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Category Archives: Debt Management

One Way to Get Student Loan Forgiven

Recently a Financial Tip reader shared some great topics she was interested in having covered in future tips, and this is one of those topics- breaking down student loan forgiveness programs (note, we always appreciate feedback from readers! Please feel free to send ideas for future tips or topics you want more information on to financialsuccess@missouri.edu).

For many students this time of year marks graduation, and for many of them graduation prompts thinking about student loans. Those graduating high school may be anticipating the disbursements of their first student loans in a few months to cover new tuition expenses. Alternatively, those graduating college may be expecting the end of student loan deferment and the beginning of repayment in the coming months. No matter where one is on the continuum of student loan debt, it is always important to think about the long term realities of student loans, including repayment options. This tip will outline one possible option for students who may go into careers in public service jobs.

Public Service Loan Forgiveness Program

What’s a public service job?

The definition of what is considered a public service job is fairly broad. Any employment with a federal, state, or local government agency, entity, or organization or a non-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes. Additionally, the type of services that these public service organizations provide does not matter for PSLF purposes. Some private, non-profit employers that are not tax exempt (i.e., 501(c)(3) status) can even be considered qualifying employment for the PSLF program, provided the employer provides certain public services (e.g., public health, safety, etc).

What types of loans are eligible?

Loans are either:

  • Federal- Made and/or regulated by the government, including Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans; or
  • Private- Made by a bank/private lender and generally carry higher fees and interest rates than federal loans. For more information about avoiding deceptive private loans, visit http://missourifamilies.org/features/financearticles/cfe63.htm)

Private loans are not eligible for loan forgiveness programs, and not all federal loans are either. For a list of debt cancellation/forgiveness programs and which types of federal loan types are eligible for each program, visit https://studentaid.ed.gov/sa/sites/default/files/public-service-loan-forgiveness-common-questions.pdf. Regarding the Public Service Loan Forgiveness Program (PSLF), only direct loans are eligible (i.e., loans you received under the William D. Ford Federal Direct Loan Program). Federal Family Education loans and Perkins loans are not eligible, however, they do become eligible if you consolidate them into a direct consolidation loan.

What do I have to do to get my debt forgiven?

  • Work full-time: At least an annual average of 30 hours per week. For purposes of the full-time requirement, your qualifying employment at a not-for-profit organization does not include time spent participating in religious instruction, worship services, or any form of proselytizing. If you are a teacher, or other employee of a public service organization, under contract for at least eight out of 12 months, you meet the full-time standard if you work an average of at least 30 hours per week during the contractual period and receive credit by your employer for a full year’s worth of employment. If you have multiple eligible jobs, you must work a combined average of at least 30 hours per week.
  • Make 120 on time, full, monthly loan payments. Basically, you have to put in 10 years of full, on time payments before you can be eligible for the remainder of your loans to be forgiven. On-time payments are those that are received by your Direct Loan servicer no later than 15 days after the scheduled payment due date. Full payments are payments on your Direct Loan in an amount that equals or exceeds the amount you are required to pay each month under your Direct Loan repayment schedule.
  • Be paying back your loan through a qualifying repayment plan. You cannot necessarily choose a repayment plan that will greatly lengthen your repayment period so that you are eligible for most of your loans to be forgiven. For example, 30-year extended repayment plans are not eligible for the PSLF program. However, income-driven repayment (IDR) plans are eligible. Check out https://studentaid.ed.gov/sa/repay-loans/understand/plans to see the full list of repayment plans, which includes the four main IDR options (also, you may want to check out this recent Financial Tip for info on a newly released IDR planhttp://ofsmizzou.org/a-new-student-loan-repaye-ment-plan/). The 10-year Standard Repayment Plan is also eligible, however, after meeting the PSLF requirement of 120 consecutive payments, there would be no debt left to forgive!
  • Stay on top of your record keeping. When using an IDR plan, borrowers will need to re-certify their income annually. Your lender will communicate with you on when and how to do this, but missing this communication or not completing the re-certification process can take you out of an IDR plan and default you into the standard 10-year plan (which doesn’t help you maximize the PLSF program). Also, you will need to file a form certifying your public service employment (https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf). Each time that form is received, your past payments will show up as qualifying for the PSLF program. So, be sure to file the form as soon as you have a public service job, if you change public service jobs, or anytime your lender or the PSLF program prompts you to re-certify your employment eligibility.

Deciding whether or not the PSLF program is right for you depends on many factors, mainly how much student loan debt you have and how much money you will make during the first 10 years of your public service career. The more debt you have and the less you will make, the more attractive an option the PSLF may be for you (as payments tied to your income will be less when you make less money). Alternatively, if you make a high income you may very well have paid off, or be close to paying off, your student loans by the time you get to the end of the 10 year requirement under the PSLF.

