“Picking Your Plan!”

Strategies forSuccessfully ManagingLoan Repayment

Illinois Institute of TechnologySchool of LawApril 2009

© Copyright, 2009 by Access Group, Inc. All rights reserved.

Looking AheadWhat you’ll need to do once you graduate …

• Manage your student loans

• Postpone repayment OR begin making payments

• Notify loan holder(s)/servicer(s) of address change

• Pay your bills

• Develop an affordable budget plan/spending plan

• Apply for a bar exam loan, if needed

• Check credit reports for errors

Deferment and ForbearanceOptions to Postpone Payments

• You may be able to get temporary relief if you’re unable to make your required minimum monthly payment(s)

• Options include:

• Deferment• Temporary postponement of your monthly

student loan payments

• Forbearance• Temporary postponement or reduction of your

monthly student loan payments

• Contact your loan holder/servicer for more information

Credit has becomeharder to get …

• Fewer lenders now offer the loan

• Better credit (higher credit score) is required to get ANY loan

• May need a credit-worthy co-signer to get a bar exam loan

• Loan will cost more

It’s harder to get a bar exam loan because:

Obtaining Your Credit Report

• equifax.com

• experian.com

• transunion.com

Credit reports also are available online (usually for a fee) from the three national credit bureaus at:

Go to AnnualCreditReport.com for a free copy of your report every 12 months from each of the three national credit bureaus

To successfully manage loan repayment, you should ...

• Know how much you have to repay and to whom

• Understand the terms and conditions of your loans

• Define your short- and long-term financial goals

• Develop an affordable budget plan and estimate how much you can afford to pay each month on your debt

• Select the repayment plan that best achieves your goals given what you can afford to pay each month

• Take advantage of loan forgiveness programs when you qualify for them

• Keep good financial records

Repayment RealitiesHow much will you

have to repay?

Who must you repay?

How much will youhave to repay?

I.I.T. School of LawClass of 2008

Average student loan borrowing $77,300

Estimated capitalized interest $8,039

Estimated total debt at repayment $85,339

Estimated monthly loan paymentStandard 10-year fixed Repayment Plan $999Estimated monthly loan paymentExtended 25-year fixed Repayment Plan $613Assumptions: Stafford repayment @ 6.8% for 10 years

Grad PLUS repayment @ 8.5% for 10 years

Sample Loan Repayment

Debt6.8% Interest Rate 8.5% Interest Rate

Monthly Payment

Total PaidMonthly Payment

Total Paid

$10,000 $115 $13,810 $124 $14,878

$25,000 $288 $34,524 $310 $37,196

$30,000 $345 $41,429 $372 $44,635

$40,000 $460 $55,239 $496 $59,513

$50,000 $575 $69,048 $620 $74,391

$60,000 $690 $82,858 $744 $89,270

$65,000 $748 $89,763 $806 $96,709

$70,000 $806 $96,667 $868 $104,148

Assumptions: - Standard-fixed repayment plan- 10-year repayment period

- No payment incentives

Who must you repay?Create a Detailed Listing of All Loans

You must repay your current loan holder/servicer

Loan Type/Account # Loan Holder Loan Servicer

Stafford

Name: Name:

Address: Address:

Phone Number: Phone Number:

Website: Website:

PLUS

Name: Name:

Address: Address:

Phone Number: Phone Number:

Website: Website:

Information about the current loan holder/servicer of your Title IV federal student loans is stored in the NSLDS at: www.nslds.ed.gov

Federal Student Loan Database National Student Loan Data System (NSLDS)

• Toll-free telephone• 800 - 4FED - AID

• Web site• www.nslds.ed.gov

Information about your Federal Stafford, Federal PLUS, Federal Consolidation and Federal Perkins Loans is stored in the NSLDS

Federal Student LoanRepayment Options

Repayment PlansFederal Family Education Loan Program (FFELP)

• Standard (Fixed) Repayment

• Graduated Repayment

• Extended Repayment

• Income-Sensitive Repayment

• Income-Based Repayment (available 7/1/2009)

Choice of a repayment plan may depend on your eligibility for that plan. Once you choose a plan, you can change to a different plan at least once a year provided you qualify for that plan.

