaid. In budgeting what to pay first, consider which debt has the highest interest rates and which interest might be tax-deductible. It is usually in your best interest to pay the debt with the highest interest rate first, then prioritize all other debt with the lowest interest rate to be paid last. Getting a tax deduction can be a benefit but it can also be an illusion because it often costs so much more to purchase something on credit.
If you have multiple student loans with different interest rates, request your student loan servicer to apply the majority of regular payment and any additional principal payments to the highest interest loans first. You should note this in the memo on all of your payments.
Champion Empowerment Institute offers a course, Financial Literacy 101, which teaches you to make good decisions about finances, credit, and budgeting. We also have more extensive financial literacy training tools included in our subscription.
Can I refinance my federal student loan with a private loan?
Federal loans can be refinanced with private loans but they will no longer be federal government loans or have the benefits associated with federal loans like deferments, forbearances and generous repayment schedule options.
My loans are private. Since I can get a tax credit should I keep them private or should I refinance for a lower rate?
Private loans cannot be consolidated with federal student loans so the federal student loan benefits are not available. You may have options for refinancing private student loans and terms, conditions, and interest rates are based on your credit score and payment history. Also, try asking your current servicer if they can reduce the interest rate on your loans rather than refinancing with another servicer.
What advice do you give to someone who has six figures of loans? It is daunting seeing a $165k balance.
You may want to create a plan to make additional payments to principal reduction on a regular basis to pay this down as quickly as possible. If you have loans with different interest rates, make the additional principal payments to the loans with the highest interest rates first—and make sure that you are specifically noting the loan number and that the payment is for principal reduction in the memo line on the check and on the payment coupon, then check online to make sure the payments are properly applied.
If you have equity in a home, you may want to refinance some of this debt into a mortgage loan and pay down the student loan—especially considering that the tax bill may eliminate the write-off for student loan interest and the interest on mortgage loans is still extremely low.
You may refinance your federal loans to a private lender but this will take you out of the government loan program—you might get a lower rate, but you also lose access to all of the programs and protections available with a federal loan.
If you are unable to afford your monthly payments, contact your servicer for options to lower or postpone payments but that is not in your best interest long term. With a balance that high, the interest will still accrue on the large principal balance and your loan balance will grow. If you must lower your payments to avoid default then you must do so. While you have lower payments, do anything you can to make additional payments and ask that those payments be applied to your balance. We also suggest taking a tough look at your budget to remove any unnecessary expenses. Each time you receive a bonus, raise, or tax refund, send that money and ask that it be applied to the principal.
Will refinancing my federal loans make me ineligible to be grandfathered into Public Service Loan Forgiveness (PSLF)? How binding is the language in my promissory note that details loan forgiveness? (Could I sue if they try to take it away?)
The PSLF Program was created by Congress and Congress can change or end the PSLF program at any time. The Higher Education Act of 1965 is currently (December 2017) being amended and if this program is important to you, we highly recommend that you contact your U.S. Congressman and Senators to support the continued inclusion of these benefits.
Currently, if you refinance through the federal student loan consolidation program, your 120 payments must restart. If you refinance with your spouse through the federal student loan consolidation program, your 120 payments must restart and both of you must be employed full-time with a qualified employer. If you refinance with a private lender, you will lose the benefit altogether.
If you have Income-Driven Repayment (IDR) payments, do you still quality for possible reduction or forgiveness after those 120 payments or 10-year payments? Say you go back to school and stop payments, does the 10 years or 120 payments start all over again?
No, the 120 payments/10-year repayment period will not start over again if you return to school and stop making payments. If you acquire new student loan debt, this will be considered in any new IDR payment calculation. There is no loan forgiveness until after 20-25 years. Please note that if any debt is forgiven, the amount forgiven may be taxable; in other words, you won’t have student loan debt but you may have debt with the IRS that does not have generous repayment schedules or options to reduce or delay payments.
Do we need to keep our loans with our providers while paying on the 120-month timeline or do the loans need to be transferred elsewhere specifically for that?
You can keep your loans with the same servicer(s). The U.S. Department of Education may contract with different servicers and your loans may be transferred when this happens but the goal is usually to keep your loans with the same servicer throughout your repayment period.
What are the downsides to refinancing federal loans through a service provider?
