“Picking Your Plan!” Strategies for Successfully Managing Loan Repayment Illinois Institute of Technology School of Law April 2009 © Copyright, 2009 by Access Group, Inc. All rights reserved.

Looking Ahead What you’ll need to do once you graduate … Manage your student loans Postpone repayment OR begin making payments Notify loan holder(s)/servicer(s) of address change Pay your bills Develop an affordable budget plan/spending plan Apply for a bar exam loan, if needed Check credit reports for errors

Deferment and Forbearance Options to Postpone Payments You may be able to get temporary relief if you’re unable to make your required minimum monthly payment(s) Options include: Deferment Temporary postponement of your monthly student loan payments Forbearance Temporary postponement or reduction of your monthly student loan payments Contact your loan holder/servicer for more information

Credit has become harder to get … Fewer lenders now offer the loan Better credit (higher credit score) is required to get ANY loan May need a credit-worthy co-signer to get a bar exam loan Loan will cost more It’s harder to get a bar exam loan because:

Obtaining Your Credit Report equifax.com experian.com transunion.com Credit reports also are available online (usually for a fee) from the three national credit bureaus at: Go to AnnualCreditReport.com for a free copy of your report every 12 months from each of the three national credit bureaus

To successfully manage loan repayment, you should... Know how much you have to repay and to whom Understand the terms and conditions of your loans Define your short- and long-term financial goals Develop an affordable budget plan and estimate how much you can afford to pay each month on your debt Select the repayment plan that best achieves your goals given what you can afford to pay each month Take advantage of loan forgiveness programs when you qualify for them Keep good financial records

Repayment Realities How much will you have to repay? Who must you repay?

How much will you have to repay? I.I.T. School of Law Class of 2008 Average student loan borrowing$77,300 Estimated capitalized interest$8,039 Estimated total debt at repayment$85,339 Estimated monthly loan payment Standard 10-year fixed Repayment Plan $999 Estimated monthly loan payment Extended 25-year fixed Repayment Plan $613 Assumptions:Stafford 6.8% for 10 years Grad PLUS 8.5% for 10 years

Sample Loan Repayment Debt 6.8% Interest Rate8.5% Interest Rate Monthly Payment Total Paid Monthly Payment Total Paid $10,000$115$13,810$124$14,878 $25,000$288$34,524$310$37,196 $30,000$345$41,429$372$44,635 $40,000$460$55,239$496$59,513 $50,000$575$69,048$620$74,391 $60,000$690$82,858$744$89,270 $65,000$748$89,763$806$96,709 $70,000$806$96,667$868$104,148 Assumptions:- Standard-fixed repayment plan - 10-year repayment period - No payment incentives

Who must you repay? Create a Detailed Listing of All Loans You must repay your current loan holder/servicer Loan Type/ Account # Loan HolderLoan Servicer Stafford Name: Address: Phone Number: Website: PLUS Name: Address: Phone Number: Website: Information about the current loan holder/servicer of your Title IV federal student loans is stored in the NSLDS at:

Federal Student Loan Database National Student Loan Data System (NSLDS) Toll-free telephone FED - AID Web site Information about your Federal Stafford, Federal PLUS, Federal Consolidation and Federal Perkins Loans is stored in the NSLDS ü

Federal Student Loan Repayment Options

Repayment Plans Federal Family Education Loan Program (FFELP) Standard (Fixed) Repayment Graduated Repayment Extended Repayment Income-Sensitive Repayment Income-Based Repayment (available 7/1/2009) Choice of a repayment plan may depend on your eligibility for that plan. Once you choose a plan, you can change to a different plan at least once a year provided you qualify for that plan.