There are many repayment options for student loans. A good first step would be to visit the Federal Student Aid repayment calculator at https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action to see what all your options may be. You can also look at past financial tips (achieved at http://mufinancialtip.blogspot.com/, especially the September and October 2011 tips).

Again, whether you are just starting to take out loans or have been paying them back for years, it is always good to consider your repayment options and realities. Even though the PSLF program may help some (and does encourage public service jobs), you will still end up paying back a substantial amount of the debt you take out, so never take out more loans than you need.

A New Student Loan REPAYE-ment Plan

You would be forgiven if you missed the news about a new Federal Student Loan repayment plan that went into effect mid-December last year.  After all, for some that time is finals week, others it’s Christmas break, there is shopping and family gatherings and all sorts of other things begging for our attention.  Hopefully, nearly a month and a half into 2016, you are back into the normal groove and feeling receptive toward some newish and potentially helpful student loan news.

December 17th 2015 was the date that a new repayment plan went into effect for federal student loan borrowers.  The new plan is called REPAYE, and can be considered a close relative to the existing PAYE income driven payment plan.  Each plan share similarities, but also have major differences which should be taken into consideration when trying to decide between the two.
Pay as You Earn vs. Revised Pay as You Earn
Let’s begin with the similarities.  They are both income driven plans, meaning, your income and household size are used to determine how much you will have to pay each month.  Income is evaluated on a yearly basis to determine if a new payment amount should be used.

They can be used to repay Direct Subsidized & Unsubsidized, Direct PLUS loans made to students, and Direct Consolidation Loans that do not contain PLUS loans to parents.  If you’re not sure what type of loans you have, visit www.NSLDS.ed.gov, select the “Financial Aid Review”, and login to review what types of loans you have.

If the loans are not repaid in the maximum repayment periods, a borrower may be held liable for the tax consequences of unpaid debt due to loan forgiveness, but both repayment plans are eligible for use when working towards the 10 year Public Service Loan Forgiveness (PSLF) plan.

Now let’s explore the differences between the two.
Firstly, the REPAYE plan does not require a financial hardship.  Anyone can apply and take advantage of the benefits.  Borrowers also do not have to be “new borrowers”, a classification based on the date the first Direct loans were received.  It doesn’t matter when your loans were received, you are eligible for the REPAYE plan.

Undergraduate and Graduate borrowers also get different maximum repayment periods.  Undergraduate, like with the PAYE plan, can take as long as 20 years to repay the loans.  Graduate borrowers however, get an additional 5 years, bringing the maximum repayment period up to 25 years.  As mentioned before, failure to pay off the loans in the maximum repayment periods will result in loan “forgiveness”, and taxation on the forgiven amount.

In the REPAYE plan, the “amount of your payment is 10% of your discretionary income” (see below for an explanation of discretionary income).  This is different from the PAYE plan, where the “maximum amount of your payment is 10% of your discretionary income”.  You may have noticed the lack of the word “maximum” in the REPAYE plan description.  Good on you, because that’s one of the key differences between these two plans.  Under the older PAYE plan your payments are capped, and you would never have a payment larger than the amount of a payment for the 10 year Standard Repayment Plan, no matter how much your income increased.  Under the REPAYE plan, there is no such cap.  Meaning, if your income increases significantly over the life of the loan (20-25 years), your payments will continue to grow.  The upside to that is, as you approach the end of the repayment period, you will likely have less debt to be forgiven than under the PAYE plan, and therefore a smaller tax liability.

Another difference, and arguably a disadvantage for married borrowers, is that REPAYE considers spousal income regardless if taxes are filed jointly or separately.  Since spousal income is always taken into consideration, this could increase a borrowers overall discretionary income, increasing the monthly payment amount.

And there you have it, a brief breakdown of the new REPAYE Federal Student Loan Repayment Plan, and how it differs from its cousin the PAYE plan.  I would encourage you to continue reading below for a quick breakdown on how discretionary income is calculated.  For more information about Income Driven Plans, please visit:
https://studentaid.ed.gov/sa/repay-loans/understand/plans

https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf
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What is discretionary income you ask?  It’s your Adjusted Gross Income (AGI – Found on your 1040 tax form) minus, 1.5 times the Federal Poverty Level for your Household size.

Household Size Poverty Level
1 $11,880
2 $16,020
3 $20,160
4 $24,300

Source: https://aspe.hhs.gov/poverty-guidelines

So, if your AGI is $18,000, and you are a single person without dependents (household size of 1), your discretionary income formula looks like this:
18,000 – 1.5*(11,880) = 18,000 – 17,820 = $180 discretionary income
Which makes for a very small monthly payment because, 10% of $180 is $18, and your monthly payment is $18/12 = $1.50.  Yes, one dollar and fifty cents is your estimated monthly payment, under the REPAYE plan with $18,000 annual AGI and a household size of one.
Something to consider about a payment this small is that interest will continue to accumulate as you go through the life of the loan, meaning the balance owed will increase significantly over what was originally borrowed.  If the loan can’t be repaid within the maximum allotted time, the tax liability due to loan forgiveness could be substantial.

