Guiding Your Students Toward Successful Repayment Strategies Presented by: Michele Colson Sallie Mae...

Guiding Your Students Toward

Successful Repayment Strategies

Presented by:

Michele ColsonSallie Mae

© 2008 Sallie Mae, Inc. All rights reserved


Agenda

• Student Debt Portfolios• Repayment Options Review

– Additional Considerations

• Evaluating Financial Values and Skills• Developing a Personal Repayment Strategy

• Knowing how to answer four key questions will lead the way for student loan borrowers– What do I owe?– What are my options?– What are my goals and objectives?– What do I need to do to reach these?


Overview

• Debt levels continue to rise– Federal and private loans– Credit cards

• Students will receive direct marketing solicitations from numerous lenders– Offers may include Stafford, Grad PLUS, Consolidation, and

private loans

• Pressure on schools not to recommend one lender over another

• Students need information!


Reminder

Today’s students have been taught that consolidation is a good way to lock in a low interest rate on their student loans and that

it is something they definitely should do.

But is this true?


Student Debt Portfolios

New Heights of Complexity


Loan Portfolio Complexity

• 2007-08 graduates’ debt portfolio may contain any or all of the following:– Federal Student Loans

• Consolidation loan(s) with a fixed rate

• Perkins loan(s) with a fixed rate

• Stafford loan(s) with a variable rate

• Stafford loan(s) with a fixed rate

• Grad PLUS loan(s) with a fixed rate

– Private loan(s) with a variable rate– Credit cards, likely with a variable rate


Loan Portfolio Complexity

• Increased portfolio complexity requires that students have a solid understanding of the loans in their portfolios– Debt types –

• Loans versus revolving credit

• Federal versus private loans

• Loan program

– Debt holder / servicer– Interest rates –

• Actual interest rates

• Fixed versus variable

• Frequency of rate changes

Repayment Timeline Complexities

1. Make payments (Full or Interest-only)2. Deferment (UNEM or HRD?)3. Forbearance

Need to manage debt from this time period forward

FPDDOSD

Grad PLUS and Most Existing Consolidation loans

OSD – Out of School DateEOG – End of Grace PeriodFPDD – First Payment Due Date

Stafford loans (unconsolidated) and DL “In-school” Consolidation loans

EOG FPDDOSD (6 month grace period)

Perkins loans

EOG FPDDOSD (9 month grace period)

(may or may not have a grace period)

OSD

Private loans

EOG FPDD

2007 Sallie Mae, Inc. All rights reserved.


Repayment Options

Federal Student Loans


Repayment Options

• Repayment options for Federal student loans– Repayment plans– Postponement options


Repayment Plans

• Four choices of repayment plans– Standard– Graduated– Extended– Income-based (either income-sensitive or income- contingent)

• Structure of repayment plan may vary slightly between FFEL and DL, and among FFEL lenders

• Each plan has advantages and disadvantages• Can typically switch plans at least annually, if needed


Standard Repayment

• Monthly payment amount remains substantially the same over the repayment term

• Most commonly selected repayment plan• Automatically selected if borrower doesn’t choose a

different plan• Typically the lowest overall cost• Monthly payment amount is often the highest in

comparison to other repayment plans


Graduated Repayment

• Monthly payment amount is scheduled to change (usually increased) at one or more pre-determined intervals over the repayment term

• Reduced initial monthly payments • Higher overall interest cost due to lower initial

payment amount• Later payment tiers can become unaffordable if

income does not substantially increase


Extended Repayment

• Repayment plan offering a 25 year repayment term– Could be structured as a standard schedule, graduated

schedule, or choice of either

• Only available to “new borrowers” with no outstanding debt in that loan program (FFELP or DL, as appropriate) prior to October 7, 1998– FFELP loans: Total FFELP debt must exceed $30,000– DL loans: Total DL debt must exceed $30,000

• Reduced monthly payments due to 25-year term• The 25-year repayment term often results in higher total

repayment costs• Not all borrowers will qualify for this repayment plan


Income - Related Repayment

• Income-Sensitive Repayment (FFEL Program)– Borrower’s income is taken into consideration– Payment must cover accruing interest