Comparison of Repayment Plans

OptionsPayment Structure

Maximum Payment Period

Additional Features

Standard Fixed 10 years - Highest initial payment- Lowest total interest- No negative amortization

Graduated Tiered 10 years - Interest only payments initially- Payments increase incrementally- No negative amortization- Monthly payments can’t be more than three times greater than any other payment (“3 times rule”)

Extended Fixed or tiered 25 years - Lowest initial payment without considering income- No negative amortization- To qualify in FFELP: - FFELP debt must be > $30,000 - New FFELP borrower ≥ 10/7/98

Income Sensitive

Adjusted annually based on:- Total gross income

15 years - Subject to “3 times rule”- No negative amortization

Income Based (IBR)

Adjusted annually based on:- Household AGI- Household size- Poverty guideline- State residence

25 years - Payment is 15% of “disposable” income if experiencing “partial financial hardship” (PFH)- Eligibility/payment amount re-evaluated annually- Negative amortization allowed

Income-Based Repayment (IBR)• Available July 1, 2009

• Can be used to repay:

• Federal Stafford Loans

• Federal Grad PLUS Loans (not available for repayment of Parent PLUS Loans)

• Federal Consolidation Loans (not available for repayment of Consolidation Loans that included payoff of a Parent PLUS)

• Must have “Partial Financial Hardship” (PFH) at time you select IBR Plan

• Payment while in PFH is based on:• Household AGI

• Household size

• HHS Poverty Guideline for state of residence

IBR PlanPartial financial hardship exists when …

15% of your household’s “disposal”

Adjusted Gross Income (AGI)

Your annual loan payment using the

“Standard 10-year Fixed

Repayment Plan”>

Portion of AGI Available for Loan Payment in IBR Plan

Portion of AGI Needed to Cover Basic Needs(150% of poverty guideline)

TotalAGI

Portion of AGI Available for IBR Loan Payment(15% of remaining AGI)

Portion of AGI Available for Other Expenses

Calculators are available at: Finaid.Org/calculators and IBRinfo.org

“Disposable”AGI

IBR PlanMore Details

• Once in IBR plan, monthly payment is lesser of:

• Amount calculated based on Standard 10-year fixed plan when you began loan repayment

• Amount calculated using the IBR formula

• Monthly payment can be less than accrued interest (it allows for negative amortization)

• Unpaid interest that accrues on Subsidized Stafford debt will be subsidized for up to first 3 years in repayment in IBR plan

• Repayment period for IBR plan can extend beyond 10 years regardless of the amount of your eligible debt

• Any outstanding eligible loan balance is cancelled after 25 years of being “economically challenged”

IBR PlanApprox. Maximum AGI for “Partial Financial Hardship” at Specified Debt (2009 Poverty Guidelines)

Assumptions: - Interest rate = 6.8% - Household size of 1 residing in 48 contiguous states

Debt AGI

$5,000 $20,848$10,000 $25,451$15,000 $30,055$20,000 $34,658$25,000 $39,261 $30,000 $43,864 $35,000 $48,467 $40,000 $53,071 $45,000 $57,674 $50,000 $62,277 $55,000 $66,880 $60,000 $71,484

Debt AGI

$65,000 $76,087 $70,000 $80,690 $75,000 $85,293$80,000 $89,896$85,000 $94,500$90,000 $99,103$95,000 $103,706

$100,000 $108,309$105,000 $112,912$110,000 $117,516$115,000 $122,119$120,000 $126,722$125,000 $131,325

IBR PlanPros and Cons

Potential Pros• Lowest initial monthly loan

payment

• Possible to exclude spouse’s income

• ED will pay unpaid interest on subsidized Stafford for up to 3 yrs

• Loan cancellation after 25 years of eligible payments

• Entitlement

Potential Cons • Increased interest will

accrue and may have negative amortization

• If married might need to file separate tax returns

• Unpaid interest will be capitalized at some point

• Annual income and family size verification required

• Monthly payments could change each year

Comparing Payment Plans $100,000 Stafford Loan Balance

Options Standard Graduated Extended IBR

MonthlyPayment

$1,151$567 (2 yrs)

$694

$555 (1st yr).

