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Federal Student Loan Forgiveness Programs

Federal Student Loan Forgiveness Programs

Today, the standard federal student loan period is 10 years. For the borrowers who aren’t able to afford their monthly payments under the 10-year plan, the federal government has created income-driven repayment plans to help make student loan payments more affordable under the Federal Student Loan Forgiveness program and the William D Ford Act. If you are looking to qualify for a federal student loan forgiveness program, continue reading.

In certain situations, you can have your Federal student loan forgiven. Under the Pay As Your Earn (PAYE) and Revised Pay As You Earn (REPAYE), borrowers pay 10% of their discretionary income for 240 months (20 years). Under REPAYE if you have graduate loan debt, the repayment period is 25 years.

Trump plans to combine all the programs into one single plan to make it less confusing for borrowers. While Trump’s proposal raises the monthly payment cap from 10 % to 12.5% he cuts the repayment period by 5 years. He plans to pay for his new student loan plan by reducing federal spending overall.

 

PUBLIC SERVICE AND TEACHER LOAN FORGIVENESS

Those working as public servants or teachers who meet certain criteria, under the existing plans, are eligible for loan forgiveness after 120 consecutive monthly payments.

If Congress eliminated the Public Service Loan Forgiveness and placed all borrowers under the same income-based repayment plan, existing borrowers in the PSLF program would be grandfathered in.

 

OTHER POTENTIAL CHANGES

Expect to see other student loan policies emerge from Trump’s nominee for Secretary of Education, Betsy DeVos as well as other congressional leaders. These changes may include:

  1. Risk sharing between federal government and universities with respect to students who default on their student loans.
  2. Potential education of federal government’s role in student lending and a corresponding increase in the role of private lenders.
  3. Amount of “profit” the government generates from student loans, which may result in a reduction of interest rates for federal student loans.

 

Check if you qualify for student loan forgiveness now. No Credit card or payment information required.

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TOP 5 QUESTIONS AND ANSWERS

1. Will I save more money on my student loans under Trump’s plan compared to Obama’s existing plan ?

If Trump’s doesn’t change anything and everything else remains equal, student will be able to enjoy the forgiveness programs. Now, if Trump decides to change things around, you should think enrolling into the forgiveness programs soon as you will be grandfathered in once changes are made.

2. How do I apply for student loan forgiveness ?

There are a few factors that determine your eligibility for Federal Student Loan Forgiveness under the existing income-driven plans. To find out if an income-based repayment program is the best option for you, we suggest you speak with a loan specialist. They will be able to take a look at your loans and determine the best route for you. You can also read these 4 ways to get Federal Student Loan Forgiveness.

3. Under student loan forgiveness programs, “will I owe more money after the loan is forgiven ?”

If you have the right qualifications for student loan forgiveness programs, you WILL be saving a lot of money on your student loans as these programs are built to help borrows who are having a hard time paying their loans.

4. Will Trump’s plan lower my monthly student loan payment ?

This depends on what you’re being asked to pay now and if you’re grandfathered into an income-based program already.

5. What are the benefits and risks to income-driven repayment plans ?

Overall, the benefits of income-based repayment programs far outweigh the risks involved. These plans make it affordable for borrowers to pay back their student loans! While not being forced into a financial hardship in the process.

 

 

Under the standard repayment program, 10 years in length, borrowers are asked to pay roughly 1% of their current student loan balance every month. If someone owes $50,000, their monthly payments will be around $500/month. This isn’t affordable for the average American which is why these programs exist.

The main benefit: you’ll save money upfront by getting a lower monthly payment which extends the repayment period to 15 years. The yearly adjusted monthly payment will vary based on your income. We’ve seen students making $35,000 a year and paying nothing on their loans.

If you’d like to learn more and to see if you qualify for any of the FederalStudent Loan Forgiveness programs, contact us here or fill the form below and we’ll be in touch with you soon.

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Why You Should Be Worried About Trump Repealing PSLF

I’ve gotten a ton of clients asking me about the Trump administration’s plans in regards to the Public Service Loan Forgiveness program (PSLF). For those who don’t know, PSLF allows you to work for a not for profit employer for 10 years and receive tax-free loan forgiveness. For many borrowers burdened by huge amounts of student debt, PSLF is their only hope. Here’s how you should prepare your finances if you’re worried about Trump repealing PSLF.

