Good afternoon. My name is Heather Jarvis, and we will be talking today about solving student loan problems and what borrowers need to know when times get tough.
I spend a lot of time teaching other attorneys and financial advisors about counseling, student loan borrowers, who often have high student debt burdens. But also, typically have strong salaries being graduates of graduate and professional schools. That’s sort of my niche within the niche. And I just wanted to provide this series of consumer information for all of us who may struggle at some point, financially in our lives.
And, like many people, I have been struck by the difficulties that we are experiencing as a society, and I just want to try to do my part in so far as what I have to say could be of use potentially, to someone.
So, we’re going to cover a number of things today, We’ll spend a bit of time talking about the CARES Act, which was enacted in response to the coronavirus crisis as a method of relief for student loan borrowers with specific kinds of Federal student loans.
But I wanted to talk about some other general information about dealing with debt, generally speaking, and student loans more specifically, and point out some resources that borrowers can use to try to make good decisions When things are difficult financially.
I’d like to begin by recognizing and acknowledging the, uh, excellent work of the National Consumer Law Center and the materials that they make available to borrowers.
I’ll just do this and see if that there we go. OK. So the National Consumer Law Center does a lot of important work for consumers including their fantastic website. Student loan borrower assistance dot org.
Student loan, borrower assistant’s dot org which is a wealth of information and particularly for those facing financial difficulties. In response to the pandemic, the National Consumer Law Center has made their wonderful book Surviving Det available online and it’s Digital Form for free for everyone. I have several copies of this book from previous editions and recommend it to you.
I also want to acknowledge that their structure of rules, as they call them for prioritizing debt are some that I draw from heavily for this presentation, and others. So, the National Consumer Law Center is fantastic, and this material, here, on this Next Visual Aid, comes directly from their publication. And, I want to be sure to credit them with that.
So, the, the book Surviving Debt is, has all sorts of very specific information about very specific kinds of debt that are not, you know, all part of today’s subjects and will focus primarily on student loans, but they, they do set out a set of guidelines for managing debt.
And I want to underscore the importance of recognizing that not, you know, all debt is created equal. So, I think it can be one difficult decision. People sometimes face is, you know, which bills to pay when the money doesn’t stretch far enough.
And so, it’s valuable to recognize that the first thing you need to pay for are the necessities of life, shelter, and food, too, and medical care for your family.
So, when you’re deciding which debts to pay, you want to pay debts that are linked to those necessities of life. So, for example, if you if you have a, you know, rent payment, do you want to pay that?
If you, you may be able to go a couple of months with without paying a mortgage before, you see immediate consequences, but, at a certain point, the mortgage will become a higher priority debt, And there are other sorts of debts that can have very negative effects if you don’t pay them. So those are specifically going to be things like court ordered payments, child support payments, and also can include Federal student loans. If they, if they are are approaching default, default takes nine months worth of missed payments on a federal student loan.
But after default is entered the options for flexibility become much fewer and also the consequences of non-payment can be very severe. And we’ll talk about that some here as we go forward.
But it’s important to recognize that there are lower priority debts as well, things like unsecured debt. And when I say unsecured, I’m talking about debt that does not have any collateral linked to it. So it may be that it’s It’s a high priority to make a payment on your car, particularly, if you need the car to get to work. So, if non-payment of your car loan could result in no repossession of your car and you need to use that card to get to the place where you can earn an income, then that’s a high priority debt.
So, but, you know, low priority debt is going to be something that’s not secured by property, particularly not something that is necessary to your survival or your income. So that will include things like credit cards and notably, private student loans, which are much more like other kinds of consumer debt than they are like federal student loans in, that the private lenders don’t have the collection authority that the Federal Government has.
So the SCLC points out that it’s important to prioritize your debt and, and not to allow the system of debt collection, to influence your decisions about what you should pay.
So, too, to make that point, it’s essential to recognize that no debt collectors are skilled at convincing people to pay debts, the debts that they are collecting, before paying other debts, and, and they’re not the best source of information for us as consumers.
It’s worth taking the time to get reliable information from a source like the National consumer law center, rather than allow, you know, the, you know, actions of debt collectors to influence your thinking in that regard.
