What payment plan is right for me?

If there is one thing I know scary it is if you can’t afford your student loan payment.  Those payments can be nothing short of paralyzing.  I remember when my wife got her first notices for over $900.  Good news is we didn’t panic right away and we looked over our options.  You too have options so let us look at them and see what is best for you.

This analysis is for three basic people.  First one is the person I just spoke about who cannot afford his or her payment but can afford a lower payment.  The second is for the person who can afford their payment but wants to pay less of the exorbitant interest that often times comes with student loans.  The last person is a person who qualifies for forgiveness of some type but wants to know how to lower his or her payment without “jacking up the money” on their forgiveness.

While I have a ton of experience while working for a student loan company, I have no secrets.  This is not one of things where I unveil the theories that “they” do not want you to know about.  I am here to give you a straightforward presentation of what options are out there to lower your payment and hopefully help you achieve student loan success however you see fit.

I won’t wait a lot of time on introduction because it doesn’t matter.  My name is Heath Hullihen and as I mentioned above I worked for a federal student loan companies for years helping tens of thousands of borrowers with their situation.  While I no longer hold this job, I continue to enjoy helping others however possible find out the right plan for them.

The part I enjoy most about being out of the federal program is student loans go beyond just federal programs and taking both that and what private banks offer will benefit you the most.

So in order to find a person’s solution, we must first identify their issue.  While every person’s problem is unique the overall student loan problem has a similar ring.  In total there is in excess of 1.2 trillion dollar in student loan debt.  This is causing people to experience problems with buying houses, making different career moves, etc.  And as time is going on this problem is only getting worse.  In 2012, 71% of students graduated with student loan debt and about 20%of 2012 graduates debt was private loans.  This is particularly a problem because private debt that is received while in school is often times higher interest rates and they don’t have the protections that are available to them by the government.  These protections can often times be important whenever you are first starting looking for employment

So what is the solution?  Well while forbearances and deferments was an option that was always presented as a student loan counselor, it should be a last resort.  This is because interest will often times continue to accrue and will cause your payments to raise over time.  Simply put you can run but you can’t hide.  Student loans usually cannot be discharged in bankruptcy and interest that accrues during a deferment or forbearance will often times be added to your loan at the end of this time period.  You can put yourself into a huge hole if you are not proactive.

Instead of running from your student loan problem, hit it straight on.  Don’t be Mayweather, be Tyson (before he went crazy).

You have both federal and private options.  You could look first at changing your repayment schedule.  This option is only available to your federal loans.  There are 3 choices if you do not want to be on a Level Repayment plan is the Graduated Repayment Plan, the Extended Plans, or a plan based on your income.  The other option is loan consolidation that can be done either through a private company or government.  If a government loan, private loans cannot be included, term is based on the loan debt, and it has a weighted interest rate.

The last choice is to refinance your student loans which is to lower your payment by lowering your interest rate.  There are not separate plans for this but they do have different terms available and interest rates are based on term and the borrower’s financial situation.

While every situation is different, in order to understand your options, we need to have a sample to work off of.  So meet our Sample Borrower.  We are going to call him Chuck.  Chuck has undergraduate loans of $27k at 5.5% interest and graduates loans of $57k at 6.75%.  His family income is 65k with a family size of 3.  He has a federal payment of $947.42 and if he makes his exact monthly payment on the due date, he will pay $29,702.21 in interest over 10 years.

We are first going to look at the Graduate Repayment Plan.  This plan goes up every two years approximately 20%.  The good news though is it falls under what is called the 3x rule.  With this rule, the highest payment cannot be more than 3x the amount of the lowest payment.

This can lower the payment from the Level often times by around half.  In fact with our Sample borrower, the payment would reduce from $947.52 to $542.05.  However as previously stated this is just for 24 months and then must go up to still have it paid off in 10 years.

Because you are paying less during the beginning, you will pay more in interest over the life of our loan.  In the example of our sample borrower, Chuck will pay almost $7,500 more in interest over the life of the loan.

Another option is to increase your term with Extended Plans.  These plans run 25 years.  However you must qualify by having $30,000 in FFELP Loans or Direct Loans.  FFELP loans are older style loans that were originated by a bank whereas a Direct Loan is one that is originated straight from the federal government.

For this type of loan, some loans may be eligible while others are not.  For example, is you have 24k in FFELP but 30k in Direct Loans, you can extend the Direct Loans but not the FFELP.

You can choose between the Level Payment or Graduated.  Level Payments are the same payment the entire loan whereas a Graduated is a stair-step plan.  You will pay significantly more interest over the life of the loan due to this increased term.

The most popular of the Federal Loans in an Income Plan.  It is not only popular among borrower’s but it is a big push for the Department of Education as well.  This is mainly to keep people out of deferments and forbearances which for sure is a good thing.  However the main problem is it is based on your income and many people do not qualify, but it is definitely a piece worth investigating.

