Boston Student Loan Lawyer

Law Office of Adam S. Minsky

The Six Most Common Student Loans, Ranked

| Default Income-Based Repayment Loan Forgiveness Private Student Loans

So, you’ve got a student loan. Don’t we all? One could argue that they are all pretty terrible, and you would not be totally wrong about that. However, in my opinion, some are better than others. If you are looking for some basic financial aid counseling, here is my own ranking of the most common student loans, least-worst to most-worst:

  1. Federal Perkins Loans. These are low-interest federal student loans available to both undergraduates and graduates who have significant financial need. The funds for Perkins loans are provided by the federal government to participating colleges and universities, and then leant by the schools to students directly. I like Perkins loans because they have low, fixed interest rates at 5% and relatively small loan balances. Interest accrual is deferred while you are enrolled in school, and they have fairly generous forgiveness and cancellation options if you work in the right profession. There are two major downsides, however: these loans are not eligible for Income-Based Repayment (IBR), and if you default on them, resolving the defaults can be quite costly, and might even involve litigation.
  2. Federal Subsidized Stafford Loans. These are next on my list and are probably the most common student loans out there. They are available to undergraduate, graduate, and professional students and have relatively low interest rates. The government waives interest accrual during school enrollment, which is a huge benefit.
  3. Federal Unsubsidized Stafford Loans. These loans are the Subsidized Stafford loan’s evil twin. Although they also tend to have relatively low interest rates and are widely available, they are typically disbursed in larger amounts, and the government does not waive interest during school enrollment or other deferment periods. This makes these loans significantly more costly for students than subsidized loans, given that thousands of dollars of interest can accrue by the time you graduate.
  4. Federal Graduate PLUS Loans. These loans are available only to graduate and professional students. They have much higher interest rates than most other federal loans and they can also have origination fees. Students can borrow up to the cost of attendance, but these loans are not subsidized, which means a huge amount of interest can accrue during school enrollment and other deferment periods. This can be quite costly.
  5. Federal Parent PLUS Loans. These are the worst federal student loans, in my opinion. These loans are only available to parents for the benefit of their child’s education. Like Graduate PLUS loans, these loans have very high interest rates, origination fees, high balance limits, and they are not subsidized. To make matters even worse, these loans are not eligible for Income-Based Repayment (IBR), which can cause a major hardship (although it may be possible to place these loans on a less-favorable income-driven plan in certain circumstances).
  6. Private Loans. If you follow my posts, this should come as no surprise to you. Private student loans typically have high interest rates, high origination fees, and few avenues for repayment flexibility or hardship relief. Private loans should be avoided at all costs, in my opinion.

Top 5 Myths About Income-Driven Repayment

| Income-Based Repayment Loan Forgiveness Pay-As-You-Earn

With the recent news about the Obama administration’s proposed expansion of the Pay-As-You-Earn repayment program for certain federal student loan borrowers, people have been talking a lot about income-driven repayment. The problem is that there are a lot of misconceptions about these repayment programs, and this can steer public discourse in the wrong direction. I’d like to try to dispel some of the most common myths I encounter.

