1 STUDENT LOANS: UNDERSTANDING THE BORROWING PROCESS

Much has been written and said about the importance of wealth in our lives. Is there a perspective or foundation that could help us manage our finances (and wealth) better? These pillars form the foundation, that if understood, will help us keep our priorities in order and to use our wealth as we should.  Ownership  Stewardship  Agency  Accountability Spiritual Foundation for Using Wealth Wisely

Perspectives: Behavioral versus money In most cases, financial problems are behavioral problems, not money problems  We know what we should do: live on a budget, spend less than we earn, not go into debt, etc. How do we motivate ourselves and others to make better financial choices? “True doctrine, understood, changes attitudes and behavior. The study of the doctrines of the gospel will improve behavior quicker than a study of behavior will improve behavior.” (Boyd K. Packer, “Little Children,” Ensign, Nov. 1986, 16.)

Is there Reasonable Debt? President Gordon B. Hinckley  “Reasonable debt for the purchase of an affordable home and perhaps for a few other necessary things is acceptable. But from where I sit, I see in a very vivid way the terrible tragedies of many who have unwisely borrowed for things they really do not need.” Gordon B. Hinckley, “I Believe,” Ensign, Aug. 1992, 2. President James E. Faust stated:  “Over the years the wise counsel of our leaders has been to avoid debt except for the purchase of a home or to pay for an education. I have not heard any of the prophets change this counsel.” “Doing the Best Things in the Worst Times,” Ensign, Aug. 1984, 41.

Does education pay? 5

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How much will you pay on Stafford loans? What is the “real” cost?  Assume “best case” subsidized Stafford at 6.8% APR with no interest growing during school  Unsubsidized Stafford loan or alternative loan will be much more expensive Borrow $1.00 Debt: Opportunity Cost of Student Loans

How much will you pay on student loans? What is the “real” cost to borrow $1? (Assume 10 years, 22% tax rate, 10% tithing and 6.8% APR) You Borrow $1.00 You Pay Back $1.38 You Must Earn $2.03 Borrow Earn $1.00 > $2.03 Rent $700 > $1,422 Dinner $50 > $102 Gas gal. $3 > $6 Clothing $100 > $203 Car pmt. $300 > $609 Debt: Opportunity Cost of Student Loans

Paying down your student loans Take care of the small debt before it grows! Loan 2 Loan 3 Loan 6 Loan 7 Loan 5 Loan 4 $20/mo. $35/mo. $45/mo. $65/mo. $155/mo. $200/mo. Add up the minimum monthly payments for each loan: $530 each month Budget for an extra $70 each month and apply it to the smallest debt first. $600/mo. total When the smallest debt is gone you will be able to put an extra $80 towards the next debt. Loan 1 $10/mo. Continue until all of your debt is gone- this is the fastest way to get out of debt! + $70 $100 $135 $180 $245 $400 $600/mo.When debts are done start investing this money

Paying down your student loans Each month your payments will look like this: $530 you must pay each month + $70 extra: U-owe:Jan.Feb.Mar.Apr.MayJuneJuly Loan 1($80) Loan 2($120) Loan 3($205) Loan 4($315) Loan 5($505) Loan 6($1,175) $600 $5,400- your total debt Loan 7($3,000)

Free Application for Federal Student Aid (FAFSA) Determines the amount your family is expected to contribute to your education Must be filled out each year Determines grants, loans and work- study

Award Letter –Tells you what your EFC (Expected Family Contribution) is –How much you are eligible to receive in federal grants, work- study & loans

Award Letter Determining Your Award NEED = COA – EFC st.html

Master Promissory Note Binding Legal Document Sets up terms of the loan Promise to repay Use same one for multiple years

Award Letter UNSUBSIDIZED LOANS –Not need-based –Student responsible for ALL interest SUBSIDIZED LOANS –Need based –Government pays interest while in school, during grace period & during deferment

Types of Loans Direct Subsidized Loans (undergrad only) Direct Unsubsidized Loans (undergrad, grad, professional) PLUS loans (parents of undergrads, grad, professional) Perkins Loans (undergrad, grad, professional) Private Loans

Direct Subsidized Student Loans –Government pays interest while in school, during grace period & during deferment –Need based –Only available for undergrads –Interest rates: –Set each year by Congress –4.66% (July 1, 2014 – August 31, 2015) –4.29% (July 1, 2015 – August 31, 2016)

Direct Unsubsidized Student Loans –Student responsible for ALL interest –Not need-based –Available for all students

Direct Unsubsidized Student Loans –Interest rates - Undergrads: –Set each year by Congress –4.66% (July 1, 2014 – August 31, 2015) –4.29% (July 1, 2015 – August 31, 2016) –Interest rates – Grads & Professional Students: –Set each year by Congress –6.21% (July 1, 2014 – August 31, 2015) –5.84% (July 1, 2015 – August 31, 2016)

Direct Unsubsidized Loans –Unpaid interest is capitalized on unsubsidized loans –Example $5500 in loans; 5 years to graduate; 6.8% –Accrued interest $2057 (Interest = principal x rate x time) –$5500 x.068 x 5.5 = $2057 –Principal balance at repayment: $7557

PLUS Loans –Loans parents take out to use to help pay for children’s education –Additional award amounts to graduate or professional students –Current Interest rate 6.84% –Unsubsidized –Origination fee: 4.0%

Perkins Loans –Need based –Distributed directly by the University –Available for all students –Fixed at 5%

Private Loans –Available for all students –Credit check –Variable interest rates – some higher than 18% - no caps –No postponing payments