 

Act Like Trump Repealing PSLF is Not Going to Happen

I had an interesting conversation with a client a couple days ago about their $200,000+ student debt balance. She had the ability to refinance and was incredibly worried about Trump repealing PSLF. Hence, her thought was why not go ahead and lock in a lower interest rate and pay everything off. Otherwise she would have to take her chances with whatever the new administration will do over the next 10 years.

If she stays on PSLF and files her certification paperwork, she’s on track to save about $200,000. If she refinances and avoids waiting around 10 years to find out PSLF doesn’t exist anymore, she could save about $50,000.

Let’s think about this scenario like I would as a former bond trader. One outcome gives you savings of $200,000. The other outcome gives you savings of $50,000. The two options are mutually exclusive, meaning PSLF can’t exist and not exist at the same time. Therefore, if I wanted to decide what to do, I would multiple each of the numbers by the probability of each event and sum them.

What is the PSLF Repeal Probability?

This is a hard question to answer without freaking anyone out, because PSLF is almost certainly going to be repealed. However, the major question is HOW. The 2015 Republican repeal plan grandfathered in anyone who currently holds federal student debt.  It does not apply to anyone seeking new debt.

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The Democrats also effectively proposed their own repeal plan in President Obama’s budget around the same time. The President tried to limit PSLF to $57,500 in max benefits. The Democrats’ PSLF repeal plan was actually far more damaging than the Republicans for current borrowers.

Fast forward to January 2017, and Republicans have all the levers of power. Therefore, my expectation is that Trump repealing PSLF will happen within 12-18 months, especially given how the confirmation hearing for his Education Secretary hardly mentioned student loan policy. However, current borrowers are very likely going to be grandfathered in when the repeal happens. I’d put the odds at about 85% that this will happen, with odds of 15% that current borrowers will be completely screwed over. I’ll say though that these probabilities are my educated guess and take them with a grain of salt.

Now Calculate the Expected Value of Staying on PSLF

Going back to the earlier example, say you have $200,000 of savings under PSLF or $50,000 in losses if you stay and it gets repealed. With my probabilities, the expected value of staying on PSLF is $200,000*0.85+(-$50,000)*0.15=$162,500. Even if the probability is 50/50, the expected value of staying on PSLF is still very positive.

Therefore, if you’re looking at PSLF logically as an investment professional would, you need to be staying on the program if your savings are significant.

 

Now Prepare Your Finances Like Trump Repealing PSLF is Happening Tomorrow

So what about my guess that there’s a 15% chance that Trump repealing PSLF becomes reality? If I told you that there was a 15% chance of something horrible happening, you wouldn’t feel so good. That’s why you need to prepare your finances just in case the worst becomes reality. After all, many election models had Trump’s chances at below 5%.

Borrowers going for PSLF fall into two camps. The first group could pay their student debt off if they wanted to. They’re pursuing PSLF because it’s a better financial decision, not because it’s their only option. The second group can never repay their student debt. They will be forced onto private sector loan forgiveness in the absence of PSLF.

Borrowers in the first group will have debt to income ratios below 2. They will refinance their loans with a lender like the ones in my sidebar above. Then, they’ll get the lowest interest rate they can and pay it back.

Borrowers in the second group will need to save a lot of money. For repayment plans like IBR, an individual with a $400,000 student debt balance might have a balance of $600,000 after 25 years of not covering the full interest payments. That borrower would then owe taxes on the $600,000 forgiven balance as if it was income. The only way to pay that burden is to save $500-$1,000 a month in an investment account at a place like Vanguard. When the tax bomb hits, you withdraw the full amount, pay taxes on your capital gains, and pay off the tax debt.

 

Set Yourself Up For Success Regardless of What Happens with PSLF

Trump repealing PSLF would be bad news for a large number of borrowers. That said, it doesn’t have to be a disaster. Plan for PSLF with your loan repayment strategy. Fill out the PSLF certification form. Maybe consider submitting it every 6 months instead of every year.

If you stop building progress towards tax free loan forgiveness, you’re giving up the potential future savings that could very well happen. We’re all probably going to be dealing with higher tax rates in the future anyway, so you might as well get all the benefits you’re eligible for.

