Student Loan Repayment

There are few ways in which someone can have a student loan canceled using a school related argument.  For example, those that feel they went to a school that did not provide them with a proper education, job placement services, or left you with other unfulfilled promises cannot simply cancel the loan.  But given the fact that there are some legitimate issues that arise with schools, there are a few circumstances that may give you hope in cancellation.

School Closure

One reason for cancellation that is oftentimes granted is if you were attending a school that was closed during your enrollment or if you chose to leave a school within 90 days of its closure.  If the school only closes one of many locations then the location you were attending must be the one that was closed.  If this has happened to you and if your student loan was originated after 1986 then you may be granted cancellation.  This cancellation is not automatically granted, but it does allow you to apply for it.  This application covers all Perkins, Stafford, PLUS, and Federal Family Education Loans.

False Certification

Under this category one or more of your qualifications or the schools certifications were not properly presented and you were essentially defrauded.  This includes if the person attending the school fraudulently claimed they were you. The four categories within this are ability to benefit (ATB), disqualifying status, forgery, and identity theft.

Ability To Benefit (ATB)

Many programs have a minimum standard educational level that is required to be able to understand the coursework and benefit from the program.  For example, a person that has graduated high school or has the equivalent GED may be the minimum standard for the school.  A person that does not have this attained level of education may not be able to complete coursework or understand what is expected of them. Many schools have a standardized exam that they give these students in order to determine if they have the ability to benefit from the educational programs offered by the school.  If the student passes this “ability to benefit” test then they are allowed into the program.

But if the test is not properly administered, if students are allowed to cheat, if they are given more time than necessary, or if the test is not approved by the federal department of education then it is possible that you have a claim to cancel your student loans that were acquired to enter this program.  The foundation for the argument is that you did not or could not benefit from the school because you were not qualified.  You did not know you were not qualified because the school did not administer the test properly and therefore it is through no fault of your own.

Disqualifying Status

If you are allowed to attend a school in order to achieve a certification or degree in a field for which you are not eligible to be employed, you may seek discharge of that student loan under the disqualifying status provision.  An example of this type of situation would be a person that attends a professional driver training program only to find out that their history of passing out disqualifies them from attaining driver certification from their state.  Or for a person attending a school that teaches you to be in the security industry but that their criminal history disqualifies them from getting a security license.  The same for a person attending school to be an annuity broker only to discover their background disqualifies them from selling annuities.  These are all examples of situations where the school should have not taken the money from the loan and should not have admitted the student.  Therefore the stud en can be relieved of the burden of them loan through having it discharged.

Forgery

This is a simple case where the school itself completes your loan paperwork, obtains the loan, and cashes the loan check without your signature or authorization.  If the school does this and does not have either your signature nor your authorization it is possible for you to get that debt discharged. The important restriction to this is that it must be the school that has forged your signature and not a third party not related to the school.

Identity Theft

This is situation where you must prove that you were the victim of identity theft and that the party that received the loans and attended the school was not you.  It can also apply if you did go to the school but you did not obtain the loans.  These cases are difficult to prove and difficult to use as a qualification for discharge.  But if you are the legitimate victim if this type of crime it is worth your time to make certain all aspects of it are handled.

Can I cancel my student loans?

Previously, we talked about how to legally get rid of your student loans. Let us today take a closer look into the various circumstances that allow your to cancel your student loans. Canceling a student loan is something that can be accomplished given you, the lender, or the school has met or violated certain rules or obligations related to the loan.  When summarizing these situations it is best to think of all of the logical situations in which a loan should be canceled.  This is not the wishful thinking of many borrowers where they simply do not want to honor the debt, but the true situations where the loan itself was more or less provided under false or fraudulent conditions.

One situation that allows for full loan cancellation is if the school that is being attended closes.  This is an important provision because even if a student is near graduation from a multi-year program, if the school closes prior to graduation the student is eligible to apply for full loan cancellation.  Cancellation is not guaranteed, but under this circumstance the student does meet the minimum threshold for consideration.  This also applies when a school simply discontinues a students specific course of study or if they close an individual campus and not the entire school or program.  If the school closes the campus that a student attends, they may be eligible for loan cancellation.

If the school allows a student to attend that is not qualified nor prepared to handle the academic environment of that school, then there is a possibility that student can have the loan canceled under the provision of false certification and ability to benefit.  This is primary allowed when a student has not graduated high school nor obtained a GED and yet takes qualifying exams and tests, administered by the school, to see if they are able to participate in the school program.  If the exams are not properly administered or are not approved by the federal Department of Education, then it is possible the student could have been falsely certified as being able to benefit from the program and as a result was admitted under a false certification through no fault of their own.  In this case it is possible for the the student to request loan cancellation.