• Income-Contingent Repayment (DL Program)– Specific formula based on outstanding amount of Direct Loans, family

size, and adjusted gross income (AGI)• AGI includes borrower’s and spouse’s income

– Amount not repaid after 25 years of repayment is cancelled• Cancelled amount is taxable under current law

– Not available on PLUS loans

• Alternative Repayment (DL Program)– Technically not an “income-based” program– Schedule is negotiated with Secretary of Education

• Income-Based Repayment (FFEL & DL Program)– Coming in July 2009


Postponement Options

• Postponement options for Federal student loans– Deferment– Forbearance

• Postponement options may either eliminate or reduce the required monthly payment


Deferment

• A period of time in which an eligible borrower is not required to make payments of loan principal– Government pays interest on subsidized loans, and subsidized

portion of consolidation loan– Unsubsidized interest may be paid by the borrower– Unpaid interest can be capitalized

• Common deferments– Enrolled at least half-time– Unemployed– Economic hardship– Military service


Forbearance

• A period of time during which the borrower is permitted to temporarily make reduced or no payments– Some are entitlements for qualifying borrowers; others are

granted at the lender’s discretion

• Cannot exceed one year at a time• Borrower is responsible for all interest that accrues

– Unpaid interest can be capitalized

• Borrower should consult with lender on whether use of forbearance will affect eligibility for incentive benefits


Additional Considerations

Other Items Affecting Repayment Strategies


Consolidation

• A consolidation loan is another option for managing student loan debt

• Consolidation loan is a new loan– Repays loans included in consolidation– Typically eliminates all or nearly all terms and benefits applicable

to those loans included in the consolidation– Usually offers a longer repayment term that can reduce monthly

payments but often results in higher total repayment costs

• Consolidation may be available through both federal and private programs


Consolidation

• Private loans cannot be included in a federal consolidation loan

• Federal loans can be included in a private consolidation loan– Doing so results in loss of all federal benefits:

• Fixed interest rate

• Interest subsidy

• Repayment plans

• Postponement options

• Cancellation benefits

• Some lenders may offer both private and federal consolidation with a combined billing option


Consolidation Interest Rate

• Federal Consolidation– Fixed interest rate*

• Weighted average, rounded up to nearest 1/8th percent

• Maximum rate of 8.25%

• Private Consolidation– Varies by lender, but typically a variable interest rate

• Variable rate may adjust annually, quarterly, or monthly

• Consult with lender on actual rate and interest rate formula

* Special rules apply to federal consolidation loan that include HEAL loans.


Incentive Benefits

• Incentive benefits can reduce loan costs– Interest rate reductions– Fee rebate – Principal rebate

• Optional, not an entitlement• Expect some type of eligibility requirements• Incentive benefit only has value if earned

– Understand requirements to qualify– Understand disqualification criteria


Assess Your “Average” Student

Take a moment to note the options your “average” student will likely consider first.


Financial Skills

Personal Goals Can Affect Strategy


FAO As Trusted Advisor

• Students look to your office for guidance• Proactively reaching out reaffirms your position as

trusted advisor • Offer factual information with consideration for personal

goals and values• Educate your students early and continuously

Information empowers each student to make sound fiscal decisions impacting

financial wellness for years down the road


Personal Values and Skills

• Be careful about not imposing your values and objectives into someone else’s strategy

• Each student will have his or her own preferences and skill-level for managing the student loan preference

• Help students identify their own values, financial skills, and goals– These will lead to a successful, personal strategy


Debt Management

• Repayment Strategy– Choose a repayment strategy to meet personal financial goals– Choose a repayment strategy for today and tomorrow– Evaluate all influencing factors

• Monthly budget

• Current and future salary expectations

• Financial management skills

• Personal spending and repayment patterns


General Tips

• Repayment behavior controls how quickly and inexpensively a loan will be repaid

• To avoid delinquency and minimize costs, select option with highest monthly payments that can be reasonably afforded

• Federal student loans have no prepay penalties– Can minimize the “required” monthly payment amount but can

pay more when budget permits– Can pay more on a monthly, quarterly, or annual basis, or even

as an individual lump sum amount

• Can use federal loan repayment strategies as a means for achieving goals on non-federal debts, then focus later on the federal debts


Identifying Goals and Values

• Prioritize goals• Use “leading questions” if needed• Goals for our discussion

– Minimize total interest costs – Aggressively repay higher interest rate loans– Minimize monthly payment (short-term)– Minimize monthly payment (long-term)– Minimize payments to multiple companies– Manage private loan repayment– Manage credit card repayment


Repayment Success

Developing a Personal Strategy


Common Goals

• Minimize total interest costs • Minimize monthly payment (short-term)• Minimize monthly payment (long-term)• Minimize payments to multiple companies• Pay higher interest rate loans quickly• Manage private loan repayment• Manage credit card repayment


Sample Leading Questions

• Do you know what your scheduled monthly payments will be?