Hedge your risk against PSLF repeal. Save aggressively outside of your retirement plan. If Trump destroys PSLF, then you can retool your loan strategy accordingly.

 

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Trying to Appeal Student Debt? Apply For Federal Student Loan Forgiveness

Some college students across the nation have recently been applying for federal student loan forgiveness to help pay for their college loans.

According to CBS News, “More than 7,500 people have asked the federal government to forgive a total of $164 million in student loans…” Many of these students are forming arguments around the recent trend of “for-profit” colleges being found committing fraud because of their risky advertising guarantees.Infomercials and marketing materials have been found to claim future careers and earnings after graduation. Students are still paying the cost for widespread fraud found at Corinthian Colleges. The event brought attention to the federal program and the number of students submitting claims for loan forgiveness has risen.

Corinthian liquidated after declaring bankruptcy last year. A majority of the students from the colleges, mainly Everest Institute and Wyotech and Heald College, sought loan forgiveness or borrower defense to repayment from the Federal Student Aid (FSA), an office of the U.S. Department of Education.

In the U.S. Higher Education Act of 1965, there is a clause that allows students who were defrauded by their colleges to request loan forgiveness. This act also authorized most federal student financial aid programs. This included the Educational Opportunity Grant Program and the Guaranteed Student Loan Program.

“I don’t know if it’s the government’s job to compensate (students for the loans)…(loan forgiveness) is rare and underutilized,” said Melissa Shepherd, the director of Financial financial Aid aid at Longwood University.

What Is Federal Student Loan Forgiveness

Under the direction of President Barack Obama, the Obama Student Loan Forgiveness program has allowed that “the federal government will no longer give subsidies to private lending institutions for federally backed loans…borrowers of new loans starting in 2014 will qualify to make payments based on 10% of their discretionary income. (This) money will be used to fund poor and minority students and increase college funding,” according to Student Debt Relief.

The Student Loan Forgiveness Program assists those working in public service jobs, such as nonprofits, manage their debt loan through forgiveness after 120 payments (ten years). Students that qualify for one of these federal student loan forgiveness programs can possibly have their monthly payment reduced to $0/mo. To find out if you qualify for federal student loan forgiveness, contact us. 

“Student loans are a hot-button issue,” said Shepherd. “Even though over-borrowing is definitely bad, borrowing is not necessarily bad.”

If a student or parent is struggling to pay off the debt from student loans, Shepherd suggests, “Do not avoid the problem, (student loans are a) problem that doesn’t go away.”

Federal Loans Are Packaged in Students’ Financial Aid Packages

There are two types of federal loans that are packaged with student financial aid at Longwood: student loans and parent loans.

Fifty-four percent of Longwood students receive federal loans. For undergraduate borrowers who complete their education, the typical total debt they face is $25,327 with a typical monthly loan payment of $281 a month, according to the FSA.

“Those that graduated in the fall had an average federal student loan debt of $24,365,” stated Shepherd. “A freshman has the ability to receive $5,500 in a federal loan,” which will not come close to the full amount of tuition that is typically sought out through scholarships and grants.

However, if a student is independent and does not report their parent’s information on FAFSA (Free Application for Federal Student Aid) for any given reason, then they would be eligible to receive $9,500.

Although the cost of tuition for most universities has gone up, the amount of money that a student can borrow has remained the same.

What Loans Are Provided By the Government?

There are two types of loans offered by the government, subsidized and unsubsidized. Subsidized loans are need-based and result in the government paying for the interest on the loan while the student is in school. Unsubsidized refers to interest that accumulates over a period of time while a student is in school, and once a student graduates then the student is “paying interest on top of interest” to pay off the loan.

In reality, a lot of people don’t have that money that are getting loans, but if you do, it’s a smart option to pay the loan off.

Paying off your student loan can have a positive effect on your credit score. Graduates have a better chance of being accepted for their first apartment or car loan if they have built a solid credit history. Learn more about how a student loan affects your credit score. 

How to Apply For a Federal Student Loan Forgiveness Program?

If you have taken out a federal student loan and want to find out if you qualify for one of the federal student loan programs, fill out the form below.