$703 (9th yr).

$1,063 (23rd yr)$1,353 (8 yrs)

Maximum Payment Period

10 years 10 years 25 years 22.9 years

Total Paid $138,096 $143,530 $208,222 $215,592Assumptions: - 6.80% fixed interest rate

- No payment incentives- For IBR Payment:

- Household AGI = $60,000 in year 1, then increases by 3% annually - 2008 Poverty Guideline for household size of 1 = $10,400

Loan Repayment Calculators

• Access Group offers online interactive calculators at: AccessGroup.Org/calculators

• “Loan Repayment” – both simple and advanced

• “Compare Monthly Payments” – provides a comparison of monthly payments using Standard Repayment and Extended repayment

• IBR calculators available at:

• FinAid.Org/calculators

• IBRinfo.org

Loan Forgiveness forPublic Service Employees

Public Service Loan ForgivenessNew Direct Loan Forgiveness Program

• Your Federal Direct Loans are not in default

• You’ve worked full-time for a total of 120 months in a qualifying public service position on or after October 1, 2007

• You’ve made 120 qualifying loan payments on Federal Direct Loans during period of qualifying public service employment

You’ll qualify for loan forgiveness if …

Public Service Loan ForgivenessGeneral Provisions

• Effective for qualifying monthly Direct Loan payments made on or after October 1, 2007

• Loans eligible for forgiveness are limited to:

• Federal Direct Stafford Loans

• Federal Direct PLUS Loans

• Federal Direct Consolidation Loans

• Any amount cancelled in this program will NOT be taxable in the calendar year it is cancelled

Public Service Loan ForgivenessQualifying Payment Requirements

• You must be working full-time in an eligible public service position, AND

• Make qualifying payments using:

• Income Contingent Repayment, or

• Income Based Repayment, or

• Standard 10-year Fixed Repayment plan, or

• Other plan, but monthly payment must be at least equal to amount required using Standard 10-year Fixed Repayment plan

Public Service Loan ForgivenessAdditional Eligibility Provisions

• 120 months do NOT have to be consecutive

• You must be working full-time in qualifying public service position at time of forgiveness

• Loan payments made on any loan prior to October 1, 2007 do NOT count toward the 120-month requirement

• Loan payments on non-eligible loans (e.g., FFELP loans, Federal Perkins Loans) do NOT count toward 120-month requirement

Public Service Loan ForgivenessDefinition of “Public Service”

In general, it’s full-time employment in:

• A 501(c)(3) organization that is exempt from taxation under section 501(a) of the Internal Revenue Code of 1986, or

• Government (federal, state, local, tribal) agency

Public Service Loan ForgivenessSample Benefit Scenario (AGI = $40,000)

Eligible federal student loan debt $100,000Estimated monthly payment-Standard Plan $1,151Principal balance after 10 years $0Total amount paid after 10 years $138,097

Comparison with IBR Plan (2008 Poverty Guideline)

Assumed starting AGI in year 1 $40,000Assumed Annual Growth Rate in AGI 3%Assumed Annual Increase in Poverty Guideline 3%Assumed Annual CPI 3%

IBR monthly payment in 1st month $305IBR monthly payment in 120th month (max) $398Assumed AGI in year 10 $52,191Total interest paid in IBR over 10 years $41,958Total principal paid using IBR over 10 years $0Total accrued interest forgiven after 10 years $22,953Total principal forgiven after 10 years $100,000Total amount forgiven after 10 years $122,953

Public Service Loan Forgiveness Pros and Cons

Potential Pros• May make it possible

financially for you to pursue public service career

• Portion of your debt may be forgiven

• Entitlement

Potential Cons • “All or nothing” benefit;

must put in full 10 years

• Only Direct Loans can be forgiven—you’ll need to consolidate FFEL loans into Direct Loan Program to be eligible

• Will you have debt left to forgive?