False certification and ability to benefit also extends to a provision called disqualifying status.  This primarily applies to vocational and technical schools that are teaching with an expectation on the part of the student that at the end of the program they will be fully qualified for a particular career.  For example, if the school admits a convicted felon to a security guard training program, and yet the State does not allow for security guards to have a criminal record, that student can apply for loan cancellation.

Loans can also be canceled for a variety of reasons from identity theft to forged loan documents.  The key to remember when seeking loan cancellation is that the cancellation has to be through no fault of the borrower’s and not foreseeable by the borrower.  Other type of loan cancellations relate to loan forgiveness and loan discharge.  These are programs are where the loan is honored and paid off, paid down, or forgiven by employers, through public service, military service or through dozens of other different forgiveness programs.

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State Student Tuition Recovery Funds Overview

The State Tuition Recovery Fund (STRF) in any state is designed to be a resource and place for students to turn should they be victimized by one of many different circumstances relative to paying tuition for a state certified vocational, technical, or post secondary educational program or school.  These funds are managed by each state and the specific details for each state may vary.  Some of the anticipated uses for this fund are for students that have taken an economic loss relative to tuition, the following is a partial list of possible qualifying reasons for relief from this fund

1. School closure or the ending of the particular program for which the student had paid tuition.
2. If the school was expected to forward funds to other institutions or certification organizations including state testing agencies and yet failed to do so within 6 months of the school closing.
3. If the school failed to supply within 6 months of closure the materials and or equipment the student had paid the school to obtain as a part of the program.
4. The amount of excess or required funds that were provided by student loans for the student specifically and yet paid to the school and the school failed to give the student their allocated portion.
5. If the school breaches their contract with the student relative to the coursework and program expectations and design.
6. The school was fraudulent in their recruitment of students and made untrue claims.
7. If the student obtained a court judgment against a school and were unable to collect on that judgment.
8. If the quality of coursework significantly declined for a period of time prior to closure.
9. If the school collected advance tuition or offered reduced future tuition for prepayment.

For most states you must be a resident of that state in order to qualify for access to the STRF and you must have attended an institution that participated in the STRF program for that state.  In other words, the fund itself operates similar to an insurance fund.  If the school paid into the fund then the students of that school have the ability to seek economic recovery from that fund.

The STRF program will normally not pay for reimbursement if the reimbursement is being sought on behalf of a third party and not to the student directly.  For example, if the student had their tuition paid by their employer or some other agency and the student is seeking recovery that will be passed through to that employer or agency they are not eligible to seek that recovery from the STRF in most states.  The fund is designed for students themselves who have suffered a loss due to a schools fraudulent activity, negligence, or closure and it is not designed as a recovery mechanism for employers and agencies that have the ability to sustain economic loss easier than an individual student.  It is important to seek out the specific rules for the recovery fund in the state where the school is operating because each states specific rules may vary.

What are the differences between IBR and ICR repayments?

We talked quite a bit about Income based student loan repayment and Income contingent student loan repayment options in our previous articles. In this article let us take a look at the differences between the two.

The first level difference between these two programs is the underlying loans for which they are eligible.  The IBR is offered as an option to those that have had both Direct Loans as well as Federal Family Education Loans (FFEL) whereas the ICR program is only available for those with Direct Loans.  It is also important to note that in order to obtain approval to participate in the IBR program you must meet a standard of financial hardship.  This hardship is defined when the IBR calculated payment is greater than your standard payment under traditional repayment or if you are married and your combined required IBR payment is greater than your standard combined traditional payments.  This is a low standard for hardship because it in essence states that if the payment under IBR is less than your standard payment, you qualify.

With the IBR repayment program the overall debt owed in student loans is not considered as a part of the payment owed calculation.  The payment is strictly restricted to using overall family income in relation to the federal poverty level for a family of that size.  The ICR on the other hand does incorporate the total amount owed into its calculation.  This can be helpful for those with low income and it can make it so the payment is even higher than the payment under the traditional repayment plan for high income earners.  This is of course as it should be.  A high income earner with low debt should stick to the traditional repayment plan and not avail themselves of special payment programs.