So, so I wanted to point out, you know, that there are also, we talked about this last session, but there are always bad actors who are looking to prey on people who are struggling. So, if someone is suggesting that there are some quick fixes or easy ways to to fix a financial difficulty, you know, that’s generally not the case. So, you know, if it sounds too good to be true, it probably is.
And so, I commend you to this publication called Surviving Det, if you’d like to learn more about how to decide when, or whether it’s time to file for bankruptcy, or what sort of assistance that you can get from reliable sources, when, for example, getting advice from an attorney is, is useful.
So, so begin with the notion that when you’re dealing with that, it’s important to recognize that some debts have higher priority than others, And when it comes to student loans, certainly federal student loans must be dealt with because the federal government has significant collection authority, and they can and will pursue collection of those loans, literally, to the grave. So, Federal student loans takes priority over private student loans.
On the other hand, Federal student loans are much more flexible than private student loans. So there’s often a way to postpone or reduce payments and to stretch payments out. For example, there are, there are possibilities to have Federal student loans discharged under certain circumstances. Private student loans.
Lower priority because those lenders do not have the authority, for example to garnish wages or C’s tax refunds unless or until they are able to sue and get a judgement against the borrower. So, private student loans are, are a lower priority unless they have already achieved a court order. So a court ordered payment can be enforced by seizure of assets or garnishment of wages with with certain rules surrounding that.
So, you’ll you’ll want to recognize the difference between those sets of circumstances.
So, when it, so as a student loan borrower, if you are facing financial distress, the first thing you want to do is get a clear inventory of the student loans you have, because your, your options will depend quite a bit on, on the specifics. So begin by getting a clear list of all of your Federal student loans, And that can be done online at student aid dot gov.
You can log in using your federal student Aid, username and password, and then you can see there them on a dashboard there, and Federal Student Loans include all the the ones that you see on your screen here.
Perkins loans are somewhat special in that they are a campus based federal loan, and parent plus loans are those that are issued to the parents of undergraduate students who are dependent, according to their financial aid status. And so, they have slightly less flexible rules and slightly fewer options for parents borrowers, but these are all examples of Federal student loans, mm meter, and federal student loans, as they say, are much more flexible, and we’ll talk about some of the things that are available for for borrowers with Federal student loans. But the next sort of part of inventory, student loan debt is to download a copy of your free credit report which you can access at annual credit report dot com.
And that’s where you can get a report from any of the credit bureaus and search on that report for all of the they’re typically labeled education loans and then compare them to the federal loans that you see on your federal record.
Now if the federal loans are are not the only education loans on your credit report, then the additional loans that are seen on the credit report are going to be the private student loans.
And anytime that you see the name of a of a bank associated with a student loan on the credit report, if it’s a, if it’s a student loan that is not more than 10 years old, then that’s going to be a private student loan. So, it’s been 10 years since private banks were involved in the Federal Student Loan Lending System. So, whenever there’s a bank listed as the, as the lender, then that’s going to be a private student loan, assuming it’s less than a decade old.
So, getting that inventory is essential. And then it’s, it’s important to first, think about whether there’s any way to get out of the debt completely. So discharge or cancelation. Is a a complete solution for the limited universe of borrowers? who can qualify?
So I don’t mean to say that it is a widely available solution, but it is certainly the best result for borrowers and so it’s the first thing to consider when thinking about, you know, what the options are. So there are various discharge provisions for Federal Student loans that are associated with issues around the school.
So if, If your school closed down while you’re in attendance, for you were able to finish your degree program, or if there was refund Owed to you by the school that you did not receive. Or if there was some fraud in the transactions with the school, there can be some defenses that the borrower can raise to repayment.
Those are have gotten more difficult in recent days, was actions from this administration with regard to the borrower defense rules.
But if there are serious problems with your school, there may be some, some federal discharge of federal student loan debt available.
Also, in the case that a borrower becomes totally and permanently disabled, federal student loans can be discharged based on showing of total and permanent disability, the requirements for for docking mending that are very specific.
But it is available for, for those who, who meet the qualifications.
Also, federal student Loans or Discharge Goal upon the death of the student loan borrower. So the state is not liable as long as a death certificate is filed.
