Handling Expensive Student Loans

As you already know, college education can get pretty expensive. Add on fees, room, board, supplies and transportation, and you can easily spend $25,000 to over $100,000 a year! Unfortunately, most of us cannot afford to pay these kinds of tuitions without some help. That is exactly the purpose of the Direct Loan Program of the Department of Education. Through it, you can receive payment-deferred student loans that you do not have to start paying back until you have completed your education. 

In the past, multiple providers of student loans competed for business, but all were guaranteed by the federal government. Students could end up with two, three or more different student loans, all at varying interest rates and terms. Congress changed the law in 2010 so that from now on, all federal student loans originate from the Direct Loan Program. While this is great for new students, older ones may be saddled with multiple checks they must write each month to multiple loan programs.

A better solution is to consolidate federal student loans. The Department of Education has various programs to consolidate federal student loans, so that you only have to write one check a month for a fixed amount. The highest interest rate you will ever pay is 8.25 percent, as mandated by law. Your actual interest rate will be calculated as the weighted average of the interest rates on your outstanding loans. When you consolidate federal student loans, you are subject to a fixed interest rate, never a variable rate.

There are financial repayment plans that help former students having a partial financial hardship. The Department of Education defines this as a condition in which the sum of all eligible student loan payment, as per a standard 10-year repayment plan, exceeds your discretionary income, defined as 15 percent of the difference between your adjusted gross income and 150 percent of the poverty line for your state and family size. If you are experiencing a partial financial hardship, you can apply for the Income-Based Repayment Plan (IBR). This plan caps your payments at 15 percent of your discretionary income.

You can use IBR to consolidate federal student loans, as long as they are not PLUS loans made to parent borrowers. To participate in the IBR, you must authorize the Internal Revenue Service to inform the Department of Education as to your adjusted gross income. 

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Student Loan Repayment

In the United States, student loans can be obtained either from the federal government or from private sources. Terms surrounding student loan repayment vary with the type of program. 

Since the passage of the Health Education Reconciliation Act of 2010, all public student loans are directed through the Federal Direct Loan Program. The lender is the U.S. Department of Education, which has displaced banks and other financial institutions in this capacity.

Federal student loans are the most basic way for students and parents to borrow funds to help pay for college. The loans can be used for tuition, fees, room and board, transportation and supplies. When you apply for a federal student loan, the funds are directed to you through your school.

One feature of student loan repayment is deferment. Students do not have to begin repaying loans until six to 12 months following the end of their studies. Students who remain enrolled at least half time can continue to defer their student loans indefinitely.

The loans themselves are offered at attractive low fixed rates, usually a couple of points below commercial rates. Beginning in 2014, students who qualify can cap the amount of student loan repayment each month to ten percent of discretionary income, a reduction from the current cap of 15 percent. Besides income-based repayment plans, there is a loan forgiveness program that activates after 20 years of repayment.

Once, students felt victimized by the old system in which banks acted as the middlemen in the student loan program. They complained about complex rules and surprise extra costs. Those days are gone now that all government loans come directly from the Department of Education. It is estimated that $6 billion was saved by eliminating banks and other financial institutions from the government student loan program.

Because the terms of federal student loans are so good, the Department of Education recommends that all federal aid be exhausted before a student turns to private loans.

Students request federal student loans through the online Free Application for Federal Student Aid (FAFSA). The application allows you to indicate the schools you are thinking about attending. The Department of Education will process your application and the notify each of the schools on your list. Each school then contacts the student and informs him or her how much financial aid is available. This aid comes from scholarships, grants, work/study programs and federal loans. If you decide to take a federal student loan, the next steps in the process will be forwarded to you by your school.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Avoiding Student Loan Default

Are you facing default on your student loans because you can’t stretch you paycheck far enough each month? If you have exhausted your deferments, don’t panic! Instead, apply for a government student loan consolidation.  

There are a lot of benefits to a government student loan consolidation. Basically it allows you to forget about sending multiple checks to multiple lenders each month. Instead, you write just one check, to the Department of Education. The size of the new check will be less than the sum of the old ones, even though it may stretch out your total repayment term. The interest rate you pay will be the weighted average of the loans under consolidation, and the rate will be capped at eight and a quarter percent.

The interest rate and monthly payments are fixed, even if some of your previous student loans were variable rate. This alone is a great benefit, because you can budget precisely how much will be spent each month on repayment through government student loan consolidation. 

There are several repayment plans from which to choose. Two are income-based: the Income-Based Repayment Plan (IBR) and the Income Contingent Repayment Plan. The IBR Plan is tailored for those undergoing some financial hardship, and is based upon your annual income. It is targeted for students who will be working at jobs that don’t pay a lot, like a starting public health nurse or school teacher. It works by capping monthly payments at a percentage of discretionary income. 

When figuring your discretionary income for IBR, note that if you are married and file separately, your spouse’s income will not be included in the calculation. After paying out your IBR loan for 25 years, the remainder will be forgiven (although you may have to pay taxes on the forgiven amount).

The Income Contingent Repayment (ICR) Plan is another way to benefit from government student loan consolidation. Your monthly payment will be a function of your annual income, the size of your family, and the amount of the loan. As with the IBR, any balance remaining after 25 years is automatically forgiven. 

Every year, your ICR payment will be recalculated based upon your adjusted gross income and the balance left on the student loan. To be eligible for IBR or ICR, you must give the Department of Education permission to look at your income tax returns filed with the Internal Revenue Service.

 

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC

Federal Student Loans Are Easy

The Health Education Reconciliation Act of 2010 mandated that all federal student loans originate from the Department of Education. Before this act, banks and financial institutions acted as middlemen and charged fees for loans that were guaranteed by the U.S. government. The 2010 act saved over $6 billion by removing the banks from the process. This has also eliminated much confusion and discontent that used to be voiced by students who felt they were being ripped-off by the banks. 

One of the attractive features of the federal program is the provision for student loan repayment. As long as a student is enrolled at least half-time at a college or university, the student loan repayment is deferred. The loan repayment starts from six months to a year after a student ends study. This is an excellent benefit that encourages students to continue their education and take master’s and doctorate programs. Also, a student can change their concentration of study without jeopardizing the deferment, so students can serially study as many subjects as they like.

Another nice feature regarding student loan repayment is the new cap on payments. Currently, students do not have to pay more than 15 percent of their monthly discretionary income towards student loan repayment. In 2014, this cap drops to ten percent, a 33% decrease. This will be welcome news to upcoming students, as it means more money to live on without undue hardship because of student loan repayment.

Some students think that federal loans can be used only for tuition. However, other covered expenses include fees, transportation, supplies, room and board.

The interest rates on federal student loans are low, usually a couple of percentage points lower than bank loans. Terms are so good that the Department of Education recommends that students first max out their federal loan potential before even thinking about a private loan, which will no doubt cost more and have less favorable terms.

You apply for a federal student loan through the online Free Application For Student Aid (FAFSA) process. This is a streamlined web form that allows you to list all the schools that interest you. After you apply using FAFSA, the Department of Education will notify each school on your list that you are potentially interested in attending. The schools then contact you and let you know the range of financial options available to you, including grants, scholarships, jobs and loans. 

When you decide on the school you will attend, the government will forward your loan proceeds to you via the school. No banks or other financial institutions are involved.

Eric Bank, Freelance Writer

© 2011 Hedge Fund Writer LLC