LOAN REPAYMENT STRATEGIES Understanding the Unique Nature of Federal Student Loans Module 1 Tulane University Jeffrey Hanson Education Services

Majority of students … … now graduate with an EDUCATIONAL MORTGAGE Copyright © 2013 by Law School Admission Council, Inc. 2

What do you think?  Should you pay the interest as it is accruing in school?  Should you pay off your federal student loans as fast as possible?  Should you refinance your federal loans with a private loan to get a better rate? 3

Doing so may not be best … … you need to make “informed” decisions when managing repayment! 4

Did you know? Interest is accruing as SIMPLE interest!  Interest starts accruing on unsubsidized student loans when funds are disbursed, but it is NOT compounding!  In other words, you are not paying interest on the accruing interest while you are in school.  Accruing interest will capitalize when loans enter/re-enter repayment (e.g., six months after graduation).  Therefore, paying the accruing interest while you are in school is not the best use of your funds financially.  If you have the funds, it is better to reduce the amount you are borrowing rather than paying the accruing interest.  It is the principal balance that is accruing interest while you are in school—not the interest itself. 5

Interest Capitalization Unsubsidized Loans  What is capitalization?  Unpaid interest is added to the principal loan balance  Once capitalized, interest starts accruing on the new higher loan balance (i.e., interest starts accruing on that capitalized interest)—thus, total debt increases  When is interest capitalized?  When loan first enter repayment (after grace period) OR  When loan re-enters repayment after a continuous period of deferment and/or forbearance 6

Federal student loans are flexible and safe …  You should never have to miss a payment or default  Payment relief options exist that provide financial “ safety nets ”  Payments can always be less than 15% of your AGI  Flexible payment options exist including income-driven repayment (IDR) plans that can limit debt-to-income ratio impacts  Debt should be gone within 25 years or less  Portion of debt could be forgiven if not fully repaid  No penalty for prepayments  Can always pay extra or make payments when not due to reduce total interest paid and get debt paid off more quickly if that is your goal 7 Your “ educational mortgage ” should not prevent you from:  Pursuing your desired career  Achieving your financial goals

What should you do? Consider:  Choosing the repayment plan that offers the LOWEST scheduled monthly payment Why?  This provides maximum cash flow flexibility so that you can:  Maximize amount you are prepaying in a targeted way at your most expensive debt (e.g., private student loans) AND/OR  Allocate “extra cash” for other purposes (e.g., investing and saving for the future) 8 8

Financially, you’re not boxed into a corner! Federal Student Loans:  Provide flexible repayment options including the income- driven repayment plans that can accommodate changes in your circumstances.  As such, consider leveraging this flexibility when planning for repayment so that you can:  Successfully repay your federal student loans  Achieve your professional, financial and personal goals more quickly 9 9

For more information …  Contact your loan servicer(s)  Online resources:  Federal student loans: StudentAid.gov  Federal student loan repayment: StudentLoans.gov 10

Opportunities to learn more …  Planning for Student Loan Repayment  Exploring the Student Loan Repayment Plans  Understanding the Income- Driven Repayment Plans  Estimating Your Monthly Student Loan Payments  Taking Stock of Your Student Loan Portfolio  Developing Your Student Loan Repayment Timeline  Choosing Your Student Loan Payment Plan  Understanding Student Loan Consolidation  Public Service Loan Forgiveness 11 Check out all the loan repayment modules:

BE STRATEGIC: Take Charge of Loan Repayment! Jeffrey Hanson Education Services Tulane University