And that dust discharges is no longer taxable income to the estate under the recently updated tax provisions.
As an aside that that non taxability is expires over after a period of time without additional congressional approval. So that is the rule in place now.
It may not always be There are also forgiveness provisions that can help relieve balances for federal Student Loan borrowers over time. They are certainly not magic. They don’t happen quickly and, and be B, beware of any person or organization that tries to claim that they have some fast track to loan forgiveness because it really doesn’t work that way.
1, one sort of federal loan forgiveness is, is earned by borrowers over a long period of time of making payments that are driven by their income. So, that takes at least 20 years, 25 years in the case of some of the repayment plans.
And then there’s public service loan forgiveness which can be very generous for borrowers who are working full-time in specific public service jobs, such as non-profit and government work.
And public service loan forgiveness takes 120 qualifying payments over at least 10 years in order to earn.
But that can be a very effective way of reducing the long term burden of debt.
And then also bankruptcy is possible for student loans. Student loans can be discharged in bankruptcy, although it is very, very difficult to do.
And the reason you always hear that, you know, you can’t you can’t declare bankruptcy for student loans. It’s just that the standard is so tight that they are considered presumptively non discharge goal in the bankruptcy proceeding.
Meaning the burden is on the borrower to show an undue hardship.
And typically, that requires someone to be, to have circumstances that mean that their income is low and will continue to be for the foreseeable future.
And so those circumstances are typically quite stark, and but bankruptcy can also have other benefits for student loan borrowers, even if it doesn’t discharge the debt completely. Because it will, for example, put a stop to collections such as wage garnishments, which during the pendency of the bankruptcy, which can be very helpful in some cases.
So, also, um, let’s so so, in many cases you won’t be able to get your debt discharged. Or if you can, it will be long slog. But but, you know, those discharge provisions we talked about are rather extreme circumstances, typically, or, you know, maybe somewhat unusual.
It’s important still, though, too, to recognize that they’re there.
But, if you have, you know, sort of gone through that checklist in your mind, and you’ve recognized that none of those things are going to be possible for you, then you can think about ways to either reduce your payments if you can afford to make some sort of payment. Or to postpone your payments altogether on your federal student loans.
So, there are two different names for postponing your obligation to make payments on a federal loan. one is deferment.
The other is forbearance, and the differences are a few.
So deferment can be issued by the loan servicing company based on specific circumstances, such as unemployment or full-time status, as a student or military service.
And there are a number of specific circumstances where deferment is available.
So if the firm is available, it has a slight benefit over forbearance because during the period of deferment to the extent that you have subsidized loans, the subsidy will apply during the period of deferment.
And the subsidy I refer to is going to be associated with loans that were borrowed, generally for undergraduate school these days, although you used to be able to get subsidized loans for graduate school as well. But the subsidy just means that the government takes care of or waives, the interest on those student loans during that period of deferment.
So if a deferment is available, it’s going to be a little bit cheaper, because it’s going to stop the interest from accruing on a specific portion of the balance, the subsidized portion.
High debt borrowers tend to have the majority of their debt an unsubsidized loans, However.
So, in any event, a forbearance is another path to postponing payments. And forbearance is available for people who request it in one-year renewable increments for up to three years.
It can be issued on the basis of economic hardship and again, in forbearance, interest will accrue on all the loans and at the conclusion of the forbearance, whatever interest accrued will be capitalized, it will be added to the principal balance of the loans.
So, that is less than ideal, but another thing that is really worth considering for many, many borrowers.
If the reason that it’s difficult to make the student loan payments is income, either a reduction in income, or an inability of to earn enough money at a given point, then income driven repayment plans can be very good and can reduce people’s payments all the way down to zero, potentially.
So an income driven repayment plan is one that sets payments according to the federal poverty rate that corresponds with the borrower’s family size, as well as a consideration of the borrower’s income, typically documented from their previous year’s tax return.
An income driven repayment plans can be requested, and, and also can you can ask that your payment be recalculated under an income driven plan if there’s been some change to your income.
So, like, for example, people net now are facing layoffs and things like furloughs, reductions, and hours.
So, if you’re if your hours are reduced and your paycheck goes down and you’re struggling with your student loan payment, consider either applying for or, or requesting a recalculation of your income driven repayment amount.