Refinancing your federal student loans through a private loan servicer will result in the loss of access to all federal government programs and protections currently available with federal loans, often including loan forgiveness programs. There are many companies scamming students claiming they are offering assistance with “student loan forgiveness” and, if they are not the current federal servicer of your student loans or if they try to collect a fee, it is a scam! Your federal student loan servicer does not charge a fee to help you qualify and apply for loan forgiveness. Champion Empowerment Institute includes this service for free with your subscription. The scammers often ask for thousands of dollars and you never see any loan forgiveness. Please, see the Nerd Wallet Student Loan Watch List to see a current list of questionable companies.
What do you suggest for someone with private loans that have a variable interest rate? I can only afford interest and not payments.
Talk to your lender and be honest about your circumstances and see if they have options for refinancing with a set interest rate. Also, you may want to consider refinancing the loan with a different lender. Depending on your credit score, you may qualify for a lower interest rate which could help you have the additional available funds you need to afford regular payments. If you have equity in your home, you may want to consider refinancing your home to pay off some or all of your student loan debt especially considering the low mortgage interest rates currently available and the tax benefits of mortgage loans.
What are your thoughts on Public Service Loan Forgiveness (PSLF) program? I have private and federal loans.
For federal student loans this is a great option if you qualify. To see if you qualify for the federal student loan PSLF program, please check here.
Currently there are no Public Service Loan Forgiveness programs available for private student loans.
My loans are through Great Lakes. I have 6 of them. They are combined so I have one bill. Can I split them up so I can pay the smallest one off first?
Normally, the servicer’s system splits the payment up automatically. Before looking at paying the smallest balance, look at the interest rates on each loan. It is better to pay the highest interest rate loan first regardless of the balance. If they are all the same interest rate, then you can request paying off the low-balance loan first. In any of these cases, if you have special instructions, write the loan number with instructions in the memo field of the check and on the payment coupon so that you have legal recourse for how you want the payments applied. Follow-up with the loan servicer to make sure the payments are applied properly.
Are there additional options for teachers other than Public Service Loan Forgiveness (PSLF)? Is the PSLF the only program that offers loan forgiveness for teachers?
The available options depend on your loan type and when you took your loan out. Here are some of the programs:
- Teacher Loan Forgiveness: Forgives up to $17,500 of your Direct or FFEL Subsidized or Unsubsidized Loans after 5 complete and consecutive years of teaching at a qualifying school. Details here.
- Perkins Loan Cancellation for Teachers: Forgives up to 100% of your Federal Perkins Loan Program if you teach full-time at a low-income school, or if you teach certain subjects such as math, science, foreign languages, special education or other subjects determined by your state education agency to have a shortage of qualified teachers in your state. To see if a school is classified as a low-income school, visit this link.
- State-Sponsored Student Loan Forgiveness Programs: Several states offer loan forgiveness programs for teachers. The American Federation of Teachers has a database to find programs you may qualify for here. Congress is currently working on reauthorizing the Higher Education Act of 1965 and is defining a new student loan program that may include loan forgiveness for teachers. Make sure that you stay on top of these programs and research if the amount forgiven remains untaxable or becomes a taxable event (where the amount forgiven is taxed by the IRS).
You may qualify for more than one of these programs, but taking part in one program may impact your ability to qualify for another program later on. We recommend fully researching your options before making any final decisions.
To get a lower payment I am in an extended graduated plan. Can I make additional payments?
Yes. Regardless of the repayment plan you have agreed to, you can always make additional payments that should be noted in the memo, “Please, apply to principal reduction.”
The extended graduated plan is one that we do not recommend because so much interest accrues and is capitalized at the beginning that increases your student loan debt substantially and, later, the payments increase to unrealistically high amounts. In addition to making principal reduction payments, you would be well served to look into converting to a standard repayment schedule or an IDR plan.
If my loans are consolidated, does that mean that they are refinanced? How does that impact the interest rate?
Technically, consolidation loans are not refinanced and they use a “weighted average” of the existing interest rates and balances to determine the interest rate for the consolidated loan.
Can I un-consolidate my loans? My loans are combined with Great Lakes.
No. Once a loan is consolidated you cannot un-consolidate it.
What if you do freelance work or are self-employed? How do they determine income based when your income is so variable!
Income-based Repayment Plans are available for freelancers and self-employed individuals and payments are determined by completing a self-certified letter stating name and address of employer, amount of weekly hours worked and monthly gross income (pre-tax).
