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Guiding Your Students Toward Successful Repayment Strategies Presented by: Michele Colson Sallie Mae © 2008 Sallie Mae, Inc. All rights reserved.

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Presentation on theme: "Guiding Your Students Toward Successful Repayment Strategies Presented by: Michele Colson Sallie Mae © 2008 Sallie Mae, Inc. All rights reserved."— Presentation transcript:

1 Guiding Your Students Toward Successful Repayment Strategies Presented by: Michele Colson Sallie Mae © 2008 Sallie Mae, Inc. All rights reserved

2 Agenda Student Debt Portfolios Repayment Options Review –Additional Considerations Evaluating Financial Values and Skills Developing a Personal Repayment Strategy Knowing how to answer four key questions will lead the way for student loan borrowers –What do I owe? –What are my options? –What are my goals and objectives? –What do I need to do to reach these?

3 © 2008 Sallie Mae, Inc. All rights reserved Overview Debt levels continue to rise –Federal and private loans –Credit cards Students will receive direct marketing solicitations from numerous lenders –Offers may include Stafford, Grad PLUS, Consolidation, and private loans Pressure on schools not to recommend one lender over another Students need information!

4 © 2008 Sallie Mae, Inc. All rights reserved Reminder Today’s students have been taught that consolidation is a good way to lock in a low interest rate on their student loans and that it is something they definitely should do. But is this true?

5 © 2007 Sallie Mae, Inc. All rights reserved Student Debt Portfolios New Heights of Complexity

6 © 2008 Sallie Mae, Inc. All rights reserved Loan Portfolio Complexity graduates’ debt portfolio may contain any or all of the following: –Federal Student Loans Consolidation loan(s) with a fixed rate Perkins loan(s) with a fixed rate Stafford loan(s) with a variable rate Stafford loan(s) with a fixed rate Grad PLUS loan(s) with a fixed rate –Private loan(s) with a variable rate –Credit cards, likely with a variable rate

7 © 2008 Sallie Mae, Inc. All rights reserved Loan Portfolio Complexity Increased portfolio complexity requires that students have a solid understanding of the loans in their portfolios –Debt types – Loans versus revolving credit Federal versus private loans Loan program –Debt holder / servicer –Interest rates – Actual interest rates Fixed versus variable Frequency of rate changes

8 Repayment Timeline Complexities 1.Make payments (Full or Interest-only) 2.Deferment (UNEM or HRD?) 3.Forbearance Need to manage debt from this time period forward FPDDOSD Grad PLUS and Most Existing Consolidation loans OSD – Out of School Date EOG – End of Grace Period FPDD – First Payment Due Date Stafford loans (unconsolidated) and DL “In-school” Consolidation loans EOG FPDD OSD (6 month grace period) Perkins loans EOG FPDD OSD (9 month grace period)(may or may not have a grace period) OSD Private loans EOGFPDD  2007 Sallie Mae, Inc. All rights reserved.

9 © 2007 Sallie Mae, Inc. All rights reserved Repayment Options Federal Student Loans

10 © 2008 Sallie Mae, Inc. All rights reserved Repayment Options Repayment options for Federal student loans –Repayment plans –Postponement options

11 © 2008 Sallie Mae, Inc. All rights reserved Repayment Plans Four choices of repayment plans –Standard –Graduated –Extended –Income-based (either income-sensitive or income- contingent) Structure of repayment plan may vary slightly between FFEL and DL, and among FFEL lenders Each plan has advantages and disadvantages Can typically switch plans at least annually, if needed

12 © 2008 Sallie Mae, Inc. All rights reserved Standard Repayment Monthly payment amount remains substantially the same over the repayment term Most commonly selected repayment plan Automatically selected if borrower doesn’t choose a different plan Typically the lowest overall cost Monthly payment amount is often the highest in comparison to other repayment plans

13 © 2008 Sallie Mae, Inc. All rights reserved Graduated Repayment Monthly payment amount is scheduled to change (usually increased) at one or more pre-determined intervals over the repayment term Reduced initial monthly payments Higher overall interest cost due to lower initial payment amount Later payment tiers can become unaffordable if income does not substantially increase