And that can be done at student aid dot gov as well. That’s where you’ll see that.
So, reducing or postponing payments is one thing that can be done. Now, it can be really tricky to differentiate between the different income driven repayment plans, and, when I say income driven repayment, I’m talking about a group of repayment options that have the calculation that I mentioned with regard to family size, poverty rate, and income.
And so, if you’re looking for the lowest possible payment on your loan, it’s going to depend on several different things.
In general, people who are eligible to choose a repayment option called pay as you earn, ought to give some consideration to pay as you earn, and perhaps compare that with the plan called revised pay, as you earn.
The, the plan’s called income based repayment, there are two different ones, depending on your borrowing date’s, tend to have less advantages.
The original income based repayment plan that is available for borrowers with older student loans, set’s payments at a higher percentage of income, and so with payments are typically going to be higher under that plan.
The Nuer income based plan sets payments at the lower percentage of income, but it doesn’t have the same benefits in terms of interest accrual that you see in the pay as you earn plan and the revised pay as you earn plan.
one of the handouts I put I associated here with this training is a is are some instructions on how to go to the student aid website and apply for income driven repayment plans.
The other advantage to these plans, as I mentioned, is that, not only do they have affordable payments, lower payments than you might make, under a standard repayment term, but they also are associated with those forgiveness provisions. So, you could limit the period of time over which you’d have to make payments. There is a maximum period of time over which payments are required. After which time forgiveness is issued.
So, when comparing the plans, people need to think about stuff like whether they’re married, which is I assume, you know, at the top of one’s mind, you know for sure if you’re married or not. Especially during the pandemic when your, when your whole family is underfoot. So it will also depend, though, whether if you are married, whether your spouse earns money, or has their own student loans. And some of the income driven plans have a payment cap, all of them do, except for the revised pay as you earn plant. So those are some of the factors that go into making a decision between the plans.
And I’m happy to take more specific questions about those repayment plans too, if you have them, Just feel free to let me know.
So, when you’re choosing an income driven plan, if you are, you want to think about your monthly payment amount. And, which is going to give you the lowest monthly payment, if that’s what you’re looking for. But also, it’s worth understanding that the forgiveness period associated with those plans can vary as well.
If you’re a person who’s working toward public service loan forgiveness, that can be earned over 120 monthly payments. In as little as 10 years will, no matter which of the income driven plans is selected.
So, the forgiveness period is not driven by the, by the repayment plan, in the case of public service loan forgiveness, but in the case of the forgiveness that’s not associated with employment, the, the long term income driven forgiveness that is dependent on the plan. And the, the original or older income based repayment plan requires a full 25 years before forgiveness is achieved.
Whereas pay, as you earn, sets the forgiveness time at 20 years. And, under the revised pay as you earn plan, forgiveness can be achieved in 20 years for people who have only undergraduate student loans and did not borrow for a graduate or professional program. Whereas, people that went to graduate and professional schools have to pay for 25 years under revised pay, as you earn.
So, that’s another factor that needs to be taken into account when determining which plan is, which are which plan is, is best.
And so, one of the best reasons to recognize the flexibility of federal student loans and consider the availability of deferment and forbearance and income driven plans, is that the consequences of defaulting on federal loans are severe. The collection fees can be very high as high as 18.5% of the principal balance.
The federal government can garnished wages of student loan borrowers without first getting a court order.
They can offset federal benefits, including seizing tax refunds or even social security payments within limits.
And the federal government generally doesn’t have to sue to collect on federal student loans, but it can, and does sometimes do that as well.
So the, the thing with federal student loans is that if you can’t get them discharged or repaid in full or or forgiven, then you’ll, you’ll want to recognize that default is really not a good strategy for dealing with federal student loans. It takes nine months worth of missed payments on a federal loan before a default status is entered. And once the loan goes into default, then your options are fewer for, for relief. So avoiding default is best if that’s not possible.
If you, if you’re in a situation where that’s the circumstance and you need to deal with it, it’s really worth considering, whether you can, or should cure the default status so that you can get back on track. Because it isn’t going to. There. there will be no end in sight if the loan stay in default.
You know, meaning that they’ll never stop with their, with their collection efforts, even these, what we call, forced collections.