I owe over $100,000 in student loans, most through Federal Government, some through Sallie Mae. I was denied student loan refinancing, a loan for a mortgage and the ability to co-sign for my children’s student loans. I feel like this amount of student loan debt is holding me hostage. How much does the credit score pay a part in being able to refinance? I am a medical professional and am fortunate to make a great salary. I just feel if I could get my monthly payments under $950 a month, I could pay them off faster. Thanks.
Your credit score plays a major part in refinancing private student loans. If your score has improved since you originally took out the loans (or last refinanced), it may be time to go through the process to see if refinancing can lower your rates.
Most Sallie Mae loans are federal loans unless they are SMART loans. There are also some federal consolidation programs that can include some medical student loans. Call your federal student loan servicer and ask what options are available.
My student loan company moves the payment date of my loan ahead each time I pay more than is due each month....this was their email to me "When a payment is received, it is first applied to outstanding fees (if applicable), then outstanding and accrued interest, and finally to principal. Any additional payment amount received is automatically applied to principal. Even though the extra funds are applied towards principal, they are also applied towards the next month’s payment, as we are unable to ask you to pay your loans off early. " is this making it take longer to pay off my loan? are they allowed to do this?
Additional payments that are being applied to future payments is currently allowed in regulation but against the law in several states.
Always, write a note in the memo to “Apply additional payment to principal reduction.” When they cash the check, they have a legal obligation to apply the payment how you have instructed them to do.
If the additional payments have been misapplied, call the loan servicer and request to have the payments reversed and reapplied with the additional amount applied to principal reduction. You will most likely have to follow-up on this several times because they make more money applying it to future payments (the language in their email is a nice way of putting it) so you have to hold them to doing the right thing. If you aren’t getting anywhere with them and you have a subscription with Champion Empowerment Institute, just give us a call and we will be happy to help you get this completed.
Paying additional to principal reduction does not reduce the monthly payment amount under IDR because the payments are based on your income while principal reduction can reduce the monthly payments under standard repayment because they are based on the loan balance.
I’ve wondered about refinancing my loans to private loans for better rate but am worried about the risks.
You may acquire a lower interest rate depending on your credit rating, but keep in mind that you will no longer have the benefits associated with federal loans like deferments, forbearances and generous repayment schedule options.
I have a single loan debt in excess of 40,000 dollars. Is it worth paying minimum per month to ensure personal savings with investments? Also do you recommend refinancing considering I need to take another loan for my spouse in the near future?
The simple rule of thumb for debt and savings is this: If the interest rate on the debt is higher than the interest rate on the savings (after you have saved 2-3 months of your monthly overhead for emergencies), pay down the debt. If you are earning more on the savings or investment than you are paying on the debt, put more into the savings or investment.
How often can I refinance my loan to achieve a lower interest rate? It feels like I am throwing away money on interest.
For federal consolidated loans, you can only consolidate more than once if you have new loans to add to the consolidated loan.
If you are refinancing your private student loans multiple times may not be beneficial if the costs (fees) outweigh the benefits (interest savings).
Each time you apply to refinance, a hard check will appears on your credit report. Depending on the time between each check, having too many of these hard checks may have a negative impact on your credit report.
Which do you think is better, pay off student loans faster? Or build savings?
Everyone’s circumstances are different. If you don’t have some savings built up, anything that goes wrong can disrupt your life, ruin your credit, and possibly force you to lose your home, your job or your health so building a savings account that will cover 2-3 months of your monthly expenses is wise. After that, pay down debt beginning with the highest interest rate debt which is usually credit cards—then, stop using the credit cards! Since student loans have fairly low interest rates, it is good to pay them off early and keep in mind that you can also save money by paying off higher-interest-rate debt first.
Why does it take loan companies so long to correct misapplied funds?
Lenders make money on interest so when they have misapplied payments to future payments with interest they really haven’t earned, which is illegal in several states, you are requesting them to give up profit. Also, it is a manual process for them to reverse payments and reapply them properly because they usually have their computer programmed to process payments the way that yours was applied.
What is a good interest rate for refinancing right now?
Defining a good rate is difficult. But we can say that as of December 11, 2017 on Nerd Wallet what they listed for fixed rates were between 3.09 and 8.33% while variable rates were 2.49 to 8.24%.