Here are the basics.  It is made up of three different types of programs, Income-Based, Income-Contingent, and the Pay As You Earn Repayment Schedules.  Depending on the plan you have will either pay 10%, 15% or 20% of your adjusted gross income towards your student loans after it is adjusted for the poverty line.  If you are Married Filing Jointly, you will include both you and your spouse’s income.  It also discharges after 20 or 25 years depending on the plan.  However any discharge is taxable and often times the payment doesn’t even cover accrued interest.  This can cause an unpleasant tax bill for people the year after the discharge as we will discuss with our sample borrower later on in the process.

Another popular option is to consolidate your loan with federal consolidation.  Over the years I learned that people often times do this because they think it is the right option without knowing anything about it.

The length of your loan as seen here can range from 10 years to 30 years.  Because our sample borrower has loan debt over $60,000, he would qualify for 30 years.

One of the big misconceptions is consolidation will save you on interest.  This is often times not the case as interest is based on a weighted interest rate.  As a result you will either have very meniscal savings on daily interest, no savings, or in some cases even pay a little bit more.  What you almost always do though is pay more over the life of your loan due to the increased term.  In the example of our sample borrower, he paid $104,658.26 in interest over the life of a loan with only a balance of $84,000.  Paying more in interest than you do in principal is not usually looked favorably upon by borrowers.

While consolidation is often times a great answer, it is not a one-size-fits-all conclusion and needs to be looked at carefully.

Next we will look at the final stage of our “solutions” category, refinancing your loan.  What refinancing often times does is allow a borrower to lower his or her interest rate, pay less over the life of the loan, and lessen the payments as a result.

Interest rates are a big point of contention current in regards to loans, led by Senator Elizabeth Warren.  And while I’m sure Senator Warren would want the federal protections that are lost with many refinances, it does offer a chance for borrowers to refinance to as low as 3.5% fixed and under 2% variable depending on the term they choose and their credit situation.

Rather than offer different payment plans, refinancing is all level repayment with different interest rates and terms based on how long the borrower wants to pay for and their credit score, debt to income ratio, etc.  And while Federal Deferments and Forbearances do not exist, many companies do offer short term forbearances for things such as job loss and some even offer job hunting assistance and training.

So who is refinancing good for?  Typically it is good for people do not need the government protections or currently have private loans, that are already not eligible for these programs.  Also if you can afford your payment and hate paying that much interest, lowering it can be a very attractive option.

Finally since all the protections are based on income, if you are a high income earner, you may not benefit and may want to turn to private options instead.

But  there is always another side to the coin and there are borrowers for whom refinancing is bad for.  For example if you qualify for federal loan forgiveness, this option would be taken away for any amount you refinance.  However as we will look at with our sample borrower, Chuck, there are times where you can still take advantage of refinancing and federal forgiveness programs.

Also if you have an unstable job history or are new to the workforce you should not refinance your federal loans and should instead let yourself have the luxury of the deferments, etc.  However even in this case remember private loans are still fair game!

So if you think refinancing your student loans might be a good choice, let’s see how it may help you.  To do so we are going go visit Chuck again.  Real quick as a reminder, Chuck has a total of 84k in student loan debt, an income of 65k and a family size of 3.  His regular payment on a Standard plan ins $947.52.

So we are going to look at four scenario at times when refinancing may or may not help you.  The first of which is if you can afford your payment.  So in this example, Chuck can afford his payment of $947.52.  However he doesn’t want to pay the $29,702.21 in interest.  By refinancing to 4.75% rate that is currently being offered by one of the banks, he will save over $8,000 in interest and reduce his payment by over $60.00.  However if I was advising Chuck I’d tell him to still pay his old payment save even more, but either way you have a great amount of savings!

But almost $1,000 is a lot of money and sometimes you can’t afford that.  So Chuck decides to get on the Extended Level Payment of $560 for 25 years.  Unless Chuck needs the federal protection refinancing will be an even better option for him.  This is because he can refinance to 20 years, which is the max for most private companies, and save over $29,000 over the life of the loan on interest while paying less than $19 more a month than the extended.  This is due to the reduced interest and payment term!

If Chuck is able to pay it off in 15 years by paying $675.26 a month at 5.25% interest, he will realize a savings of over $46,000 dollars in interest compared to the Extended Level Plan.  Though not as significant if you pay the extra on the Extended Plan you will also see some level of savings which is why it is always important to pay more if you can!

Forgiveness is where it gets a little bit dicey as you don’t want to leave any free money on the table.  However there may be a solution as I eluded to earlier.

First off unless it is his intention to just pay off the loan as quickly as possible, if Chuck qualifies for Public Service Loan Forgiveness, it would be more beneficial to not apply for refinancing.  This is because any forgiveness after 10 years for PSLF is not taxable.

However let’s say instead Chuck is a teacher at a low income school and qualifies for Teacher Loan Forgiveness.  This forgiveness only covers between $5,000 and $17,500 depending on his subject area.  If Chuck doesn’t need government protection he can simply not include the forgiveness amount in the refinance loan, let it be forgiven down the road and realize the interest savings from refinancing the remainder of  his loan.  This is a win win in such a situation.