And so, carrying the default can be useful, but you want to recognize that you only want to do that when, when you’re ready and able to continue this to, to handle that that, because you only have one shot at some of these, um, at some of these relief options. So rehabilitation is one way out of default and consolidation is another. I will again, recommend you strongly to the student, Loan, Borrower assistance dot org website, operated by the National Consumer Law Center for a clear side-by-side comparison of the of the tradeoffs between rehabilitation versus consolidation.
Now, rehabilitation requires a borrower to make nine on time monthly payments over a 10 month period.
Before the loan is rehabilitated, consolidation cures the default more quickly upon the consolidation of the loan, and the selection of an income driven plan for the consolidation loan.
Some borrowers cannot consolidate out of default if they have done so already, and the same goes for rehabilitation. But the loan servicing companies and the collection companies do tend to favor rehabilitation over consolidation.
Because there’s, it’s seen as a, as a more successful result, from the perspective of the lender and the collector.
Which, you know, should and would commend you to the consolidation, as potentially, a better option.
Now, let me just pause here.
I have a question from Dan, Hulu, Dann.
And Dan was noticing on the Student Loan Data Text File that can be downloaded there at student aid dot gov.
He sees that there’s a field that indicates how many payments have counted towards public service loan forgiveness but isn’t seeing the same sort of count for the taxable loan forgiveness the 20 or 25 year forgiveness and wondering if the lenders are keeping track of that?
So the, the answer is that, yes, the lenders and or loan servicers are supposed to be keeping track of it and the long term forgiveness is supposed to be automatic, it’s supposed to be triggered by the servicing company.
And that is a concern to all of us who have worked in this area for some time Because The loan servicing companies make tons of mistakes and we don’t like to count on them to do anything. So, so that is a concern, but you’re right down there isn’t any ticker. So what what you, what you can do in order to help is start by establishing when the clock started towards the fergie towards the long term forgiveness. And if some of you who’ve been to my trainings before, you may know, that I get all crazy about telling people not to use a clock metaphor when it comes to public service loan forgiveness. Because public service loan forgiveness is not tied to the passage of time, it’s tied to the making of qualifying payments over time.
But that’s not the case with the long term forgiveness. It really is a matter of the passage of time, but it’s the passage of time from a specific date. Right.
So the first thing you want to do is establish when did that borrower choose the income group. An income driven plan for the first time. Because that’s usually going to be the date where the clock started ticking towards the forgiveness. And then it’s a matter of, you know, counting up the months and there there can be periods where there was no progress toward forgiveness.
But typically, it’s, it will keep running unless there’s like a default status, for example. It’s the case of during certain periods of forbearance.
You can be credited for time towards forgiveness or not all so that, I know that’s not necessarily a fantastic answer, but that’s the best we have.
So the other thing down and I have a sort of a template letter, that that I can share that, that you can send to the loan servicing company that says hey, I am, you know want to know you know when I started this income driven plan and you know what is my maximum payment amount and you know when when am I going to get forgiveness and what do you record show and the like? So I find that can be helpful, sometimes, to start putting things in writing.
So, I want to, so, now, yeah, let’s talk about the CARES ACT. This is, this is the government’s attempt, or the, this is what was able to get done, I should say, in terms of specific relief for, for student loan borrowers during this time of pandemic.
And they passed the Coronavirus Aid, Relief and Economic Security Act and it was, it was actually signed into law on March 27th, but it is being applied retroactively to March 13th, which was when the Executive Branch first issued a postponement of borrowers obligations to pay.
So, the deal with the cares Act with regard to student loans, is that, payments on federally held, student loans are suspended from March 13th through the end of September, That’s the end of the federal fiscal year. And this is under this legislation, It could be extended, but that would require additional legislation or action on the part of the executive branch.
And this is for Federally Held student loans, and I’ll explain what that means here. And also during this period, there is no interest accruing on federally held student loans. The interest rates have been set to zero.
So, which loans are federally held, student loans? Well, all the direct loans that have been issued by the federal government for the last 10 years since the summer of 2010. Our federally held loans, by definition, they were they have always been, and they always will be federally held student loans. Also covered are some older federal loans issued under the Federal Family Education Loan Program.