The End to Beginning

I can’t believe how fast time flies.  Here we are at the end of another year, which coincides for a brief moment with the beginning of the New Year.  As such it is time to take stock of where we are financially.

Taxes:

  • If you’ve some capital gains in your portfolio, look for some capital losses to offset those gains and remove them from income taxation. You may deduct an additional $3,000 in losses (above your capital gains) from your ordinary income.
  • Americans are addicted to income tax refunds. Like other addictions, you need to control your impulse to loan Uncle Sam money for the year while not charging him interest.  Seriously, if you have a substantial refund coming each year, reduce your withholdings by filing a revised W-4 with your employer.  If you’ve changed your family structure; divorce, marriage, or children, a tax estimator like this one from the IRS:  https://apps.irs.gov/app/withholdingcalculator/ may help.
  • On the other hand, if you’ve underpaid your taxes and think you’ll owe taxes, prepay additional taxes to avoid being charged a penalty. The final date for prepayment is January 15, 2016.
  • If your income is dropping next year, move as many deductions as you can legally move to this year. On the other hand, if you expect next year’s income to exceed this years, you will benefit from moving deductions to next year.
  • If you have a flexible spending plan for child care and/or medical care expenses and have over $500 in these plans that is not carried forward by your employer, spend the balance on qualified expenses. For a list of allowable expenses read https://www.irs.gov/pub/irs-pdf/p502.pdf
  • If a favorite charity accepts gifts of appreciated securities, such as stocks, donate some from those which have appreciated. You receive the entire deduction for the full market value on the day of the gift and you do not have to pay taxes on the gains.  If your favorite charity does not accept the gift of securities, set up a donor advised fund which allows you to deduct the gift and you can decide on the beneficiary later.  Charitable gifts from an IRA of those 70-1/2, in lieu of taking distributions from the IRA, is no longer allowed under most cases.

Investments:

  • Be cautions when buying mutual funds in December. Many funds make their annual distributions to shareholders in December and this flow of money is taxable in the year they are paid.  Thus, some of the money you’ve already been taxed on will be taxed again and the value of the mutual fund will fall by the amount of the distribution.
  • Rebalance your portfolio to assure that it reflects the diversification you want. You may have to sell some securities that have appreciated (taxable event) while others may have gone down in value.  This forces you, in a small way, to sell high and buy low.  Proper diversification is important for long-run investment success, but rebalancing too often can lead to greater costs of investing which removes some of the benefits of rebalancing.
  • Calculate your net worth to see if the difference between you assets and debts is greater than it was the year before. If you did not do this last year, you will not know.  Yet doing this year after year is a great way to keep score in your financial life, as we want to see your net worth grow by at least the rate of inflation each year.
  • Review your savings. Are you saving enough money for your goals; retirement, education, second home, vacation, and etc.?  This year the market has been relatively flat for the year with the SP500 standing at 2058 in January and 2052 at the time of this writing. If this indicates that you need to add to savings to reach your goals, add to your savings.

Debts:

  • Which of your debts have the greatest interest rate (APR)? Add to your monthly payment to the one with the greatest APR until it is paid off. Then, pay more to the next highest APR loan.  Keep doing this until all your loans are repaid with the exception of, possibly, your mortgage.  Yet even a modest mortgage interest rate represents money that you’re paying out instead of taking in.   In the process do NOT skip payments on any loan for it will reduce your credit rating.
  • If you’ve many debts with some at high rates, it may pay to consolidate them into a home equity loan since rates are relatively low. You must have home equity to do this. (That is, you must be a home owner with a home worth substantially more than the mortgage.)  In this way, the interest you pay may be reduced and is tax deductible, in most cases.

 

Much of the above is common sense and has been repeated in other weekly Tips.  It is good, however, to ask ourselves the question of what we can do differently to improve our lives, beginning with our finances. That said, we might find that we are successful in our financial lives but lacking in our personal lives.  Money is not everything, yet it is a long way ahead of what comes after it.  Be a good shepherd of your money and remember to be grateful for the gifts you’ve been given. The writer William Arthur Ward once said, “Feeling gratitude and not expressing it is like wrapping a present and not giving it.”  So, wrap your presents to give to others.  As a gift to yourself, freely give your thanks for those you love and believe that they love you.  Be grateful for your financial success and celebrate the diversity of our great nation.