  • Borrowers pay little or nothing on an income-driven plan. There are several income-driven repayment plans, each with their own eligibility criteria and formulas to calculate monthly payments. Two of the plans, Income-Based Repayment (IBR) and Pay-As-You-Earn (PAYE) have exemptions for people at or below 150% of the federal poverty limit. This makes sense, since if it’s a choice between putting food on the table and paying your student loans, we want you to put food on the table. For everyone else, 15% of discretionary income for IBR and 10% of discretionary income for PAYE is not an insignificant payment amount, particularly given the rising cost of food, fuel, and housing, as well as declining purchasing power. Under IBR, a borrower making $35,000 per year will pay about $230 per month. At $55,000 per year, the borrower will pay about $480 per month.
  • Everyone will get their loans forgiven. For all of the income-driven repayment plans, if you make payments for the full repayment term (25 years for IBR, 20 years for PAYE), any remaining balance will be forgiven at the end of the term. However, the fact is that the vast majority of people in these programs will repay their loans before the repayment term ends, and there will be no balance to forgive. Take the following example. A borrower who graduates with $33,000 in federal student loan debt (the average debt load for the Class of 2014) at a 4.8% interest rate, and has a starting salary of $35,000, will repay their loans in full under both the IBR and PAYE plans.
  • It’s easy. All you have to do is send in documentation of income every year, and your loan servicer will recalculate your payment. Piece of cake, right? Wrong. The federal student loan servicing system is plagued by administrative errors and inefficiency. Many of you recall that when I tried to re-certify my income to remain in income-driven repayment, I had tremendous difficulties. And I’m the expert when it comes to this stuff!
  • Borrowers get a free pass, and taxpayers foot the bill. Most borrowers will repay their student loan debts in full by the end of their income-driven repayment terms, so only a fraction of borrowers on income-driven plans will have any balance forgiven. Furthermore, because of how interest works, the vast majority of borrowers will wind up repaying significantly more than they originally borrowed, including those who get some of their balance forgiven at the end of their repayment term. On top of this, any forgiven balance could be treated as taxable income for the borrower, meaning the borrower would have to pay additional taxes. What all of this means is that under these plans, even with their forgiveness provisions, the government (and the taxpayer) still come out on top. It’s not even close. This is not a free pass for borrowers.
  • Students borrow more because of these plans. There is no actual data to back up this assumption. The fact is, with college tuition exploding during the past twenty years, education has simply become much more expensive. Students entering college and taking on student loan debt have very little counseling about their post-graduation repayment options, and most do not even know about income-driven repayment until they graduate. Data shows that these programs are significantly under-utilized, meaning that borrowers who could be eligible for IBR or PAYE are simply not enrolling because they do not know that they exist.

FAQ For the President’s Expansion of “Pay-As-You-Earn”

| Income-Based Repayment Loan Forgiveness Pay-As-You-Earn

Yesterday, President Obama signed an Executive Order expanding the “Pay-As-You-Earn” (PAYE) repayment plan option for federal student loan borrowers. PAYE is essentially a more-affordable version of the “Income-Based Repayment” (IBR) plan.

So what does this mean, exactly, and how will you be potentially impacted? These are some of the most common questions I’ve been getting:

What is IBR? In 2007, Congress and President Bush passed a law that created the Income-Based Repayment (IBR) program, which allows federal student loan borrowers to make payments on their federal student loans based on their income. The program caps monthly payments at 15% of a borrower’s discretionary income. After 25 years of payments under the IBR program, whatever balance remains is forgiven.

How is PAYE better than IBR? PAYE improves upon IBR by capping payments at 10% of a borrower’s discretionary income. To illustrate, a single borrower with $40,000 in eligible federal student loans with an income of $35,000 per year would have a monthly IBR payment of $220. Under PAYE, the monthly payment for the same borrower would be $145. Furthermore, under the PAYE program, a borrower’s remaining loan balance is forgiven after only 20 years, instead of 25 years under IBR.

So why not choose the PAYE plan now instead of IBR? When the PAYE program was created in 2012, the U.S. Dept. of Education limited the program’s eligibility to what it calls “new borrowers.” These are borrowers who had no outstanding federal student loan debt as of Oct. 1, 2007, and also took out a new federal student loan on or after Oct. 1, 2011. This locked out borrowers who had older loans.

And what does the President’s Executive Order do? The President’s Executive Order eliminates the “new borrower” eligibility restrictions on the PAYE program, meaning that borrower who took out loans prior to Oct 1., 2007, or did not take out a new federal loan after Oct. 1, 2011, will now be eligible.

Great! Where do I sign up? Not so fast. The program will not become effective until at least December 2015. The U.S. Dept. of Education has to issue new regulations governing the expanded PAYE program, and that is a long process.

