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When It Comes to Student Loans There’s A New Player in Town

Graduation cap with moneyThe Student Loan Marketing Association (Sallie Mae) has long been the largest purveyor of student loans in the US. It began life as a government entity but is now a publicly traded corporation. It originates, services and collects on student loans and currently manages in excess of $180.4 billion in debt for more than 10 million people. While the company initially provided federally guaranteed student loans under the Federal Family Education Loan Program (FFELP), it now provides only private student loans. It calls this side of its business Navient.

The new player in town

There is now a new company that may be taking away some of Sallie Mae’s customers. The San Francisco-based company SoFi (Social Financing Inc.) is a peer-to peer-lender that is growing fast. It was founded by Stanford University graduate Mike Cagney and has now issued more than $500 million in loans to more than 5000 members.

What makes SoFi different from Sallie Mae is that it enables its highly qualified members to refinance their federal and private student loans. This, according to Cagney, has enabled SoFi members to purchase a home or even start a business and has helped its members save an average of $9400 over the life of their loans. Again, unlike Sally Mae, SoFi is community-based and offers its borrowers such unique benefits as entrepreneurship support, career coaching and protection against unemployment.

As Cagney explained, “We lend to individuals who we believe have the potential to be great customers for the big lenders — but we get them two years early. They are in their early 30s with a high FICO score — high incomes and cash flow — but they do not yet satisfy the criteria to get loans from the big banks.”

SoFi claims that its customers repay their loans as they have more cash flow, higher FICO scores and higher incomes.

Not for everyone

If you owe a lot on your student loans and would like to have them refinanced, SoFi could be a good choice. However, it’s not for everyone. First, you’re basically borrowing money from alumni of your school, which means your school must be one of the 550 that participate in SoFi. You must reside in one of the company’s eligible states

Note: variable rate loans are not available in Minnesota and Tennessee and in Iowa the minimum loan amount is $50,000.

Plus, there are other factors that SoFi takes into consideration including your income, credit score and that you are either employed or have an employment offer. In addition, you must not have declared bankruptcy in the past three years and must not have been convicted of a felony.

The dangers of loan refinancing

Another factor that makes SoFi unique is that it will refinance both private and federally backed loans by consolidating them. For some people, this is “breaking the golden rule of student loans.” These experts point out that once you consolidate federally backed loans with private loans you lose the benefits that come with the federal loans. You would have a loan with a fixed interest and a fixed term but would lose the possibility of having your loan canceled, deferred or extended. In other words, it would pay to be very familiar with the terms of your SoFi loan because once you sign on the dotted line that’s pretty much it.

The biggest benefit of  federally backed loans

The biggest benefit you would give up if you consolidated your federally backed loans with a private loan is the various repayment options available with federally backed loans. In fact, there are a total of seven repayment programs, including four income-driven plans. The other three are the 10-Year Standard Repayment program, Extended Repayment and Graduated Repayment. Students with federal loans are automatically put into the 10-Year Standard Repayment program unless they choose another option. This program has a fixed monthly payment, a fixed interest rate and a fixed term of 10 years. In comparison, the Extended Repayment program lengthens the term of a student loan to 25 years, which should dramatically reduce its monthly payments. In the case of Graduated Repayment, the loan payments would start low but then gradually increase every two years. This can be an excellent option for people that are just starting out and that have careers with incomes that will continue to increase.

Income-driven repayment

Of the four income-driven repayment plans, the one that has gotten the most attention recently is Pay As You Earn. The reason for this is that Pres. Obama recently signed an executive order that makes nearly five million more people eligible for this program. In addition, it caps borrowers’ monthly payments at 10% of their disposable income. Your disposable income is determined by subtracting 150% of the poverty level from your total income.

Other things you need to know

There are some other things about Pay As You Earn you need to know. For one thing, it takes into consideration not just your income but also your family size as larger families mean lower monthly payments. Second, your payments will be scheduled according to a 20-year repayment term instead of 25 years. If you make all of your payments and on time for those 20 years but still have a remaining balance, it will be forgiven. Finally, you will be required each year to submit documentation proving your income, which means your monthly payments could go up or down every year.

How to know if you could qualify for Pay As You Earn

The reason why more people will soon be eligible for Pay As You Earn is because borrowers who got their loans before October 2007 or stopped borrowing by October 2011 are now eligible. Prior to this, only newer borrowers were eligible. However, it’s important to keep in mind that these changes do not kick in until 2015. So if you feel it would be advantageous to switch to Pay As You Earn, you might have to wait until these changes take effect.

If you’d like to more details about Pay As You Earn here’s a video courtesy of National Debt Relief with lots of more information.

Income-based Repayment

A second popular repayment program for federal loans is called Income-based. It is much like Pay As You Earn except monthly payments are capped not at 10% but at 15% of your disposable income. To qualify for this repayment plan, your payments must be less than what you would pay under 10-Year Standard Repayment. Generally speaking, you would be eligible for Income-Based Repayment if your federal student loan debt is higher than your annual discretionary income or if it represents a large portion of your annual discretionary income.

Again your payments would be based on your income and family size.

Income-Contingent repayment

The third form of Income-driven repayment is Income-Contingent repayment. This program was created to make it easier for people to repay their loans that intend to pursue careers with lower salaries, such as public service jobs. The way it does this is by fixing the borrower’s payments according to family size, income and the total amount he or she borrowed. As with Income-Based Repayment, the monthly payments under this program are adjusted each year depending on the borrower’s family size and income. It also offers loan forgiveness after 25 years of payments made on time.

Income-Sensitive Repayment

The fourth and final form of Income-driven repayment is called Income-Sensitive. This program is an alternative for loans that are serviced by lenders in the Federal Family Education Loan Program. Like the Income-Contingent program, this plan was created to make it easier for borrowers tha have low-paying jobs to make their monthly payments. The way it works is that payments are pegged to a fixed percentage of the borrower’s gross monthly income. This percentage will be between 4% and 25% and is determined by you the borrower. However, the resulting monthly payment must be larger than or equal to the interest that accrues. And it’s important to understand that some lenders set a minimum threshold on the percentage of your income, which will be based on your debt-to-income ratio.

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