Associated Goal(s):

All



• Are you going to be ready to make payments as they become due, or will you need to reduce or even postpone payments?– If the student will not be ready for payments, explore whether

payments need to be reduced or postponed, consider asking why, and discuss how long repayment relief is needed.

Associated Goal(s):

Minimize monthly payments (short term)



• Are your loans with different lenders or servicers?– If yes: Will it be difficult for you to manage making payments to

different places?

Associated Goal(s):

Minimize payments to multiple companies



• Do you need to reduce your monthly payment amount?– If yes: Do you understand that reducing your monthly payment

will ultimately result in higher interest costs?– If yes: Do you need to reduce your payments for only a short

period of time, or do you need long-term payment reductions?

Associated Goal(s):

Minimize monthly payments (short term and long-term)



• Do you intend to maintain a “hands on” approach with your loans?– Example: Do you plan on repaying your highest-rate loan quickly,

then your next highest-rate loan, and so forth, in order to minimize your total interest costs?

– Explore further how the student wants to manage the debts so you can identify appropriate options.

Associated Goal(s):

Minimize total interest costsAggressively repay higher interest rate loans



• With credit cards, do you tend to pay just the minimum balance, pay a little more that the minimum, or pay the entire balance off within just a month or two?

Associated Goal(s):

Minimize total interest costsAggressively repay higher interest rate loansMinimize monthly payments (short term and long-term)Minimize payments to multiple companies



• [For borrowers with variable rate loans] Are you uncomfortable with having a variable-rate loan?– If yes: Explore whether there are reasons for the discomfort, e.g.,

perhaps the student doesn’t realize there is a cap on the interest rate.

Associated Goal(s):

All, plus an indicator of whether consolidation should be a consideration within the strategy.



• What benefits do you have on your current loans?• What do you have to do to earn the benefits?

– Do you expect that you will be able to earn them?

Associated Goal(s):

Minimize total interest costs



• Do you have student loans at different interest rates?• Did you borrow private student loans?• What additional debts (other than student loans), such as

credit cards, do you have? – What are the interest rates of those debts?

Associated Goal(s):

Minimize total interest costsAggressively repay higher interest rate loansManage private loan repaymentManage credit card repayment



Take a moment to jot down any additional questions that might be relevant to your students.


Prioritizing Goals

• Given the following possible financial goals, which are the most important to you, and how would you rank (prioritize) them?– Minimize total interest costs – Minimize monthly payment (short-term)– Minimize monthly payment (long-term)– Minimize payments to multiple companies– Pay higher interest rate loans quickly– Manage private loan repayment– Manage credit card repayment

Developing a Personal Repayment Strategy

2007 Sallie Mae, Inc. All rights reserved.

IF YOUR FINANCIAL GOAL IS:

CONSIDER THESE REPAYMENT STRATEGIES

Minimize total repayment costs

Select the repayment option with the highest monthly payment and shortest repayment term that you can afford.

Pay some or all of the accruing interest during periods in which payments are not required.

Prepay loans with highest interest rates first.

Ensure all required actions are taken to earn borrower benefits, if available.

Investigate loan forgiveness and cancellation options.

Consolidate variable rate loans when interest rates are low.

Assess the value of borrower benefits on your current loans that you may lose by consolidating.

Minimize monthly payment

(short-term)

Investigate deferment options* to temporarily reduce or eliminate payments.

Review graduated repayment plan options. You may be allowed to choose the appropriate length of time that your monthly payment is minimized.

Investigate forbearance options to temporarily reduce or eliminate payments*.

Minimize monthly payment

(long-term)

Pursue an extended repayment option if you are eligible.