The program was discontinued in 2010, but loads of borrowers still have those loans. And if the federal government owns those loans, they’re covered, but the federal government only owns some of the fell loans. The fell loans were issued by banks and private lenders. And they will be held by those commercial entities unless the US. Department of Education has acquired them.
Department of Education would have acquired them is bought when those loans entered default because they were guaranteed by the federal government. So that the government would pay the fell lender and take the loan, the defaulted loan. So, but, also, during the last recession, in, oh, 708, the, there was a concern that the cell lenders were, weren’t going to have the liquidity they needed in order to.
Continue issuing student loans. And so, the feds bought up some of the fell loans to inject some liquidity. And so, those fell loans are federally held, but there are a number of federally held or not federally held. there are a number of fell loans that are commercially hill.
And one estimate is that around nine million student loan borrowers have at least one loan that’s not covered by the Cares Act. So, the commercially held fell loans are not covered, neither are the Perkins loans being held by the campuses and the Health Education loans are outside of the Department of Education. As well.
And then, of course, also, private student loans are just simply not covered because the feds have taken the position that they can’t tell the private lenders what to do, although presumably, they actually could, if they wanted to, in my view.
So, Cynthia has a question: She wants to know how can I tell if a loan is held federally or commercially?
What a good question you have voom, next slide, how to determine whether you have federally held student loans. So what you’re going to do is go to the student aid dot gov website, login with your stuff.
Go to hover under your name, and you’ll see the account Dashboard.
And when you go to that, you can click through to the details and click through the loan types, And if you see that your loan types are all direct, then that’s all you have to do. If every loan has the word direct in the name of the loan, you don’t have to take any additional action. But if it doesn’t, then, what you’re going to want to do is click where it says Download your download.
My aid data, it says, and then you have to search through that. It’s difficult to read text file, but if you use that like control F thing where you can find something in the file, you look for the loan contact type and name.
And usually it’s going to say loan. Sometimes there’s a few different kinds of loan contacts. There could be a guarantor, a servicer, and a lender. And you want to look for the Loan Contact Lender.
And the name of the lender has to say, US Department of Education, in order for it to be federally held.
So if it’s not federally held, you’re going to see the name of some bank or private entity, like Sallie Mae or or the like. But you’ll see some you may see something like it says there like US Department of Education and some dates like LP. CP’s, like that liquidity protection, something something I can’t remember what it was called. But that’s that’s how you can tell if it’s federally held.
The other thing is, you may, you may see if you, if the, if the Servicers did everything correctly, the Federally Held Student Loans will show a zero interest rate, and they’ll show in a forbearance status, because of the cares Act.
But direct loans are always federally held. Loans those sell loans look for the current lender and see if it’s the Department of Education.
And a little bit more here about what this cares Act stuff means for borrowers in certain circumstances.
So if you are someone who is already enrolled in an income driven plan, when the pandemic came and the cares Act took effect March 13th, then the time period during which you’re not making payments can count towards that long term taxable forgiveness.
And, and if you enroll in an income driven plan during this period of suspension, you can also start earning time toward forgiveness.
If you are someone who was working toward public service loan forgiveness, you would have also had to be enrolled in an income driven plan and you you need not make payments because the period of suspension is going to be considered qualifying toward forgiveness. And that’s required by the Cares Act. I will say, true to form, that loan has already failed to apply that law properly.
I was just working with a borrower the other day who, whose April payment was to be her 120th payment.
And so, she made a payment, even, though she wasn’t required to, because she was afraid, if she didn’t, she wouldn’t get the forgiveness. And then, she, you know, filed the employment certification. She had found employment certification form and it doesn’t count the months during the payment suspension.
And, you know, upon much hand-wringing and calling them fed loan, fed loan acknowledged that their automated systems were not able to be updated in order to reflect the cares Act, or maybe it’s that it takes more time. I’m not sure if that will occur at all. But when a borrower files an employment Certification form that covers this period of time, at least right now, they’re getting a rejection back that says, Nope, this month, didn’t count towards forgiveness.
And it should, but their systems is seeing the forbearance and triggering a rejection.