Will this impact Public Service Loan Forgiveness? Public Service Loan Forgiveness (PSLF) is a separate federal loan forgiveness program whereby borrowers can get their remaining loan balance forgiven after 10 years of qualifying payments under the IBR or PAYE plans. Many borrowers were concerned after the President’s budget proposal offered a new “PAYE” plan that capped loan forgiveness at the 10-year point, and extended the repayment term of higher-debt borrowers to a 20-year term. The President’s Executive Order that he signed this week does not implement any of the proposed changes to loan forgiveness that were contained in his budget proposal, and the White House’s fact sheet on the Executive Order specifically mentions that “any remaining balance” under the expanded PAYE program is forgiven after 10 years of qualifying public service employment. Of course, additional changes to these programs could come in the future. But for now, this Executive Order does not impact the PSLF program.

Stay tuned as more information on this becomes available.

BREAKING: Pres. Obama To Expand “Pay-As-You-Earn” Program

| Loan Forgiveness Pay-As-You-Earn Policy & Reform

In a move that could benefit millions of federal student loan borrowers, President Obama will be issuing an executive order to reduce monthly payments under current income-driven repayment programs.

In 2007, Congress and President Bush passed a law that created the Income-Based Repayment (IBR) program, which allows federal student loan borrowers to make payments on their federal student loans based on their income. The program caps monthly payments at 15% of a borrower’s discretionary income. After 25 years of payments under the IBR program, whatever balance remains is forgiven.

Last year, President Obama created the Pay-As-You-Earn (PAYE) repayment program. This program improves upon IBR by capping payments at 10% of a borrower’s discretionary income. Furthermore, a borrower’s remaining loan balance is forgiven after only 20 years, instead of 25 years. PAYE is a significant improvement over IBR in terms of the repayment and forgiveness terms, but unfortunately, the U.S. Dept. of Education limited the program’s eligibility to what it calls “new borrowers.” These are borrowers who had no outstanding federal student loan debt as of Oct. 1, 2007, and also took out a new federal student loan on or after Oct. 1, 2011.

This week, President Obama announced that through executive order, he will be expanding the PAYE program to an additional 5 million borrowers. I’ve been advocating for an expansion of this program for years. This will have real, measurable impacts for people by significantly reducing their monthly payments and shortening their repayment term. It is unclear, however, who these 5 million borrowers will be, since there are approximately 30 million borrowers in the Direct Loan program.

Will you be eligible for the expanded PAYE program? Who is going to be left out of this executive action? Stay tuned, I’ll be posting new information about this as it becomes available.

New Consolidation System Lets Borrowers Choose Their Servicer

| Loan Forgiveness

The U.S. Department of Education has recently started a new program for borrowers applying for new Direct Consolidation loans, which allows the borrower to choose their consolidation loan servicer. This is a huge change, and one that I hope will really benefit borrowers.

By way of background, the Dept. of Ed used to service Direct Loans in-house, so to speak, using a single private contractor. Then, a few years ago, the Dept. of Ed brought on over a dozen different private contractors to take over loan servicing operations, which caused some disruption for many borrowers in repayment. That reshuffling has continued as the Dept. shifts around student loan accounts to its new contractors.

Up until now, borrowers had no choice at all in selecting their servicer. You were stuck with whatever company you got. Now, however, the Dept. of Ed has instituted a pilot program where borrowers who are consolidating their non-defaulted federal student loans can select from one of the four primary Direct loan consolidation servicers:

FedLoan Servicing is the Direct Loan servicing branch of the Pennsylvania Higher Education Assistance Association (PHEAA), a state agency. They have a special department for people who are on track for Public Service Loan Forgiveness.

Great Lakes Higher Education is a nonprofit organization based in Madison, Wisconsin. In addition to their servicing operations for the Direct Loan program, they also serve as a guaranty agency (with an internal collections department) for the FFEL federal loan program.

Nelnet is a for-profit company based in Nebraska. They have dozens of subsidiaries and they service student loans throughout the United States and Canada.

Sallie Mae likely needs no introduction. They are a for-profit company based in Pennsylvania. In addition to their Direct Loan servicing operations, they are the largest private student loan lender and servicer in the country, and they also service federal loans in the FFEL program.

I don’t really have particularly strong feelings about the specific companies above (borrowers have had both good and bad experiences with many servicers). However, I am encouraged that borrowers are being given a choice. My hope is that this limited program will be expanded to all borrowers in the Direct loan program so that someone who is dissatisfied with their current servicer can switch to a different company. In my opinion, this would encourage competition between the servicing companies and might help incentivize better customer service. There are no indications that such a change will happen anytime soon, but one can dream, and this is certainly a step in the right direction.