I went to Everest and during the enrollment, the financial person said I needed a cosigner. After all was said and done, they did a bait and switch and I ended up with a parent plus loan. What are my options for this plan? The payments are high and I have no right to the loan.
Parent PLUS loans are eligible for the Income-Contingent Repayment (ICR) plan IF the loan is first consolidated to a Direct Consolidation Loan.
Another option is to refinance the loan in the student’s name. During refinancing, some companies allow transferring the ownership of Parent Plus Loans from the parent to the child. Keep in mind that you will be refinancing to a private loan company and thus losing access to all of the programs and protections available with a federal loan, including eligibility in Public Service Loan Forgiveness (PSLF).
If I am able to refinance for a lower rate and continue to pay down the debt in the interim, is there any reason not to refinance multiple times to take advantage of lower rates? (Assuming I am not extending the term of the loan.) Will it hurt my credit score in the long run?
For federal consolidated loans, you can only consolidate more than once if you have new loans to add to the consolidated loan.
If you are refinancing private student loans multiple times may not be beneficial if the costs (fees) outweigh the benefits (interest savings). Each time you apply to refinance, a hard check appears on your credit report. Depending on the time between each check, having too many hard checks may have a negative impact on your credit report.
How will the new tax bill (December 2017) effect student loans? My concern is the loan forgiveness.
There are several bills moving through Congress that will affect federal student loans including the tax bill, the budget bill, and the reauthorization of the Higher Education Act of 1965. Unfortunately, education is part of the domestic discretionary budget which meaning that it is a piece of the budget pie that is not mandated but is funded based on what is left over in the budget. Because, education is not mandated funding, many decisions are made to fit a budget and not to educate America—this is why many of our education laws make no sense and are often hurtful to students or, as politicians often say “have unintended consequences.”
Since all of these bills are currently in motion, it is hard to estimate the final outcome because everything is negotiable. If you feel strongly about something, it is very important for you to reach out to your U.S. Congressional Representatives in the House and Senate to tell them how you feel and how including or eliminating certain benefits will help or hurt you. Your input is valuable and it’s the only way that lawmakers know the impact of their decisions.
For example, the PROSPER ACT that is moving through the U.S. House of Representatives eliminates interest subsidies for federal student loans, imposes high caps for the amount of unpaid interest that can be capitalized or added to the principal balance of the loan, reduces repayment schedule options, and eliminates some options for lowering and delaying payments. While the press is touting the transparency of additional data sharing and reporting, it has failed to report these elements that will harm students. Champion Empowerment Institute’s President and CEO will actively work to minimize the adverse effects of these bills and will need students and former students to join in writing their congressmen and women to affect changes before these bills cross the President’s desk and are signed into law.
Is it better to take out separate government loans or get one large private loan?
You may acquire lower interest rates with the federal government loans, will have multiple repayment schedule choices, and will have better options to postpone or lower payments should you need the assistance. If you do postpone or lower payments, you may accrue unpaid interest that can be capitalized or added to your loan principal balance and you will pay a lot more for your loan. Depending on your credit rating and goals, we suggest comparing terms and interest rates for private loans and deciding which is most suitable for you.
I am working on consolidating my student loans. The interest rate is slightly higher than some of my existing terms but is also lower then some. Is it a good idea to consolidate them? It's been 11 years and I work in public sector, so I'm hoping for a lower payment and getting loans forgiven eventually.
If you are working for a qualified employer where you would get Public Service Loan Forgiveness, DO NOT CONSOLIDATE your loans because your requirement to make 120 payments will start over.
The interest rates are different because federal consolidated loans use a “weighted average” interest rates based on the original interest rates and the principal balance of the loans at the time of consolidation so it makes sense that you would have some going up and some going down.
I work for the federal government and have received calls on loan forgiveness but when I worked through with a company (who wanted to be paid to service this) it turned out that by the time it would all work out I would’ve paid off my loan anyway. Can you talk a little bit about loan forgiveness for federal employees?
Currently full-time employees of government organizations at any level (federal, state, local, or tribal) qualify for PSLF. On a qualifying payment plan you have to make 120 monthly payments, it will be at least 10 years after you make your first qualifying payment before you can apply for PSLF.
If a company is charging you for loan forgiveness, it is a scam company! Your federal loan servicer and legitimate ethical companies like Champion College Services and Champion Empowerment Institute don’t charge students large fees to help them with their benefits.