In addition to the above, another primary difference to the two programs is that under ICR, if your payment is less than the accrued interest for that month, the interest is added to the principal of the loan until it reaches a 110% cap.  Under IBR the interest is not added to the principal as long as it is determined you are eligible for the program and you continue to have a financial hardship.  This is especially important when it comes to the 25 year and loan cancellation.  Should you reach the 25th year under these two special programs and the loan is canceled, you would likely be better off with the lowest unpaid balance between the two.  In order to plan for this possibility it is always best to discuss the tax implications of each plan with a tax professional.

The primary similarities between the two programs are that they are options that have been designed specifically with the low income borrower in mind.  Both plans have built in “fail safes” where if a high income earner wishes to participate, if qualified, their actual payment would be higher than if they did not participate in the program.  Both programs are not allowed under the Parent PLUS plan, and both programs do qualify for the ten year public service forgiveness program.  This is not to be confused with the 25 year cancellation pr gram that applies to both programs.  The final similarity is that under both IBR and ICR, the monthly payment for the borrower will be adjusted annually dependent upon their income and continued qualification.

What is Income Contingent Repayment?

Previously, we talked about the income based repayment (IBR) plan. Today’s article will highlight the income contingent repayment program. Under various student loan programs you will see this repayment option referred to as the Income Contingent Repayment Program (ICRP) and the Income Contingent Repayment (ICR) option.  These are the same programs, only with two different abbreviations.  The most commonly used is ICR, therefore we will use ICR to represent both ICR and ICRP

ICR is a program that is offered exclusively for Direct Loan program and direct Loan Program Consolidation borrowers.  The program is available for graduate PLUS borrowers but not for parent PLUS borrowers.  For the parent PLUS borrower that is looking for a new repayment plan, they should seek counseling from the loan issuer.  If the parent PLUS borrower wants to participate in the ICR program they can consolidate all of their PLUS loans into a Direct Loan and then qualify for the ICR program with the new Direct Consolidation Loan.

The payments under the ICR program cover a wide range depending on your underlying level of income.  If using the federal poverty guidelines you find that you and your family are below the federal poverty level your payments under ICR will be zero.  If your income is above the federal poverty level for your family size then the overall payment cannot exceed 20% of the amount that you earn that is above that level.  this does not mean that it will be nearly that high a percentage of your marginal income above the poverty level, it simply means that it will not exceed that 20%.

The specific amount that you will owe for each payment will be recalculated each year as you submit your proof of income to the lender.  Upon submission the lender will analyze your income and debt wand will determine a payment for that year.  This process will repeat for up to 25 years.  If you have not paid the loan off in full by the end of the 25th year, the remaining balance will be canceled.  This cancellation of the debt will have a tax consequence for you because the remaining balance will be shown as income to you for that year.  This will also impact any and all other programs and public assistance that you are receiving in the year of cancellation.  You should consult a tax advisor as well as talk to the overseeing agencies for other programs you are involved with to mitigate this impact.

Within the ICR program their is a single unique attribute that makes this option attractive to the low income borrower.  With this program the payments that are determined based on the current income for the borrower are oftentimes less than the interest accrual for that loan.  Under this circumstance the accrued interest is added to the balance of the loan.  This leads to the outstanding balance of the loan increasing each month.  Under the ICR program this increase in the overall balance of the loan is capped at 10%.  Therefore any interest accrual that is not covered with the monthly payment that is added to the principal above that 10% cap is waived.  This is an important feature to understand and will become particularly critical if the the borrower hits the 25 year cancellation for the loan.  This is because the amount of cancellation will have been limited to the original principal plus 10% and will not have been allowed to grow past that level.

What is Income Based Repayment?

Income based repayment (IBR) for student loans is just as the name implies, a repayment plan that is based on your income.  There are various types of repayment plans that are offered for each type of student loan, the income based repayment plan is primarily designed for those at a low level of income or for those that are having difficulty making their payments.  For those that are not having difficulty making payments or are at a high level of income, there are other repayment plans that they can utilize.

The IBR program that is available for federal student loans is available for the Federal Family Education Loan (FFEL) programs and all of the Direct Loan programs including the graduate PLUS program but not the parent PLUS program.  In order to qualify for this program the loan must not be currently in default.  This does not mean that it was never in default, it simply means that the payments must be current at the time of application.

How are the payment amount calculated?