House Tax Plan Slams Student Borrowers

| Loan Forgiveness Pay-As-You-Earn Policy & Reform

The Republican-controlled House of Representatives recently came out with a tax reform plan that slams student borrowers with additional tax burdens. There are three main elements to the proposal that would directly impact student borrowers:

  • Elimination of tax deduction for student loan payments. Under current law, borrowers who are making payments on their student loans can deduct up to $2,500.00 in interest payments per year on their tax return. This modest tax benefit gradually phases out for higher income earners. The House proposal would eliminate this tax deduction entirely, which would effectively raise taxes on low-and-middle income earners who are making payments on their student loans.
  • Elimination of tax deduction for tuition payments. Under current law, students or their parents can deduct certain tuition-related expenses on their tax return, thus reducing their tax burden. This is a modest but helpful deduction for people that can lower the cost of education and reduce the need to borrow student loans. The House proposal would eliminate this tax deduction.
  • Imposition of taxes on Public Service Loan Forgiveness. Under current law, loans forgiven pursuant to the forgiveness provisions of Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Pay-As-You-Earn (PAYE) would likely be treated as “taxable income,” which could impose a tax burden on student borrowers. Advocates and policy makers, including the Obama administration, are working to change this so that the forgiven balances are not taxable. In contrast under current law, loans forgiven pursuant to the Public Service Loan Forgiveness (PSLF) program would not be subject to a tax burden; thus PSLF offers tax-free loan forgiveness. The House tax plan eliminates this exception. Under the House proposal, any federal loans forgiven after 2014 would be treated as taxable income. This would impose a huge tax burden on borrowers who elected to get on the PSLF track based on the promise of full loan forgiveness.

It is astounding to me that during a time where there is near-universal agreement that our student lending system is broken, and that student debt has become a huge burden on our economy, that we are talking about imposing additional financial burdens on student borrowers. The tax reforms outlined above would have measurable and, in some cases, devastating impacts on people, and this is significantly more troubling to me than the proposed reforms recently announced by the Obama administration.

As with the Obama administration proposal, however, even this draconian plan from the House is unlikely to make it into law anytime soon, given our divided government. However, this is a warning bell for all student borrowers: changes may be coming, and you must stay informed and make your voice heard.

MAJOR Changes Proposed to Federal Repayment and Forgiveness Programs… But Don’t Panic Yet

| Loan Forgiveness Pay-As-You-Earn Policy & Reform

I’ve been getting a lot of inquiries about possible changes to federal repayment and forgiveness programs proposed by the Obama administration recently. There’s a lot of panic out there. I’ve put together a concise, straightforward summary of the proposals and my own thoughts on it. I hope this will reduce some of the fear and misinformation that’s been circulating.

First, some background. As part of the budget proposal for the 2015 fiscal year, the Obama administration has proposed various reforms to federal student loan repayment and forgiveness programs. Before we even get into the details, let me point out a few important things:

  • This is a budget proposal. This is not a bill or a piece of legislation, this is not a court decision, this is not an executive order. In other words, this has no force of law. It is simply a proposal, a starting point, a recommendation.
  • This is a budget proposal during an election year with a divided government. This means that, practically speaking, the final product will probably be significantly different. Who knows what the final budget will even look like? I certainly don’t.
  • The entire budget process is incredibly slow and tedious. Whatever the final product is, we may not even see it for a year or two, or longer.
  • Any substantial material changes to federal student loan programs will require an act of Congress, signed by the President. We are nowhere near that point.

So, with all that being said, let’s get into the details. This specific proposal actually has two very good elements to it, which I think we can all get on board with:

Read More

Beware of the “Loan Forgiveness” Scam

| Loan Forgiveness

I’ve been hearing a lot recently about student loan forgiveness advertisements that have been circulating around the country via email and regular mail. The advertisements are sent directly to borrowers (I don’t know how they get borrower’s contact information). They claim that there are new loan forgiveness programs available, and they encourage borrowers to contact their agency immediately to help get their loans forgiven and obtain substantial savings.