Comparison of Repayment Plans Options Payment Structure Maximum Payment Period Additional Features Standard Fixed10 years - Highest initial payment - Lowest total interest - No negative amortization Graduated Tiered10 years - Interest only payments initially - Payments increase incrementally - No negative amortization - Monthly payments can’t be more than three times greater than any other payment (“3 times rule”) Extended Fixed or tiered25 years - Lowest initial payment without considering income - No negative amortization - To qualify in FFELP: - FFELP debt must be > $30,000 - New FFELP borrower ≥ 10/7/98 Income Sensitive Adjusted annually based on: - Total gross income 15 years - Subject to “3 times rule” - No negative amortization Income Based (IBR) Adjusted annually based on: - Household AGI - Household size - Poverty guideline - State residence 25 years - Payment is 15% of “disposable” income if experiencing “partial financial hardship” (PFH) - Eligibility/payment amount re- evaluated annually - Negative amortization allowed

Income-Based Repayment (IBR) Available July 1, 2009 Can be used to repay: Federal Stafford Loans Federal Grad PLUS Loans (not available for repayment of Parent PLUS Loans) Federal Consolidation Loans (not available for repayment of Consolidation Loans that included payoff of a Parent PLUS) Must have “Partial Financial Hardship” (PFH) at time you select IBR Plan Payment while in PFH is based on: Household AGI Household size HHS Poverty Guideline for state of residence

IBR Plan Partial financial hardship exists when … 15% of your household’s “disposal” Adjusted Gross Income (AGI) Your annual loan payment using the “Standard 10- year Fixed Repayment Plan” >

Portion of AGI Available for Loan Payment in IBR Plan Portion of AGI Needed to Cover Basic Needs (150% of poverty guideline) Total AGI Portion of AGI Available for IBR Loan Payment (15% of remaining AGI) Portion of AGI Available for Other Expenses Calculators are available at: Finaid.Org/calculators and IBRinfo.org “Disposable” AGI

IBR Plan More Details Once in IBR plan, monthly payment is lesser of: Amount calculated based on Standard 10-year fixed plan when you began loan repayment Amount calculated using the IBR formula Monthly payment can be less than accrued interest (it allows for negative amortization) Unpaid interest that accrues on Subsidized Stafford debt will be subsidized for up to first 3 years in repayment in IBR plan Repayment period for IBR plan can extend beyond 10 years regardless of the amount of your eligible debt Any outstanding eligible loan balance is cancelled after 25 years of being “economically challenged”

IBR Plan Approx. Maximum AGI for “Partial Financial Hardship” at Specified Debt (2009 Poverty Guidelines) Assumptions: - Interest rate = 6.8% - Household size of 1 residing in 48 contiguous states DebtAGI $5,000$20,848 $10,000$25,451 $15,000$30,055 $20,000$34,658 $25,000$39,261 $30,000$43,864 $35,000$48,467 $40,000$53,071 $45,000$57,674 $50,000$62,277 $55,000$66,880 $60,000$71,484 DebtAGI $65,000$76,087 $70,000$80,690 $75,000$85,293 $80,000$89,896 $85,000$94,500 $90,000$99,103 $95,000$103,706 $100,000$108,309 $105,000$112,912 $110,000$117,516 $115,000$122,119 $120,000$126,722 $125,000$131,325

IBR Plan Pros and Cons Potential Pros Lowest initial monthly loan payment Possible to exclude spouse’s income ED will pay unpaid interest on subsidized Stafford for up to 3 yrs Loan cancellation after 25 years of eligible payments Entitlement Potential Cons Increased interest will accrue and may have negative amortization If married might need to file separate tax returns Unpaid interest will be capitalized at some point Annual income and family size verification required Monthly payments could change each year

Comparing Payment Plans $100,000 Stafford Loan Balance OptionsStandardGraduatedExtendedIBR Monthly Payment $1,151 $567 (2 yrs) $694 $555 (1 st yr). $703 (9 th yr). $1,063 (23 rd yr) $1,353 (8 yrs) Maximum Payment Period 10 years 25 years22.9 years Total Paid$138,096$143,530$208,222$215,592 Assumptions:- 6.80% fixed interest rate - No payment incentives - For IBR Payment: - Household AGI = $60,000 in year 1, then increases by 3% annually Poverty Guideline for household size of 1 = $10,400

Loan Repayment Calculators Access Group offers online interactive calculators at: AccessGroup.Org/calculators “Loan Repayment” – both simple and advanced “Compare Monthly Payments” – provides a comparison of monthly payments using Standard Repayment and Extended repayment IBR calculators available at: FinAid.Org/calculators IBRinfo.org

