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Student Loans and Debt Management Spring 2008

Student Loans and Debt Management Spring 2008. Eight Strategies to Success. Know your loan portfolio Know your grace, deferment and forbearance options Know your decision points and keep a calendar Run the numbers before choosing a repayment plan or consolidation

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Student Loans and Debt Management Spring 2008

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  1. Student Loans and Debt ManagementSpring 2008

  2. Eight Strategies to Success • Know your loan portfolio • Know your grace, deferment and forbearance options • Know your decision points and keep a calendar • Run the numbers before choosing a repayment plan or consolidation • Know your rights and responsibilities • Stick to a budget, maintain good records, and use credit wisely • Understand the consequences of delinquency and default • Know and use your support systems

  3. Class of ’07 Indebtedness 87.6% of graduates report having educational debt 47.2% of graduates report debt $150,000 or higher

  4. Know Your Loan Portfolio 1

  5. Current Loan Portfolio • Understanding your loan portfolio is the first step in effectively managing its repayment • Your current loan portfolio may be complex • Each loan type has its own set of repayment terms and conditions to consider • Know your servicer

  6. Loans with no interest cost to borrower in school, grace and authorized deferments: Subsidized Loans Federal Subsidized Stafford Federal Perkins Primary Care Loans Loans for Disadvantaged Students Some institutional loans Consolidation (underlying eligible subsidized loans)

  7. Unsubsidized Loans which accrue interest from date of disbursement. Borrower responsible for all accrued & capitalized interest: • Federal Unsubsidized Stafford • Graduate PLUS • Private Loans • Consolidation (underlying unsubsidized loans)

  8. FindingYour Federal Student Loans • www.nslds.ed.gov

  9. Relative Cost of Student Loans • Relative cost refers to : • a) interest rate • b) capitalization policy • c) borrower benefits

  10. Interest Rates * Variable, changes every July 1 based on the 91-day treasury bill, capped at 8.25% ** Interest rate for Direct Grad PLUS Loans 7.9%

  11. Interest Rates on Student Loans • Perkins, PCL, LDS rate is5% fixedfor the life of the loan • Private loans aretypicallyvariable- check the promissory note • Institutional loans havedifferent rates- check the promissory note

  12. Capitalization Addition of unpaid interest to the principal balance of a loan • Increases your total amount due • The less frequent the better • Consider paying the interest on unsubsidized loans prior to going into repayment • Filing deferment forms late may result in capitalization earlier than you expect NOTE: Direct Loan Program capitalizes interest on unsubsidized loans at the end of grace and again at the end of uninterrupted periods of authorized deferment.

  13. Know Your Grace, Deferment, and Forbearance Options 2

  14. Grace • Period of time following graduation when you are not required to make payments on your loans • Automatic, you do not have to apply • Subsidized loans are interest free to the borrower during grace • Unsubsidized loans continue to accrue interest • Availability and duration is loan specific

  15. Deferment • Period of time when a borrower may postpone payments • You must apply for deferments and meet certain criteria • Subsidized loans are interest free to the borrower • Unsubsidized loans continue to accrue interest

  16. Common Deferments for Residents • Economic Hardship Deferment Up to three years Current eligibility requires that two conditions be met Graduate Fellowship MUST be in an eligible fellowship program Unlimited for Stafford Check Prom notes for other loans • For a complete list and details on types of deferment:www.aamc.org/students/financing

  17. Condition One Your monthly loan payment must equal or exceed 20% of monthly gross income Condition Two Your monthly gross income minus monthly loan payment as described above must be LESS than: Family Size www.aamc.org/students/financing

  18. Economic Hardship Deferment Example – Family Size 1 Assumptions: • Do you meet condition #1? Yes $1,878 is greater than or equal to 20% of monthly gross income ($746) Yes • Do you meet condition #2? $1,851 ($3,729–$1,878) is less than $ 2860

  19. Economic Hardship Details Calculation includes ONLY Federal education loans Must provide income verification (W2s, tax returns, paycheck stub, employment contract). MUST be applied for each year – remember poverty level, interest rates and income change Be sure your servicer is aware of ALL of your federal education loans and that they are using a 10 year repayment schedule.

  20. Forbearance Temporary adjustment to repayment schedule in financial hardship Application required at least annually – use after grace and deferment Interest accrues and capitalizes on all loans, subsidized and unsubsidized Mandatory Medical Internship/Residency Forbearance available for Stafford, Grad PLUS and Consolidation loans throughout residency • Be careful of use because it adds expense! • Do use to stay out of delinquency and default!