But settle on assured this borrower that they would be on a weekly basis, reviewing the rejections manually and then correcting them manually. So, I’ve, yet to see that. Actually. follow through, I’m not holding my breath, but I will, but we will, we will get it done. And Fed loan understands what the rules are, or they’re just struggling with their systems.
And, I do want to say, um, no, I know they’re doing that. The individuals who work there are doing the best they can under the circumstances.
So also, under the cares Act, if you’re working with someone, or if you are, if you are yourself enrolled in a rehabilitation program, for a default that situation, the period of suspension, where payments are, not required. It’s also putting a stop to Collections actions.
And that period is going to count as on time payments towards the rehabilitation. That would be another one I think we need to keep a close eye on in terms of the application of the, these rules by the Servicers.
So, if you’re someone who who is on track for public service loan forgiveness, if you think that you’re going to get there, then there is no reason to make payments during this cares act suspension.
You don’t benefit by making payments.
And so it would be better to prioritize payments on private student loans, or credit cards, or, you know, other things that you are still required to pay.
Um, and, as I said, also, filing employment certification forms is going to be important and verifying that Fed loan, in fact, counted the payments that those folks to count is, again, going to be critical.
So, but for people who are not likely to benefit from public service loan forgiveness, it may be an opportunity, too to take advantage of the interest waver in order to make some more sort of strategic with debt reduction. If it’s affordable.
So but in this case, you’ll have to recognize the rules of the way payments are distributed across loans and the way they are, the way that they are disbursed to various kinds of parts of the balance.
So, if, if you send a payment when no payment is due, it will go first to any unpaid accrued interest. And many borrowers in income driven plans are paying less each month than the interest that accrues. And so, if that’s the case, there may be a balance of unpaid accrued interest.
And any payments made, will only reduce interest in that case, and will not serve to reduce the principal balance.
So, but there are some borrowers who are not likely to benefit from forgiveness and if their employment and income is continuing, then they may be able to reduce the principal balance in a way that would be more difficult to do.
Interest was accruing but important to first look to see whether there’s unpaid accrued interest.
And as I said, important to keep an eye on the loan servicers to really see whether these rules are being applied the way they ought to be.
It is not easy to change large systems that are automated, and that use, you know, legacy computers, especially when people are trying to work from home and the like. And so this is a kind of large system that has that isn’t really able to pivot quickly.
And so it’s really important as a student loan borrower to advocate for yourself, keep an eye on the records, and understand what benefits are available to you so that you can advocate for application of those benefits to your own circumstances.
So I would be delighted to spend the rest of our time together talking about whatever questions you have if you would like to pose some to me. I’m also happy to show you a couple of things.
That, couple of my favorite online tools, if we, um, While I wait for your questions to come in, if you have any. So, whatever you got socket to me because I’d be happy to take it. And I’ll show you here, the student aid dot gov site that we were talking about.
Um, Rafael is asking about whether payments made during the forgiveness. A period are applied is paid ahead. Well, that’s an interesting question, Raphael.
So I don’t think that that’s an issue, mainly because they have addressed the the suspension of payments by putting the loans into forbearance status, although it’s really not a forbearance. It’s a cares act, payment suspension, but they have them into forbearance status.
So a payment that’s made there is no paid ahead status with regard to forbearance like that. That’s a status that is associated with an in repayment status. So, I think that’s, you know, of interest.
And, Dan, it is, It is great to get on the phone with clients to talk to servicers. It can be super helpful. You do need a third party authorization signed by the client. Each loan servicer has their own form that they want you to have signed, but, they’ll usually accept it by fax because that’s a technology, as sometimes by e-mail, as well.
Um, So, yeah. So, other tools, Susan that I think are great. So, this, this one, and let me be clear in terms of tools I do not like, nor do I recommend at all right now, the loan simulator, that is being, that is available through this federal website. It was working OK before the cares Act, But, now, that, no interest is set to zero, the projections are completely wrong, and it’s terrible, and it’s going to mislead a lot of people.
The most sophisticated tool that I enjoy using that’s free is offered by the … Foundation, which is a fantastic non-profit organization that assists veterinarians, Veterinarians, borrow a lot of money for their educations. And I had some involvement in the building of this tool that they make available for everyone, So, and they have even built-in the covert 19 interest and payment suspension to their tool because they’re just that cool. It can be rather sophisticated.