Consequences of Default  Default = 9 months no payment received  Withholding of federal income tax refund  Ineligibility for financial aid  Inability to renew professional licenses (Realtor, CFP, CPA)  Negative credit history  Wage withholding  Aggressive debt collection procedures (FDCPA does NOT apply)  Large fees (25% up front)  Cannot be discharged in bankruptcy

Student loan debt exceeds $1.2 trillion Average debt load exceeds $29,000 The majority of student loan borrowers are confused about their loans and repayment plans As many as 33 million Americans may qualify to have their loans forgiven Congress keeps changing the rules General information

Repayment Plans Borrower can choose their repayment plan and can change it as often as they want Example: $35,000; 4.3%

Repayment Plans Traditional Plans  Standard  Standard Graduated  Extended  Extended Graduated

Repayment Plans Standard  10 years  Flat payment amount  Least amount of interest  Default plan Monthly Loan Payment:$359 Cumulative Payments:$43,124 Total Interest Paid:$8,124

Repayment Plans Standard Graduated  10 years  More interest than standard  Stepped increasing payment (every two years) Monthly Loan Payment:$202 - $605 Cumulative Payments:$45,164 Total Interest Paid:$10,164

Repayment Plans Extended  Up to 25 years  Flat payment amount  Requires >$30,000 Monthly Loan Payment:$191 Cumulative Payments:$57,177 Total Interest Paid:$22,177

Repayment Plans Extended Graduated  Same as Extended except: Stepped increasing payment  Most amount of interest Monthly Loan Payment:$125 - $331 Cumulative Payments:$62,528 Total Interest Paid:$27,528

Repayment Plans Income-Driven Repayment Plans  Income-Based Repayment  Pay As You Earn  Revised Pay As You Earn  Income-Contingent Repayment

Repayment Plans Income-Based Repayment (IBR)  To qualify must have Partial Financial Hardship “The payment that you would be required to make, based on your income and family size, must be less than what you would pay under the Standard Repayment Plan. Generally, you will meet this requirement if your federal student loan debt is higher than your annual discretionary income or represents a significant portion of your annual discretionary income.”

Repayment Plans Income-Based Repayment (IBR)  If borrower BEFORE July 1, 2014 Up to 25 years 15% of Discretionary Income  If borrower AFTER July 1, 2014 Up to 20 years 10% of Discretionary Income  Payment re-calculated annually  Payment will never be more than Standard

Repayment Plans Income-Based Repayment (IBR)  If payment does not satisfy monthly accrued interest Department of Education pays remainder for subsidized loans for up to 3 years  Any remaining amount after 20 or 25 years is forgiven  Forgiven amount taxable as income

Repayment Plans Pay As You Earn (PAYE)  Partial Financial Hardship: “The payment that you would be required to make, based on your income and family size, must be less than what you would pay under the Standard Repayment Plan. Generally, you will meet this requirement if your federal student loan debt is higher than your annual discretionary income or represents a significant portion of your annual discretionary income.”

Repayment Plans Pay As You Earn (PAYE)  Up to 20 years  10% of Discretionary Income  Payment re-calculated annually  Payment will never be more than Standard

Repayment Plans Revised Pay As You Earn (REPAYE)  Payment = 10% of discretionary income  Forgiveness Undergrad loans only – 20 years Grad loans – 25 years  If payment does not satisfy monthly accrued interest Department of Education pays remainder for subsidized loans for up to 3 years, plus 50% of unpaid interest for subsidized and unsubsidized after the 3-year period

Repayment Plans Income-Contingent Repayment (ICR)  No income qualifications  Up to 25 years  Any remaining amount is forgiven, taxable as income

Overview of Repayment Plans Standard: 10-year level Standard Graduated: 10-year step-up Extended: 25-year level Extended Graduated: 25-year step-up IBR: 10% or 15% of discretionary income, 20 or 25 years PAYE: 10% of discretionary income, 20 years REPAYE: 10% of discretionary income, 20 or 25 years ICR: 20% of discretionary income, 25 years

Public Service Loan Forgiveness The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your qualified loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.

Public Service Loan Forgiveness Qualified loans:  Direct Loan Program loans Not in default  Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible for PSLF  Direct Consolidation loans do qualify Consolidate before repayment begins

Public Service Loan Forgiveness Full-time  30 hours a week  Can be a combined average  What position you hold doesn’t matter  Time spent on religious instruction, worship services, or any form of proselytizing may not be counted

Public Service Loan Forgiveness Qualifying employer  Government organizations at any level (federal, state, local, or tribal)  Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code  AmeriCorps or Peace Corps The following types of employers do not qualify:  Labor unions  Partisan political organizations  For-profit organizations  Non-profit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code and that do not provide a qualifying service

Overview of Pending Legislation Could Congress take it away?

Overview of Pending Legislation Student Borrower Bill of Rights Act H.R –Main Sponsor: Representative Frederica Wilson –Proposals: Student loans could be discharged in bankruptcy like other unsecured debt Block garnishment of Social Security benefits, tax refunds and wages PLUS loans could participate in IBR, ICR, PAYE Prevent student loan debt from being listed as adverse activity on credit reports Block suspension of professional licenses for those in default 50% loan balance cancellation after 5 years of public service and the other 50% after 10 years

–Proposals: Combines incomes of married couples, regardless of whether they file separately or jointly for calculating PAYE NOTE: REPAYE does this Caps Public Service Loan Forgiveness at $57,500 Eliminates all payment plans except standard and PAYE Excludes from gross income amounts forgiven using IBR, ICR, PAYE Overview of Pending Legislation President Obama’s 2016 Budget