• No confirmation that employment qualifies

For more information on IBR and Public Service Loan Forgiveness

• “Project on Student Debt” has created a special Website specifically about IBR at: IBRinfo.org

• Equal Justice Works has information about both programs at: EqualJusticeWorks.org

• Calculators are available at: FinAid.Org/calculators, IBRinfo.org

• A scholarly paper has been written by Philip G. Schrag that focuses on the evolution of the Public Service Loan Forgiveness Program: "Federal Student Loan Repayment Assistance for Public Interest Lawyers and other Employees of Governments and Nonprofit Organizations,” Hofstra Law Review, Vol. 36, Fall 2007

Choosing YourFederal Student Loan

Repayment Plan

Choosing A Repayment PlanSteps to consider …

1. Define financial goals

2. Develop an affordable budget plan

3. View debt as a portfolio

4. Select the loan repayment plan that best meets individual needs

Setting GoalsSample Questions

• How quickly do I want to be debt-free?

• What do I want to buy as soon as I graduate?

• What kind of lifestyle do I want?

• What are my hopes for my family?

• How long do I want to work?

• When do I want to retire?

• What kind of lifestyle do I want in retirement?

• How much money will I need to invest to retire?

Developing a Budget PlanHow much can you affordto pay each month?

• Quantify monthly earnings and other available financial resources

• Estimate monthly expenses

• Include monthly student loan payment

• Include investment/savings contributions

• Do the math- is there a surplus or a deficit

• If there is a surplus, more can be allocated to debt repayment, to investment/savings, and/or to lifestyle

• If a deficit occurs, then what?

Budget PlanningUse Tools

• Use tools such as worksheets, spreadsheets and/or online calculators

• For example, Access Group offers the following online interactive calculators at AccessGroup.Org:• “Out-of-School Budget”• “Loan Repayment”

Eliminating a Budget DeficitWhat can you do?

• Reduce spending on your lifestyle

• Is this realistic?

• Reduce your investment/savings contributions

• May make it more difficult to achieve short-and long-term financial goals

• Reduce amount you pay each month on student loans

If you have a budget deficit, you need to spend less (or earn more) each month; there is no more financial aid! Failure to eliminate the deficit will increase your total debt.

Managing DebtBalancing Trade-offs

• Consider viewing your debt as a portfolio that can be leveraged to achieve your financial goals

• You may choose to pay off debt …

• as fast as possible, OR

• more slowly based solely on what is affordable given all other expenses, OR

• more slowly to maximize ability to save and/or invest for the future

• When prepaying debt, ALWAYS prepay your highest cost debt(s) first

Typical Debt PortfolioManaging Cash Flow to Repay Debt

TotalCash Flow

Federal StaffordLoan debt

@ 6.8%

Federal PLUSLoan debt

@ 8.5%

Private loan debt

@ 11% Credit carddebt

@ 15.9%

Otherdebt@ 9%

Loan Repayment - $100,000An Investment Trade-off

Years 0-10Standard

RepaymentExtended

Repayment

Total years in repayment 10 25

Total amount owed $100,000 $100,000

Monthly loan payment(annual interest rate = 6.8%) $1,151 $694

Monthly investment $0 $457

Total assets @ end of year 10(annual rate of return = 8%) $0 $71,945

Loan Repayment - $100,000 An Investment Trade-off

Years 11-25Standard

RepaymentExtended

Repayment

Monthly loan payment(annual interest rate = 6.8%) $0 $694

Monthly investment $1,151 $457Total assets @ end of year 25(annual rate of return = 8%) $398,290 $434,619

Total paid($1,151 x 300 months) $345,300 $345,300

Net gain $52,990 $89,319Difference(benefit of Extended Repayment) $0 $36,329

Investment gains require financial DISCIPLINE every month!

A Few Final Comments ...

When Choosing a Repayment PlanYou should consider the following ...

• If you want to pay the least amount of total interest over the life of repayment

• Standard Repayment Plan

• If you want the lowest possible monthly federal student loan payment

• Income-Based Repayment Plan

• Extended Repayment Plan

We’re here to help you!

Access Group800-282-1550

AccessGroup.Org