14 © 2008 Sallie Mae, Inc. All rights reserved Extended Repayment Repayment plan offering a 25 year repayment term –Could be structured as a standard schedule, graduated schedule, or choice of either Only available to “new borrowers” with no outstanding debt in that loan program (FFELP or DL, as appropriate) prior to October 7, 1998 –FFELP loans: Total FFELP debt must exceed $30,000 –DL loans: Total DL debt must exceed $30,000 Reduced monthly payments due to 25-year term The 25-year repayment term often results in higher total repayment costs Not all borrowers will qualify for this repayment plan

15 © 2008 Sallie Mae, Inc. All rights reserved Income - Related Repayment Income-Sensitive Repayment (FFEL Program) –Borrower’s income is taken into consideration –Payment must cover accruing interest Income-Contingent Repayment (DL Program) –Specific formula based on outstanding amount of Direct Loans, family size, and adjusted gross income (AGI) AGI includes borrower’s and spouse’s income –Amount not repaid after 25 years of repayment is cancelled Cancelled amount is taxable under current law –Not available on PLUS loans Alternative Repayment (DL Program) –Technically not an “income-based” program –Schedule is negotiated with Secretary of Education Income-Based Repayment (FFEL & DL Program) –Coming in July 2009

16 © 2008 Sallie Mae, Inc. All rights reserved Postponement Options Postponement options for Federal student loans –Deferment –Forbearance Postponement options may either eliminate or reduce the required monthly payment

17 © 2008 Sallie Mae, Inc. All rights reserved Deferment A period of time in which an eligible borrower is not required to make payments of loan principal –Government pays interest on subsidized loans, and subsidized portion of consolidation loan –Unsubsidized interest may be paid by the borrower –Unpaid interest can be capitalized Common deferments –Enrolled at least half-time –Unemployed –Economic hardship –Military service

18 © 2008 Sallie Mae, Inc. All rights reserved Forbearance A period of time during which the borrower is permitted to temporarily make reduced or no payments –Some are entitlements for qualifying borrowers; others are granted at the lender’s discretion Cannot exceed one year at a time Borrower is responsible for all interest that accrues –Unpaid interest can be capitalized Borrower should consult with lender on whether use of forbearance will affect eligibility for incentive benefits

19 © 2007 Sallie Mae, Inc. All rights reserved Additional Considerations Other Items Affecting Repayment Strategies

20 © 2008 Sallie Mae, Inc. All rights reserved Consolidation A consolidation loan is another option for managing student loan debt Consolidation loan is a new loan –Repays loans included in consolidation –Typically eliminates all or nearly all terms and benefits applicable to those loans included in the consolidation –Usually offers a longer repayment term that can reduce monthly payments but often results in higher total repayment costs Consolidation may be available through both federal and private programs

21 © 2008 Sallie Mae, Inc. All rights reserved Consolidation Private loans cannot be included in a federal consolidation loan Federal loans can be included in a private consolidation loan –Doing so results in loss of all federal benefits: Fixed interest rate Interest subsidy Repayment plans Postponement options Cancellation benefits Some lenders may offer both private and federal consolidation with a combined billing option

22 © 2008 Sallie Mae, Inc. All rights reserved Consolidation Interest Rate Federal Consolidation –Fixed interest rate* Weighted average, rounded up to nearest 1/8th percent Maximum rate of 8.25% Private Consolidation –Varies by lender, but typically a variable interest rate Variable rate may adjust annually, quarterly, or monthly Consult with lender on actual rate and interest rate formula * Special rules apply to federal consolidation loan that include HEAL loans.

23 © 2008 Sallie Mae, Inc. All rights reserved Incentive Benefits Incentive benefits can reduce loan costs –Interest rate reductions –Fee rebate –Principal rebate Optional, not an entitlement Expect some type of eligibility requirements Incentive benefit only has value if earned –Understand requirements to qualify –Understand disqualification criteria

24 © 2008 Sallie Mae, Inc. All rights reserved Assess Your “Average” Student Take a moment to note the options your “average” student will likely consider first.

