Did you recently receive a call or letter from the US Department of Education (ED)? If you have some type of federal loan, you probably did — thanks to reforms recently made to the Health Care and Education Reconciliation Act.
$400 billion outstanding
Did you know that all federal loans are now Direct Loans? This includes the $400 billion still outstanding in Federal Family Education Loans (FFEL). The problem with these loans is that they offer fewer options for repayment and are unreasonably costly for taxpayers. Plus, there are about six million student loan borrowers that have at one FFEL loan and a Direct Loan. This means they must keep track of and make at least two different monthly payments — which, in turn, puts them at a greater risk to default.
The ED wants you to consolidate
The ED is encouraging those of you that have two loans to move their guaranteed FFEL loan into their Direct Loan. If you have split loans, this program actually requires you to do nothing. In January of 2012 the ED began reaching out to borrowers that qualified to let them know of this new opportunity so you may have already heard from the ED.
The consolidation initiative
This consolidation initiative will keep the conditions and terms of your loan identical — except, of course, you’ll be required to make just one payment a month. If you take advantage of this program you will also get a half of a percent reduction to the interest rate on part of your loans, which could translate into reduced monthly payments and a savings of hundreds of dollars in interest. Any FFEL loans you consolidate would have their interest rates reduced by 0.25%, plus your entire consolidated FFEL and Direct Loan balance would have an additional 0.25% interest rate reduction.
What this could mean
Here’s an example of what this could mean if you were to consolidate your FFEL loans into a Direct Loan. Let’s assume you’re repaying two $4,500 FFEL Loans at 6% as well as a $5,500 Direct Loan at 4.5%. If you repay those loans under Standard Repayment, you will pay $4,330 in interest until you’ve paid off your loans in full. But if you were to consolidate those FFEL loans into a Direct Loan, you would save $376 in interest payments and would be required to make just one payment a month rather than two.
Here’s a more dramatic example. Let’s assume you are repaying a $32,000 FFEL Consolidation loan at 6.25% and a Direct Unsubsidized Stafford loan at 6.8%. If you re these loans under Standard Repayment you will pay a total of $13,211 in interest. However, if you were to consolidate that FFEL loan you would save $964 in interest.
Struggling with your student loan debts?
If you’re struggling with your student loan debts, as are many Americans, there’s a free online tool that could help. It’s called the Student Debt Repayment Assistant and is available on the website of the Consumer Financial Protection Bureau (CFPB). This tool will first ask you whether you have federal or private loans. If you have only federal loans, it will next ask if you’ve ever missed one or more payments on your federal loan. Assuming you haven’t, the tool will then ask whether or not you believe you can make your full payments — considering your other living expenses. If you are struggling with your debts and answer, “no,” the Student Debt Repayment Assistant asks if you are on active duty in the military. Answer “no” to this question and it will suggest that you move to Income-based Repayment (IBR).
The benefits of IBR
If you choose to move to IBR (based on this tool), you would get several benefits. For one thing, if you work in a profession where you have a moderate salary and a lot of debt, and stay enrolled in IBR for 25 years, you could see any remaining balances cleared (eliminated). Second, with IBR you can pay more if you want to, which would save on interest and enable you to repay your loan faster. If you work in a public service job for 10 years, you could be eligible for loan forgiveness. But the most significant benefit of IBR is that you’d probably have a much lower monthly payment – because your payments would be based on your income, the state where you live, your debt load and the size of your family.
Here’s an example of what this could mean. Let’s suppose you’re currently paying $208 a month on a $20,000 student loan debt. If you were to move to IBR, had an income of $30,000 a year and a family of three, your payment could drop to just $28 a month. You read that right. Just $28 a month.
The disadvantages of IBR
You’ve probably heard that old adage that there’s no such thing as a free lunch. This is definitely the case when it comes to IBR. It has two significant “prices” or disadvantages. The first is that it will take you much longer to pay off your loan — probably 30 years vs. 10 years in Standard Repayment — and you’ll pay more in interest. But if you’re having a tough time repaying your student loans you might be better off switching to IBR to get that lower monthly payment even if it means it will take you a lot longer to repay your loan.
Would you be eligible for IBR?
If you used the Student Debt Repayment Assistant and were told you would qualify for Income-based Repayment it’s important to understand that this may not be the case. While the Student Debt Repayment Assistant tool can be helpful, you may not be eligible for IBR despite what it says. The reason for this is because to qualify you must show you have a partial financial hardship. The way this is defined is that the monthly payment you’re currently making under a 10-year Standard Repayment Plan needs to be higher than what you would pay monthly under IBR.
If you have newer loans you might be eligible for the Pay As You Earn (PAYE) repayment program that offers even lower monthly payments than the IBR program.
Even more options
In addition to IBR and PAYE, there are Income-Contingent Repayment and Graduated Repayment. While all of these plans have many things in common, they do have different eligibility requirements and provide different levels of debt relief.
Finding the best program
As you have read there are a number of ways to deal with student loan debts, plus others such as loan deferment and cancellation that we haven’t covered. Fortunately, there is a simpler way to determine which of these programs would be best for you. The company National Debt Relief recently introduced a consulting program where it will match your situation to the best student debt elimination program given your financial situation. In addition, National Debt Relief will do all the paperwork required to get you into that new program. There is just a flat, one-time fee for this service, which is deposited into an escrow account. National Debt Relief will not withdraw its fee from this account until you have approved both your paperwork and its recommended student debt relief program. If you don’t like the program National Debt Relief recommended or are unsatisfied with your paperwork, your money will be returned and you will pay nothing.
I am an associate at National Debt Relief, which is a Debt Consolidation Company that has helped thousands of Americans facing credit card debt problems. We help with debt settlement, debt management, and other debt related financial crisis' facing consum