“Picking Your Repayment Plan”

Strategies for Successfully

Managing Loan Repayment

Today’s speaker …

Ken BrownStudent Financial ServicesNorthwestern University555 Clark Street, 1st FloorEvanston, IL 60208(847) 491- 8950

The State of American Finances?

• Do you ever feel like this?

• http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff

Agenda

• Repayment Realities

• Federal Loan Repayment Plans

• Loan Forgiveness Options

• Choosing Your Federal Loan Repayment Plan

• Developing a Spending Plan and Other Helpful Strategies

Feel free to ask questions at any time!

Repayment Realities

The reality is this…

• Financial planning starts now!

• You may be able to reduce the total amount you pay back on your student loans

• Strategy is key to your success

• Starting a Spending Plan (Budget) is critical to your financial success

To successfully manage loan repayment, you should ...

• Know how much you have to repay and to whom. (Check out Debt Summary page in CAESAR.)

• Understand the terms and conditions of your loans

• Define your short- and long-term financial goals

• Develop an affordable spending plan 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

CAESAR > Student Center > View Debt Summary Information

Finding Your Federal Loans

www.nslds.ed.gov

To access you provide:

- SS#

- Date of Birth

- First 2 letters (last name)

- PIN # (www.pin.ed.gov)

Loan TermsLoan TypeLoan Type Interest RateInterest Rate Grace PeriodGrace Period Repayment PlansRepayment Plans

(No penalty forprepayment.)

Deferment, Deferment, Forbearance, Forbearance, Forgiveness, Forgiveness, CancelationCancelation

Federal Subsidized Direct & FFEL Stafford Loans

6.8% fixed (DOE pays interest during school, grace, & deferment)

6 months 5 options - can change plans annually

ALL

Federal Unsubsidized Direct & FFEL Stafford Loan

6.8% fixed 6 months 5 options- can change plans annually

ALL

Federal Direct Grad PLUS Loan

7.9% fixed 6 months 5 options- can change plans annually

ALL

Federal (FFEL) Grad PLUS Loan

8.5% fixed 6 months 5 options- can change plans annually

ALL

Federal Perkins Loan

5.0% fixed (DOE pays interest during school, grace, & deferment)

9 months (6 month post-deferment)

10 year standard ALL

Private NU Loan Variable (changes each Sept 1st)

3 months 10 year standard Forbearance & limited cancelation only

Federal Direct & FFEL Consolidation Loan

Fixed (weighted average not to exceed 8.25%)

None 5 options- can change plans annually

ALL

Federal LoanRepayment Plans

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- 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

Comparing Federal Loan Repayment Plans $100,000 Stafford Loan Balance

Options Standard Graduated Extended IBR

MonthlyPayment

$1,151$695 (2 yrs)

$694

$305 (1st yr).

$457 (9th yr).

$885 (23rd yr)$2,078 (9 yrs)

Maximum Payment Period

10 years 10 years 25 years 22.9 years

Total Paid $138,096 $148,564 $208,222 $215,592Assumptions: - 6.80% fixed interest rate with $100,000 of loan debt

- No payment incentives- For IBR Payment:

- Household AGI = $40,000 in year 1, then increases by 4% annually - 2010 Poverty Guideline for household size of 1 = $10,890

Repayment Calculators

• You can find EXCELLENT loan repayment calculators at http://edfund.org/loancalculator/

• You can use the above calculator to compare all of the different repayment plans to see which is best for your individual situation.

Loan Forgiveness Options

Public Service Loan Forgiveness (Direct Loans only)

• Must work full-time (30 hours per week) for 10 years in Public Service:

• Non-profit, tax exempt, 501(c)(3) organizations

• Federal, state or local government

• Military service

• Public schools and colleges

• Does not have to be continuous work

• Keep documentation from employers

• After making 120 qualifying on-time loan payments to Direct Loans after October 1, 2007, your entire loan balance (principal & interest) are forgiven.

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

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

For more information on IBR and Public Service Loan Forgiveness

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

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

Other Loan Forgiveness Programs

• Loan Forgiveness Options Programs

http://www.finaid.org/loans/forgiveness.phtml

Choosing YourFederal Student Loan

Repayment Plan

Choosing A Repayment PlanSteps to consider …

1. Define financial goals

2. Develop an affordable spending plan. “You have to be knowin’ where your money is goin’”

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 spending plan How much can you afford to 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?

Eliminating a Spending plan Deficit What 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 spending plan 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.

Strategies for ReducingYour Spending

• Live with roommate(s)

• Take your own lunch; bring your own coffee, snacks, etc.

• Eat at cheap places when dining out

• Have only one phone — either cell or home phone

• Avoid excess phone features and services that add to your phone’s cost

• Have “free fun”

• Rent/share DVDs or go to matinees

• Dress for less — shop at discount stores

• Clip & use coupons, but only on things you need

• Use public transit, carpool

• Shop with a list and buy only what’s on that list

• Beware of “impulse” shopping and buying for “convenience” Use the 30 day rule.

• Other ideas ? ? ?

Spending PlanUse Tools

• Use tools such as worksheets, spreadsheets and online calculators

• www.mint.com

• You can find a variety of online calculators at http://www.finaid.org/calculators/

• In-School spending plan

How Much to Borrower

• Loan Repayment

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

Repayment Strategy

Prioritize repayment efforts - prepay the most expensive

debt FIRST!

Typical Debt PortfolioManaging Cash Flow to Repay Debt

TotalCash Flow

Federal StaffordLoan debt

@ 6.8%

Federal PLUSLoan debt

@ 7.9%

Private loan debt

@ 11% Credit carddebt

@ 15.9%

Otherdebt@ 9%

Always Pay Yourself First!

• Try to save a little money every month.

• Example: Fred and Sarah each save $2,000 a year ($167/mo)in an Individual Retirement Account (IRA)

• Fred starting saving at age 22 and stopped at age 31 (9 years)

• Sarah starting saving at age 31 and continued to do so until she retired (34 years).

• Assuming both IRA’s earn 9%, who will have more money for retirement at age 65?

Always Pay Yourself First (cont)

• Fred will. His account will grow to $579,504.

• Sarah’s will grow only to $470,247

• HOW CAN THIS BE? Fred invested only $18,000 and Sarah will invest $68,000.

• Answer: Compound interest! While Fred invested less money, he started 9 years sooner than Sarah did. Sarah’s money just didn’t have enough time to grow.

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

Check your Credit Report

www.annualcreditreport.com

Helpful Web Sites

• “Feed the Pig” (Saving): http://www.feedthepig.org/

• “You Can Deal With It” (Budgeting): http://www.youcandealwithit.com/index.html

• Loan Forgiveness: http://mappingyourfuture.org/paying/forgiveness.htm

• Loan Calculators: http://www.edfund.org/wps/portal/LoanCalculator

We are here to help!

Student Financial Services

555 Clark Street, 1st Floor

Evanston, IL 60208

(847) 491- 8950

gradfinaid@northwestern.edu