It requires quite a lot of are doesn’t require, but it allows a lot of flexibility in terms of your income inputs and such. And so, I I don’t always recommend it to beginning borrowers who haven’t had some guidance or training and how to and how to use it. I think it can be very useful if you’re willing to take the time, you know, to use it correctly, but I do think it’s, it can be a little much for people who are just, who are just getting started. I love it for advisors, though and for myself.
I also really recommend student loan, borrower assistance dot org, the National Consumer Law Center site, that has tons of really good resources for everyone.
So, you know, in, in, in summary, today, I just want to let folks know that student loans are, you know, one part of our financial circumstances. And I think that the, the, the difficulties that that we’re facing with this economic downturn have reminded everyone that it’s it: it helps to protect yourself and your family to make good, solid plans. And Federal student loans are one of the most flexible kinds of debt.
You can have the downside to that being that the federal government has very significant collection authority, so it is really smart to keep on top of your options, and not ignore it.
So, to be in touch with your loan servicing companies to use resources like those available from the National Consumer Law Center to make to decide whether it makes sense to postpone your obligation to pay through deferment or forbearance, whether you can reduce your payments to an affordable amount under an income driven plan.
Or perhaps maybe you can even earn some cancelation or discharge of some debt.
With regard to private student loans, I have found the private lenders are being more receptive to requests for flexibility during this time than they have been historically. And so, it absolutely is smart to ask if you need, reduction in payments, or a postponement of payments, but also to recognize that, you know, a private student loan is a low priority debt.
It’s not any different than credit card debt and if you can’t afford to pay for everything, don’t pay it. No, I mean that’s not the case with the federal student loans, would be my thought.
Um, I’ll take one last question before I let you all go. Hi, Sheila. Sheila says, Borrower has lower income than spouse, and they live in a community property state Wisconsin, which Public Service Loan Forgiveness program is better pay or repay.
So, um, so the community property status is a complexity. So typically, when with the income driven repayment plans, with pay as you earn, a borrower, can file a separate tax return from his or her spouse, and have their payment based on their separate income, rather than their joint income.
Under the revised pay as you earn plan, it makes no difference. If you file jointly or separately, or if you live in a community property state or not, the payments are always going to be based on both spouses combined income.
So, repay is a, is a good plan. You know, it’s different than pay as you earn in that.
If public service loan forgiveness didn’t work out, it would take 25 years under repay if they had graduate loans, whereas underpay it would only be 20 years.
Re pay also has no cap on how high the payments can go, so if a person earns enough, their payments could end up being higher under repay than they would be, under a standard 10 year Plan.
And, again, their payment can’t be separated, or their income can’t be separated from their spouse, but there’s a nice interest accrual benefit under repay.
On the other hand, under pay as you earn, to get more specifically at your question, Sheila, with regard to the community property state.
If it in a community property state, when you file your federal tax return, your it even if you decided to file a separate federal tax return, which you could do as a resident of a community property states, that federal tax return is going to show half of your community income half of your joint income.
So, which is not the same as your separate income, like an Sheilas example, the borrower’s income is lower than their spouse. So, filing a separate return, overestimates, the borrower’s income, because it shows half of the joint, rather than the borrower’s separate income.
So, in that case, Sheela, that they would still, if they wanted to pay based on separate income, they could under pay as you earn.
But they would have to file a separate tax return and then provide alternative documentation of income to show the loan servicer what their actual separate income was.
Then the regulations indicate that the loan servicing company should use a separate income figure.
So, although they live in a community property state, they should still have the opportunity to pay based on separate income by filing a separate federal tax return, plus additional alternative documentation of income, in which case, the pay as you earn plan would provide for a lower payment, because it would be based on separate income, rather than joint income, which is what you’re gonna always get under repaid.
Cool. Well, thanks all for joining. Appreciate it very much. Join me, I think it’s tomorrow, I’m doing a public service loan forgiveness session for borrowers, and then a Q and A exclusively, Q and A, for whatever cues or anybody has an age that I may come up with. And I appreciate your interest in helping borrowers or if you are a borrower I thank you for coming. Take care. Bye now.