Loan Forgiveness for Public Service Employees

Public Service Loan Forgiveness New Direct Loan Forgiveness Program Your Federal Direct Loans are not in default You’ve worked full-time for a total of 120 months in a qualifying public service position on or after October 1, 2007 You’ve made 120 qualifying loan payments on Federal Direct Loans during period of qualifying public service employment You’ll qualify for loan forgiveness if …

Public Service Loan Forgiveness General Provisions Effective for qualifying monthly Direct Loan payments made on or after October 1, 2007 Loans eligible for forgiveness are limited to: Federal Direct Stafford Loans Federal Direct PLUS Loans Federal Direct Consolidation Loans Any amount cancelled in this program will NOT be taxable in the calendar year it is cancelled

Public Service Loan Forgiveness Qualifying Payment Requirements You must be working full-time in an eligible public service position, AND Make qualifying payments using: Income Contingent Repayment, or Income Based Repayment, or Standard 10-year Fixed Repayment plan, or Other plan, but monthly payment must be at least equal to amount required using Standard 10-year Fixed Repayment plan

Public Service Loan Forgiveness Additional Eligibility Provisions 120 months do NOT have to be consecutive You must be working full-time in qualifying public service position at time of forgiveness Loan payments made on any loan prior to October 1, 2007 do NOT count toward the 120- month requirement Loan payments on non-eligible loans (e.g., FFELP loans, Federal Perkins Loans) do NOT count toward 120-month requirement

Public Service Loan Forgiveness Definition of “Public Service” In general, it’s full-time employment in: A 501(c)(3) organization that is exempt from taxation under section 501(a) of the Internal Revenue Code of 1986, or Government (federal, state, local, tribal) agency

Public Service Loan Forgiveness Sample Benefit Scenario (AGI = $40,000) Eligible federal student loan debt$100,000 Estimated monthly payment-Standard Plan$1,151 Principal balance after 10 years$0 Total amount paid after 10 years$138,097 Comparison with IBR Plan (2008 Poverty Guideline) Assumed starting AGI in year 1$40,000 Assumed Annual Growth Rate in AGI3% Assumed Annual Increase in Poverty Guideline3% Assumed Annual CPI3% IBR monthly payment in 1 st month$305 IBR monthly payment in 120 th month (max)$398 Assumed AGI in year 10$52,191 Total interest paid in IBR over 10 years$41,958 Total principal paid using IBR over 10 years$0 Total accrued interest forgiven after 10 years$22,953 Total principal forgiven after 10 years$100,000 Total amount forgiven after 10 years$122,953

Public Service Loan Forgiveness Pros and Cons Potential Pros May make it possible financially for you to pursue public service career Portion of your debt may be forgiven Entitlement Potential Cons “All or nothing” benefit; must put in full 10 years Only Direct Loans can be forgiven—you’ll need to consolidate FFEL loans into Direct Loan Program to be eligible Will you have debt left to forgive? No confirmation that employment qualifies

For more information on IBR and Public Service Loan Forgiveness “Project on Student Debt” has created a special Website specifically about IBR at: IBRinfo.org Equal Justice Works has information about both programs at: EqualJusticeWorks.org Calculators are available at: FinAid.Org/calculators, IBRinfo.org A scholarly paper has been written by Philip G. Schrag that focuses on the evolution of the Public Service Loan Forgiveness Program: "Federal Student Loan Repayment Assistance for Public Interest Lawyers and other Employees of Governments and Nonprofit Organizations,” Hofstra Law Review, Vol. 36, Fall 2007

Choosing Your Federal Student Loan Repayment Plan

Choosing A Repayment Plan Steps to consider … 1.Define financial goals 2.Develop an affordable budget plan 3.View debt as a portfolio 4.Select the loan repayment plan that best meets individual needs

Setting Goals Sample Questions How quickly do I want to be debt-free? What do I want to buy as soon as I graduate? What kind of lifestyle do I want? What are my hopes for my family? How long do I want to work? When do I want to retire? What kind of lifestyle do I want in retirement? How much money will I need to invest to retire?