25 © 2007 Sallie Mae, Inc. All rights reserved Financial Skills Personal Goals Can Affect Strategy

26 © 2008 Sallie Mae, Inc. All rights reserved FAO As Trusted Advisor Students look to your office for guidance Proactively reaching out reaffirms your position as trusted advisor Offer factual information with consideration for personal goals and values Educate your students early and continuously Information empowers each student to make sound fiscal decisions impacting financial wellness for years down the road

27 © 2008 Sallie Mae, Inc. All rights reserved Personal Values and Skills Be careful about not imposing your values and objectives into someone else’s strategy Each student will have his or her own preferences and skill-level for managing the student loan preference Help students identify their own values, financial skills, and goals –These will lead to a successful, personal strategy

28 © 2008 Sallie Mae, Inc. All rights reserved Debt Management Repayment Strategy –Choose a repayment strategy to meet personal financial goals –Choose a repayment strategy for today and tomorrow –Evaluate all influencing factors Monthly budget Current and future salary expectations Financial management skills Personal spending and repayment patterns

29 © 2008 Sallie Mae, Inc. All rights reserved General Tips Repayment behavior controls how quickly and inexpensively a loan will be repaid To avoid delinquency and minimize costs, select option with highest monthly payments that can be reasonably afforded Federal student loans have no prepay penalties –Can minimize the “required” monthly payment amount but can pay more when budget permits –Can pay more on a monthly, quarterly, or annual basis, or even as an individual lump sum amount Can use federal loan repayment strategies as a means for achieving goals on non-federal debts, then focus later on the federal debts

30 © 2008 Sallie Mae, Inc. All rights reserved Identifying Goals and Values Prioritize goals Use “leading questions” if needed Goals for our discussion –Minimize total interest costs –Aggressively repay higher interest rate loans –Minimize monthly payment (short-term) –Minimize monthly payment (long-term) –Minimize payments to multiple companies –Manage private loan repayment –Manage credit card repayment

31 © 2007 Sallie Mae, Inc. All rights reserved Repayment Success Developing a Personal Strategy

32 © 2008 Sallie Mae, Inc. All rights reserved Common Goals Minimize total interest costs Minimize monthly payment (short-term) Minimize monthly payment (long-term) Minimize payments to multiple companies Pay higher interest rate loans quickly Manage private loan repayment Manage credit card repayment

33 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Do you know what your scheduled monthly payments will be? Associated Goal(s): All

34 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Are you going to be ready to make payments as they become due, or will you need to reduce or even postpone payments? –If the student will not be ready for payments, explore whether payments need to be reduced or postponed, consider asking why, and discuss how long repayment relief is needed. Associated Goal(s): Minimize monthly payments (short term)

35 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Are your loans with different lenders or servicers? –If yes: Will it be difficult for you to manage making payments to different places? Associated Goal(s): Minimize payments to multiple companies

36 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Do you need to reduce your monthly payment amount? –If yes: Do you understand that reducing your monthly payment will ultimately result in higher interest costs? –If yes: Do you need to reduce your payments for only a short period of time, or do you need long-term payment reductions? Associated Goal(s): Minimize monthly payments (short term and long-term)

37 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Do you intend to maintain a “hands on” approach with your loans? –Example: Do you plan on repaying your highest-rate loan quickly, then your next highest-rate loan, and so forth, in order to minimize your total interest costs? –Explore further how the student wants to manage the debts so you can identify appropriate options. Associated Goal(s): Minimize total interest costs Aggressively repay higher interest rate loans

38 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions With credit cards, do you tend to pay just the minimum balance, pay a little more that the minimum, or pay the entire balance off within just a month or two? Associated Goal(s): Minimize total interest costs Aggressively repay higher interest rate loans Minimize monthly payments (short term and long-term) Minimize payments to multiple companies

39 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions [For borrowers with variable rate loans] Are you uncomfortable with having a variable-rate loan? –If yes: Explore whether there are reasons for the discomfort, e.g., perhaps the student doesn’t realize there is a cap on the interest rate. Associated Goal(s): All, plus an indicator of whether consolidation should be a consideration within the strategy.

40 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions What benefits do you have on your current loans? What do you have to do to earn the benefits? –Do you expect that you will be able to earn them? Associated Goal(s): Minimize total interest costs

41 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Do you have student loans at different interest rates? Did you borrow private student loans? What additional debts (other than student loans), such as credit cards, do you have? –What are the interest rates of those debts? Associated Goal(s): Minimize total interest costs Aggressively repay higher interest rate loans Manage private loan repayment Manage credit card repayment

42 © 2008 Sallie Mae, Inc. All rights reserved Sample Leading Questions Take a moment to jot down any additional questions that might be relevant to your students.