  21. Paying Loans Off Early You can prepayyour federal student loans with no penalties. Be aware of the relative costs and make payments towards your unsubsidized loans that have the most frequent capitalization. Unless otherwise noted, loan payments typically are applied first toward collection costs (attorney’s fees, etc.), then interest, and finally principal

  22. Know Your Decisions Points and Keep a Calendar 3

  23. Loan Repayment Timeline

  24. Run the Numbers Before Choosing a Repayment Plan or Consolidation 4

  25. Current Repayment Options • Standard (Level) Repayment • Graduated Repayment • Income Sensitive Repayment - FFELP • Income Contingent – Direct Loans • Income Based Repayment – FFELP and Direct Loans • Extended Repayment

  26. Loan Repayment Plans • Standard (Level) • Level monthly payments over 10 year period • Higher monthly payments • Lowest overall cost • Graduated • Payments start low, increase usually every two years • FFELP – must have more than $30,000 outstanding • DL – monthly payment calculated based on DL debt and interest rates of loans; never less than monthly interest accrual • Higher overall cost - Good for early cash flow, but remember cost!

  27. Loan Repayment Plans Income Sensitive - FFELP Program Only Payments tied to income Finish in 10 years (may be extended to 15 years) Income Contingent - Direct Loan Program Only • Monthly payment amount calculated based on borrower’s household income, family size, and total Direct Loan debt. Good for early cash flow, but remember cost!

  28. Loan Repayment Plans Extended Available to new FFELP & Direct Loan borrowers* Fixed or graduated monthly payments Repayment term of 25 years. Typically the most expensive option. * Must have an outstanding balance of more than $30,000 in Stafford Loans on or after October 7,1998.

  29. Income-based Repayment(effective July 1, 2009) Caps monthly loan payments 15% of income that exceeds 150% of the poverty line for borrower’s family size (Individual = $1,300 Couple = $1,750) All residents qualify regardless of income or debt Monthly Gross Income $3,729 150% of the poverty line - $1,300 = $2,429 15% of difference x .15 Monthly Loan Payment = $ 364

  30. Private Loan Repayment • Loans typically unsubsidized for life of loan • Usually a “grace” period – forbearance may be available • Repayment terms vary – choice of plans may be available • CANNOTbe included in Economic Hardship Deferment

  31. Federal Stafford Loan

  32. Private Loan and Graduate PLUS

  33. Loan Consolidation Paying off multiple loans with one new loan Both federal and private loan consolidation available Any current borrower benefits will be lost Consolidation is irreversible Ask your servicer to run the numbers before deciding!

  34. Know Your Rights and Responsibilities 5

  35. Rights Written information Default information Copy of your prom note Repayment information Subsidies, grace, deferment Forbearance Prepay without penalty Responsibilities Must repay loan Notify loan servicer: changes in contact info ability to pay change in status or grad date fail to enroll Attend exit interview before you graduate Your Rights and Responsibilities

  36. Create a Spending Plan, Maintain Good Records, and Use Credit Wisely 6

  37. Budgeting with Your Stipend • Mean PGY-1 Stipend $44,753 • Less 1/3 for taxes, FICA $14,918 • Annual take home pay $29,835 • Monthly net take home pay $ 2,486 • Compare with your monthly financial aid budget • and there is your first bump in income

  38. Budgeting with Your Stipend Net income should be more than when you were a student Consider paying down higher interest rate debt first and then student loans Consider speaking with a financial professional Financial Planning Association www.fpanet.org National Association of Personal Financial Advisors • www.napfa.org

  39. Discretionary Income…Lifestyle Choices • New Car? • Eating Out? • Pay Off Credit Cards? • Pay Down Debt?

  40. Keeping Good Records Keep in one place all of your loan papers Notify your loan servicer of changes Document calls to servicer:whenyou call,who you speak with and thesubjectof the call Keep important numbers available – bookmark sites Open and READ your student loan mail !!!

  41. Student Loans and Credit www.annualcreditreport.com

  42. Understand the Consequences of delinquency and Default 7

  43. Consequences of . . . • Delinquency Failure to make payment(s) when due Reported to credit bureaus, affects your credit history Default After 270 days late, servicer assumes you will not pay Servicer can garnish your wages and tax returns Servicer can sue - you are responsible for costs Collection agencies take over School can withhold records Licenses are pulled in a growing number of states Student loans rarely discharged in bankruptcy

  44. Know and Use Your Support Systems and Resources 8

  45. Loan Forgiveness for Public Service • Principal and interest on Direct loan is forgiven • Borrower must make 120 monthly payments • Must be employed in a public service job • Public service is defined broadly • 501(c) (3) • Government • Military Service • FFEL borrowers can consolidate into DL to qualify (effective July 1, 2008)

  46. Loan Repayment/Forgiveness Programs Service commitment programs following graduation or residency Programs currently available through: • Various states • Public Health Service • NHSC • The Armed Forces • NIH AAMC’s website lists many programs: www.aamc.org/stloan

  47. The Taxpayer Relief Act of 1997 • 1. Your deduction may not exceed $2,500 per year • 2. Voluntary payments may be eligible • 3. Interest on consolidation loans may be included • 4. There are income maximum restrictions www.irs.gov/publications/p970/

  48. Support Along the Way Your family www.aamc.org/students www.ombudsman.ed.gov 1-877-557-2575 “MD2 – Monetary Decisions for Medical Doctors” Your loan servicers’ and their web sites Your residency program Your medical school financial aid office

  49. Questions?

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