Developing a Budget Plan How much can you afford to pay each month? Quantify monthly earnings and other available financial resources Estimate monthly expenses Include monthly student loan payment Include investment/savings contributions Do the math- is there a surplus or a deficit If there is a surplus, more can be allocated to debt repayment, to investment/savings, and/or to lifestyle If a deficit occurs, then what?

Budget Planning Use Tools Use tools such as worksheets, spreadsheets and/or online calculators For example, Access Group offers the following online interactive calculators at AccessGroup.Org: “Out-of-School Budget” “Loan Repayment”

Eliminating a Budget Deficit What can you do? Reduce spending on your lifestyle Is this realistic? Reduce your investment/savings contributions May make it more difficult to achieve short-and long- term financial goals Reduce amount you pay each month on student loans If you have a budget deficit, you need to spend less (or earn more) each month; there is no more financial aid! Failure to eliminate the deficit will increase your total debt.

Managing Debt Balancing Trade-offs Consider viewing your debt as a portfolio that can be leveraged to achieve your financial goals You may choose to pay off debt … as fast as possible, OR more slowly based solely on what is affordable given all other expenses, OR more slowly to maximize ability to save and/or invest for the future When prepaying debt, ALWAYS prepay your highest cost debt(s) first

Typical Debt Portfolio Managing Cash Flow to Repay Debt Total Cash Flow Federal Stafford Loan 6.8% Federal PLUS Loan 8.5% Private loan 11% Credit card 15.9% Other 9%

Loan Repayment - $100,000 An Investment Trade-off Years 0-10 Standard Repayment Extended Repayment Total years in repayment 1025 Total amount owed $100,000 Monthly loan payment (annual interest rate = 6.8%) $1,151$694 Monthly investment $0$457 Total end of year 10 (annual rate of return = 8%) $0$71,945

Loan Repayment - $100,000 An Investment Trade-off Years Standard Repayment Extended Repayment Monthly loan payment (annual interest rate = 6.8%) $0$694 Monthly investment $1,151$457 Total end of year 25 (annual rate of return = 8%) $398,290$434,619 Total paid ($1,151 x 300 months) $345,300 Net gain $52,990$89,319 Difference (benefit of Extended Repayment) $0$36,329 Investment gains require financial DISCIPLINE every month!

A Few Final Comments...

When Choosing a Repayment Plan You should consider the following... If you want to pay the least amount of total interest over the life of repayment Standard Repayment Plan If you want the lowest possible monthly federal student loan payment Income-Based Repayment Plan Extended Repayment Plan

We’re here to help you! Access Group AccessGroup.Org

Additional Information

Standard Repayment Monthly payment is fixed – the same minimum payment is due each month (your monthly payment typically changes only if your loan has a variable interest rate and that interest rate changes) Maximum repayment period is 10 years on Federal Stafford/Federal PLUS Loans Results in lowest amount of total interest paid Requires the highest initial monthly payment Your loan holder/servicer will place you on this repayment plan unless you choose one of the other available repayment plans and notify your loan holder/servicer of that choice.

Graduated Repayment Payments start low, then increase in one or more increments over time Maximum repayment period is 10 years on Federal Stafford/Federal PLUS Loans Results in higher cost of interest paid than under Standard Plan Lenders must offer at least one graduated repayment plan; some offer more than one graduated option

Extended Repayment Fixed or graduated (tiered) payments over 25 year repayment period Lower monthly payment than Standard or Graduated Plans with 10-year repayment schedules More total interest paid Available only to those FFELP borrowers who: First borrowed a FFELP loan on or after 10/7/98, or have no outstanding balance on a FFELP loan that was borrowed prior to 10/7/98, and Have more than $30,000 in FFELP debt

Income-Sensitive Repayment Eligibility based on your expected total gross monthly income received from all sources and loan amount Payment must at least equal interest charges Reviewed and adjusted annually in case of any income changes Maximum repayment period is 15 years on Federal Stafford/Federal PLUS Loans Results in lower monthly payment, but higher cost of interest paid