43 © 2008 Sallie Mae, Inc. All rights reserved Prioritizing Goals Given the following possible financial goals, which are the most important to you, and how would you rank (prioritize) them? –Minimize total interest costs –Minimize monthly payment (short-term) –Minimize monthly payment (long-term) –Minimize payments to multiple companies –Pay higher interest rate loans quickly –Manage private loan repayment –Manage credit card repayment

44 Developing a Personal Repayment Strategy  2007 Sallie Mae, Inc. All rights reserved. IF YOUR FINANCIAL GOAL IS: CONSIDER THESE REPAYMENT STRATEGIES Minimize total repayment costs Select the repayment option with the highest monthly payment and shortest repayment term that you can afford. Pay some or all of the accruing interest during periods in which payments are not required. Prepay loans with highest interest rates first. Ensure all required actions are taken to earn borrower benefits, if available. Investigate loan forgiveness and cancellation options. Consolidate variable rate loans when interest rates are low. Assess the value of borrower benefits on your current loans that you may lose by consolidating. Minimize monthly payment (short-term) Investigate deferment options* to temporarily reduce or eliminate payments. Review graduated repayment plan options. You may be allowed to choose the appropriate length of time that your monthly payment is minimized. Investigate forbearance options to temporarily reduce or eliminate payments*. Minimize monthly payment (long-term) Pursue an extended repayment option if you are eligible. Consolidate eligible loans to obtain maximum repayment term. Minimize payments to multiple companies Consolidate eligible loans with a single lender. Consider obtaining a private consolidation loan with the lender of your federal loans (or vice versa). IF YOUR FINANCIAL GOAL IS: CONSIDER THESE REPAYMENT STRATEGIES Pay off higher interest rate loans quickly Make minimum payments on lower rate loans, adjusting your repayment plan if needed, and make the highest payments you can afford on higher rate loans. Review postponement options* on lower rate loans to allow you to make higher payments on your higher rate loans. Do not consolidate higher rate loans, or consider consolidating them separately from other loans. Manage private loan repayment Pay some or all of the accruing interest during periods in which payments are not required. Consult your private loan lender to evaluate repayment plans available. Consider reducing monthly payment amounts on federal loans to pay down private loans more quickly. Consider obtaining a private consolidation loan with the lender of your federal consolidation or vice versa. Applying with a cosigner and/or improving your credit score before consolidating private loans may result in better interest rates. Manage credit card repayment Consider reducing the monthly payment amounts on your federal loans to focus on paying off your credit cards. Stop or minimize the use of credit cards until your balance is low enough to pay-in-full every month. * Check with your lender to determine the potential effect that a deferment or forbearance may have on your ability to qualify for borrower benefits.

45 Questions? Repayment What do I owe? What are my options? What are my goals and objectives? What do I need to do to reach these?

46 “Running the Numbers” LoansBalanceInterest Rate Term (years) Monthly Payment Amount Interest Cost Total Repayment Amount Leave Loans Separate Consol Loan 1$70, %30$366$61,455$131,455 Stafford Loan S1$35, %10$403$13,334$48,334 Stafford Loan S2$35, %10$403$13,334$48,334 Cumulative Total$140,000$1,172$88,123$228,123 Consolidate Only New Loans Consol Loan 1$70, %30$366$61,455$131,455 Consol Loan 2 (S1 & S2)$70, %30$460$95,546$165,546 Cumulative Total$140,000$826$157,001$297,001 Consolidate All Loans Consol Loan 2 (All loans)$140, %30$829$158,135$298,135 Consolidation

47 “Running the Numbers” Consolidation and Extended Repayment Comparison LoansBalanceInterest Rate Term (years) Monthly Payment Amount Interest Cost Total Repayment Amount Leave Loans Separate Consol Loan 1$70, %25$400$49,725$119,725 Stafford Loan S1$35, %25$243$37,878$72,878 Stafford Loan S2$35, %25$243$37,878$72,878 Cumulative Total$140,000$886$125,480$265,480 Consolidate Only New Loans Consol Loan 1$70, %25$400$49,725$119,725 Consol Loan 2 (S1 & S2)$70, %25$490$76,753$146,753 Cumulative Total$140,000$890$126,478$266,478 Consolidate All Loans Consol Loan 2 (All loans)$140, %25$892$127,406$267,406

48 © 2008 Sallie Mae, Inc. All rights reserved Interest Rate Trends rates estimated using March 31, 2008 auction at 1.47%


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