Consolidate eligible loans to obtain maximum repayment term.

Minimize payments to multiple companies

Consolidate eligible loans with a single lender.

Consider obtaining a private consolidation loan with the lender of your federal loans (or vice versa).

IF YOUR FINANCIAL GOAL IS:

CONSIDER THESE REPAYMENT STRATEGIES

Pay off higher interest rate

loans quickly

Make minimum payments on lower rate loans, adjusting your repayment plan if needed, and make the highest payments you can afford on higher rate loans.

Review postponement options* on lower rate loans to allow you to make higher payments on your higher rate loans.

Do not consolidate higher rate loans, or consider consolidating them separately from other loans.

Manage private loan repayment

Pay some or all of the accruing interest during periods in which payments are not required.

Consult your private loan lender to evaluate repayment plans available.

Consider reducing monthly payment amounts on federal loans to pay down private loans more quickly.

Consider obtaining a private consolidation loan with the lender of your federal consolidation or vice versa.

Applying with a cosigner and/or improving your credit score before consolidating private loans may result in better interest rates.

Manage credit card repayment

Consider reducing the monthly payment amounts on your federal loans to focus on paying off your credit cards.

Stop or minimize the use of credit cards until your balance is low enough to pay-in-full every month.

* Check with your lender to determine the potential effect that a deferment or forbearance may have on your ability to qualify for borrower benefits.

Questions?

Repayment

Repayment

What do I owe?What are my options?What are my goals and objectives?What do I need to do to reach these?

“Running the Numbers”

Loans Balance Interest Rate

Term (years)

Monthly Payment Amount

Interest Cost

Total Repayment

Amount

Leave Loans Separate

Consol Loan 1 $70,000 4.750% 30 $366 $61,455 $131,455

Stafford Loan S1 $35,000 6.800% 10 $403 $13,334 $48,334

Stafford Loan S2 $35,000 6.800% 10 $403 $13,334 $48,334

Cumulative Total $140,000 $1,172 $88,123 $228,123

Consolidate Only New Loans

Consol Loan 1 $70,000 4.750% 30 $366 $61,455 $131,455

Consol Loan 2 (S1 & S2) $70,000 6.875% 30 $460 $95,546 $165,546

Cumulative Total $140,000 $826 $157,001 $297,001

Consolidate All Loans

Consol Loan 2 (All loans) $140,000 5.875% 30 $829 $158,135 $298,135

Consolidation

“Running the Numbers”

Consolidation and Extended Repayment Comparison

Loans Balance Interest Rate

Term (years)

Monthly Payment Amount

Interest Cost

Total Repayment

Amount

Leave Loans Separate

Consol Loan 1 $70,000 4.750% 25 $400 $49,725 $119,725

Stafford Loan S1 $35,000 6.800% 25 $243 $37,878 $72,878

Stafford Loan S2 $35,000 6.800% 25 $243 $37,878 $72,878


Consolidate Only New Loans

Consol Loan 1 $70,000 4.750% 25 $400 $49,725 $119,725

Consol Loan 2 (S1 & S2) $70,000 6.875% 25 $490 $76,753 $146,753


Consolidate All Loans

Consol Loan 2 (All loans) $140,000 5.875% 25 $892 $127,406 $267,406


Interest Rate Trends

2008-09 rates estimated using March 31, 2008 auction at 1.47%

Stafford and PLUS Variable Interest Rates, July 1998 to Present

8.26%

7.72%

8.99%

6.79%

4.86%

4.22% 4.17%

3.37%

2.77%

4.57%

8.02%7.94%

6.10%

7.22%7.14%

5.99%

3.42%

4.06%

7.46%

6.92%

8.19%

5.30%

3.77%

6.62%6.54%

2.82%

3.46%

5.39%

6.86%

6.32%

7.59%

4.70%

3.17%2.50%

3.50%

4.50%

5.50%

6.50%

7.50%

8.50%

9.50%

1998-991999-00

2000-012001-02

2002-032003-04

2004-052005-06

2006-072007-08

2008-09

Financial Aid Award Year

PLUS Loans

Stafford Loans in Repayment

Stafford Loans in Grace

Guiding Your Students Toward Successful Repayment Strategies Presented by: Michele Colson Sallie Mae...

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