– Rob Weagley

Financial Tips for College Students

by Ryan H. Law

Today’s Tip is a re-posting of an article that I like to review at the beginning of each semester. For those just subscribing to the Financial Tip this will be a good overview of financial steps, while for those who have been with us longer it will be a good chance to review the items and see how you are doing.

Many college students are on their own for the first time and, for many of them, that includes being on their own financially. They are expected to earn money and manage their own finances along with their busy college schedules and social lives. Taking a few simple steps now to plan and properly manage your personal finances will lead to much more positive outcomes down the road.

Here are some financial tips for college students beginning the new semester:

  • Buy used textbooks or e-books when possible and compare textbook prices online.
  • Don’t be tricked by credit card offers that come with a bag of candy, free shirt or free pizza.
  • Before signing a lease, be sure you understand the entire contract. Many people will be signing leases now for fall semester, but before you sign it take some time and read over it carefully. Your lease is a legal document that is binding!
  • Educate yourself about student loans – know what types of loans you have, how much you owe, your interest rate, and what your monthly payment will be. For information on your federal loans, visit:  http://www.nslds.ed.gov.
  • Before turning to private loans to help pay for your education, visit your financial aid adviser to be sure you have exhausted all federal loan opportunities.
  • Stay away from payday loans – they carry very high interest rates and can trap you in debt for years.
  • Shop around for a bank account.  Different banks and credit unions offer a wide variety of products – from free checking to low rates on loans. You also want to consider convenience – it is helpful if there is an ATM or branch on campus or close to where you live.
  • Learn how to budget your money, including any refund checks you get from financial aid.
  • Don’t carry your social security card in your wallet, and don’t give your Social Security number to people that don’t need it. The only thing thieves need to steal your identity is your Social Security number.
  • Watch your eating out, entertainment and clothes spending carefully.
  • Track spending to help avoid buying more than you can afford.
  • Time is your best friend when it comes to saving for retirement – start saving now if you have a job and can invest a little for retirement.
  • Become financially literate – if possible take a class in personal finance and learn how to manage your money. For students at the University of Missouri the Personal Financial Planning department (http://pfp.missouri.edu) has classes that will help you learn how to budget, manage your credit and debt, invest, manage risk, and much more. It’s a great complement to any major as you will use the knowledge gained throughout your life.

Ryan H. Law, M.S., CFP®, AFC®

Personal Financial Planning Department
Office for Financial Success Director
University of Missouri Center on Economic Education Director

Limiting Your Student Loan Liability

by Sasha Grabenstetter

With student loan debt topping $1.08 trillion as of December 31st, 2013 according to the Federal Reserve Bank of New York’s Quarterly Report, it has significantly surpassed credit card debt and become one of the most underestimated financial burdens that a young graduated can face. As a student, here are some ways to help yourself now while you’re still in college so that you don’t have to pay back so much more later:

  1. Know Your School Costs – As a student, it’s easy to forget how expensive a college education can be. Tuition, room and board, books, and school supplies can add up quickly, not to mention food and entertainment as well. Identifying these costs upfront can help to curb extra spending you may encounter. Knowing that your first freshman semester expenses were over $10,000 might make you rethink buying that late night pizza.
  2. Check Your Balance – Looking at your student loan balance may also entice you to stop adding more debt to your future self. If you don’t know what your balance is, check out the National Student Loan Data System, a website created to make students aware of their loans. Most college seniors go into exit counseling unaware of how much debt they racked up in the last four years.
  3. Limit the Amount Borrowed – Although this seems straight forward, lots of students are unaware that they don’t have to take the full amount awarded to them each semester. For example, you receive $5,500 in awards for the school year, but your expenses are only $4,400. When the cash is in your checking account, it’s easier to spend it on extras than to pay it back.
  4. Pay Student Loan Interest While In School – There are two types of student loans regarding interest, subsidized and unsubsidized. With a subsidized loan, interest does not accrue on your loan and the government “subsidizes” or supports the interest in times of deferment. With an unsubsidized loan, the interest starts to grow once the loan is disbursed to the school and you are responsible for paying that interest. By paying the interest while you’re still in school, this strategy can help reduce the overall balance of your student loan. Upon graduation, the difference between these two will be that the unsubsidized loans from freshman year will have three years of interest added to the principle while the subsidized will have none.

According to a study by Richard Fry of Pew Research, students with a college education and no student loan debt were worth 7 times more than students who had accumulated student loan debt. For some students acquiring student loans may be the only way they can get a college education, but being aware of the school costs, knowing and limiting the amount borrowed and paying on the interest accrued while in school can be excellent steps towards achieving college education and financial independence after graduation.

Sasha Grabenstetter is a former Office for Financial Success Counselor and Mizzou Alum. Sasha currently works for the University of Illinois Extension as a Consumer Economics Educator.