This is a scam.

While I cannot verify exactly what these companies are offering, more than likely they are simply re-packaging existing government programs (such as Income-Based Repayment) and selling them as their own—and then charging borrower’s hefty user fees in the process. The National Consumer Law Center recently issued a report about these so-called “debt relief” companies, and the Consumer Financial Protection Bureau has issued warnings to borrowers as well.

Be careful. If it sounds too good to be true, it probably is. While there are several federal student loan forgiveness programs out there, they all have their own specific legal requirements, and it typically takes years before the forgiveness benefits can be realized. Paying a random company will not speed things up, and will not make your loans go away.

This type of scam will unfortunately only become more common, given the massive and increasing levels of student loan debt and the growing ranks of troubled borrowers seeking some sort of relief. Be aware, and be smart.

Federal Employees During the Shutdown

| Loan Forgiveness

As the federal government shutdown drags out into its third week, furloughed and non-paid federal employees are beginning to feel the squeeze. Many employees have student loans and may have trouble paying their bills the longer this lasts. What can they do?

  • For federal loans, it is best to continue making your payments, but if you are unable to pay your bill, you can request a temporary economic hardship forbearance. Just keep in mind that interest continues to accrue during the forbearance period. Also, forbearance will not count towards loan forgiveness. So, it should only be used as a temporary, short-term fix.
  • Private loans are much more problematic. Forbearance options will be limited at best, and private lenders will likely be unwilling to work with borrowers or be flexible with payments. Borrowers should be prepared to continue making payments if they can, since missing even one or two payments can cause a private student loan to go into default. If you are unsure about your private student loan forbearance options, you can contact your private lender.

Meanwhile, as the country speeds towards default, I don’t have anything significantly new to report about federal student loan operations or federal student loan servicing. Check out last week’s post, as the situation is mostly unchanged since then. If the country breaches the debt limit this week, we might start to see more serious impacts. Hopefully it will not come to that.

Watch Out For These “Public Interest Loan Forgiveness” Pitfalls

| Loan Forgiveness

As many of you know, Public Service Loan Forgiveness (“PSLF”) is a fantastic program designed to incentivize public service work. Eligible borrowers can get their loans forgiven after 10 total years of payments (or, more accurately, 120 individually qualifying payments, which might actually take longer than 10 years).

  • The tricky aspect of PSLF is determining what counts as a “qualifying payment.” This is not a program whereby you simply work for a nonprofit organization or government entity and your loans just get magically forgiven. Unsurprisingly, the U.S. Dept. of Education does not make this easy. Each payment you make will be scrutinized to determine if it qualifies as a “qualifying” payment that will count towards the PSLF program. If any element of “qualifying” is missing, it won’t count. Here are some things to be mindful of:
  • The program only applies to “Direct” federal loans, which are loans lent directly by the U.S. Dept. of Education. Payments made to non-Direct loans (such as FFEL loans, HEAL loans, or Perkins loans) don’t count.
  • Not every repayment plan will count towards PSLF, even for Direct loans. For example, are you on the Extended or Graduated plan? Sorry, you’re out of luck, even if you work for a qualifying employer.
  • For a payment to count towards PSLF, it must be made “on time.” That obviously means you can’t be late. But it also means you can’t be too EARLY. If you jump the gun and make your monthly payment before your monthly bill is generated, it might not count.
  • Forbearance and deferment periods do not count towards PSLF, even if you are making voluntary payments while working in qualifying employment.
  • Not all nonprofit organizations will be considered qualifying employers. Don’t just assume that because you work for a nonprofit organization that it qualifies as eligible employment. Certain types of nonprofits (such as partisan political organizations) are ineligible.
  • Under current regulations, you have to remain in qualifying employment, and continue making monthly payments, at the time that you submit your application for PSLF. You also have to be in qualifying employment and be making regular monthly payments at the time that your loans actually get forgiven. I recently wrote about this.

Just some things to be aware of. Don’t ever assume that the U.S. Department of Education has made things simple for you (do they ever do that?).