The last scenario we will look at is will you save more money doing the Income Plan and taking advantage of the loan discharge or refinancing.  Obviously all situations are different but for Chuck, it may make the most sense to go with refinancing.

Here is why.

If he is on the traditional IBR, he will have nothing left to forgive after 25 years according to the calculations on studentloans.gov but will pay in total $148,000 over the life of his loan.

If he is on the Pay As You Earn, studentloans.gov states that Chuck will pay $138,000 on his loan in total and have $45,177 forgiven

If he refinances for 20 years at 5.5% interest, he will pay just under $139,000 in total on his loans.  This is less than the IBR but slightly more than the Pay As You Earn.

However the forgiveness is taxable and will cost Chuck an extra 24,000 on his taxes the following year.  This means that in total, Chuck will have paid over $160,000 as a result of being on the Pay As You Earn.

While every situation is different, in Chuck’s case it would have made more sense to refinance.  A good place to decide what is best is to talk to a financial planner along with your local tax expert.

So now we know the benefits and detriments of refinancing.  If you are 100% sure it isn’t for you, I’d probably just exit now as there isn’t much benefit on the remaining sections, but may want to check out studentloaninsider.org/pricing for my other products that may benefit you.  If you are totally sure it is for you, hang on because we are going to cover my 3 favorite companies to work with.  If you aren’t sure hang around and there will be help for you at the end as well!

So assuming you’ve decided this is a good choice for you, the question is who should you choose.  There are many many choices but I have chosed 3 based on interest rates, term offered and additional features.  The three will be looking at is Darien Rowayton Bank, Sofi, and Commonbond.

The first one we are going to look at is my personal favorite, DRB Bank.  How I discovered them is why they are my favorite.  They solve a common problem that many people face as they allow you to refinance a Parent PLUS loan out a parent’s name and into a child’s name as long as the child is eligible for a loan.  This is something as a federal counselor I told people for years couldn’t be done and I’m glad you finally can!

Some other great points about DRB is they usually have equal to or the lowest rates that are available.  So if you are looking simply to save the most money, they are often times your go to.  In addition there is no limit on how much you can borrow, they allow you to refinance undergrad and graduate loans, and they have the lowest minimum of $5,000.  Also recently DRB added a forbearance for up to 3 months at a time and a year total for financial hardship.

However there are down sides to this company as well.  First off in many cases depending on your income and debt to income ratio you may need a cosigner.  Infact if you have an income less than 50,000 a cosigner is typically requested (though not always).  In addition, you have to have graduated or have an offer to begin employment to qualify.  Also DRB had complaints about both efficiency and service but have seemed to taken steps to both streamline service and improve their turnaround time.  In fact, on a personal note,  I spoke with an individual for over an hour asking all my questions and received a tremendous level of service.

If you are interested in refinancing your loan with DRB, click here.

The next company we are looking at is Sofi.  Outside of the traditional big banks such as Wells Fargo, Sofi is probably one of the more well known names in student loan refinancing.  They have a lot of features that I love.  For example they offer a forbearance for job loss and will even give you job training.  They have an entrepreneurship program where you can get a forbearance for up to 6 months while you start a business.  Similar to DRB, you can finance both undergraduate and graduate loans.  However unlike DRB, depending of your school of attendance you may qualify for an MBA loan to help fund you while in school.

The final positive point that is unique to Sofi is they give an incentive for you to sign up through the affiliate program.  If you sign up with Sofi  through an affiliate link and qualify as a new borrower, you will receive $100.

The negative points are that loans are not available in every state such as Nevada for fixed loans and Minnesota and Tennessee for variable rates.   Also unlike DRB you are not able to refinance Parent PLUS loans into child’s names though on their website they indicate this may change by the end of the year.

If you are interested in refinancing with Sofi, click here.

The third company I’d like to review is Commonbond.  While they make my top-3 spotlight, they are my least favorite of the 3 companies.   This is because of the restrictive nature.  For example you can’t finance over $220,000 and you can only refinance if you were a part of certain programs at certain schools.

The good news though is if you do qualify, you can get loans while you are in school.  Also you are able to have your loans stopped if you go back to school in addition to Forbearance for hardship.  While this is only available to graduate students, it plays as a great second option especially if you aren’t sure if you are able to qualify for one of the others or like the socially conscious aspects that Commonbond presents over the others.  While not my favorite, I must say it is still a very viable option that is worth looking at.

If you are interested in refinancing with Commonbond, click here.

I have given you a ton of information and I appreciate the time you have taken to listen to everything.  You may have noticed that it may seem like every option has an exception and often times these exceptions have exceptions.  And if this confuses you I understand and want to take a moment to explain how I can help you.  If you have a basic question just send me a quick email to studentloaninsider@gmail.com and I’d be glad to help you out.  But if you need a little more help I specialize in clearing up issues for borrowers.

I even have a guarantee to help you out, that if I don’t save you, you don’t pay.  Now if you are able to get help through your servicer or use the links above to do it yourself, great.  If not, I’d be glad to help as well!

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