The biggest factor within the IBR program is the way in which your payment is calculated.  The IBR program uses your income, your debt, and your amount owed in student loans to determine a specific payment plan given your overall financial situation.  For very low income earners, those below 150% of the federal poverty level, that select this repayment option the payment will be zero.  For those that are making more than 150% of the federal poverty level will have a payment that will be no greater than 15% of the amount of money that they make over the 150% of federal poverty level.  This payment is adjusted every year and can change relative to changes in your underlying income.

The IBR plan does allow for a consolidation analysis for those that are married and it does allow all of the federal poverty income calculations to be based on the total income for the family.  For special hardship considerations both spouses need to qualify for that hardship.  There are many factors that need to be considered when applying for the IBR plan when you are married.  The way in which you file your taxes and if you should consolidate your application or not can affect the resulting IBR payments.  It is best to seek counseling and advice of how applying under different circumstances will affect the analysis and your resulting payment.

For all loans that are issued prior to July 1, 2014 the loan will be completely discharged if the borrower makes payments within the IBR program for 25 years.  For loans issued after that date they will be discharged after IBR payment for 20 years.  When a loan is discharged it is different than if the loan is payed for you or forgiven.  Under this program if the debt is discharged or canceled it will have an impact on your taxes for the year of discharge.  For more information on how this may impact your tax return you should seek the advice of a tax professional.  You should also be prepared for ways in which this discharge may affect any other low income programs that you are qualified under.

We have talked about Student loan repayment quite a bit. Some of the articles that come to mind are the student loan employment repayment, Perkins loan repayment amongst many others. In this article, let us look at what your repayment options are when it comes to student loans. Looking at your repayment options might be especially helpful when it becomes difficult to make those loan payments and a default is staring at you in the face.

As with all types of loans it is best to work with your lender on repayment options prior to having missed any payments.  Stepping forward and not only taking responsibility for the situation but also showing the lender that you are planning ahead and are foreseeing a problem.  This shows them that you are responsible and that you intend on following through with any agreements you make.  Prior to default your repayment arrangements are made with a department within the lender that wants to work with you and is focused on customer service.  After default you are always forced to work with the lender’s collections department and the collections department is not as friendly nor are they willing to “help” in any way.  The collections department simply wants to collect payments.

The following is a brief summary of  federal student loan repayment options.  It is important to note that if you have a Perkins loan or a private loan that there are different options that relate to each of these.  To make some of the options and exceptions consult this outline:

1. Direct Loan
   1. Same as the options available for the Federal Family Education Loan (FFEL).
   2. The Exception is the Direct Loan Income Contingent Repayment Program (ICR).
   3. Public service forgiveness program is available.
2. PLUS Loan
   1. Similar options to other loans with some exceptions.
   2. Primary exception is the income based” options such as ICR and income based repayment (IBR) cannot be used with Parent PLUS loans.
   3. ICR & IBR are available to Graduate PLUS Loans.

Traditional Repayment

This is also referred to as the standard repayment plan.  This is the default plan should you fail to select another option.  Under this plan the loan can be amortized at a term between 5 and 10 years.  This is also the payment option that is automatically applied to all FFEL loans should you not respond to their request for you to select a repayment plan within 45 days of their requesting you to make a repayment plan selection.  Under this plan you will pay off the loan faster than any other available option but you will also have a payment that is higher than the other options.

Extended Repayment

This student loan payment option allows you to amortize your loan over a longer period of time than traditional options.  The extended repayment option allows the term of the loan to go up to 25 years.  It is only offered to those that owe over $30,000 in any one particular type of loan.  Borrowers that have a FFEL, a Direct Loan, or both you need to have an outstanding balance of $30,000 or more in each type of loan in which you wish to utilize the extended repayment option.

Graduated Repayment

This option is designed to be used by those that expect to have an increase in earnings over time.  The loan payment amount is increased every two years for the life of the loan.  The maximum term for a traditional graduated repayment option is ten years.  If you owe more than $30,000 and you qualify for the extended repayment option you may be able to use the graduated repayment option in conjunction with the extended repayment option.

Perkins Repayment

The Perkins loan has its own set of rules with regard to repayment.  With the Perkins loans the minimum payment is listed in the law that allows for Perkins loans.  As a result, the school that offered the loan is limited in the repayment options they can use.  There are special circumstances that qualify for special repayment treatment such as for those that are sick, unemployed, or are considered low income.  For Perkins loans it is best to seek counseling from the issuer in order to determine all of the available Perkins Loan Repayment options.

Income Based Repayment Options

There are two primary Income Base options when it comes to student loans.  The first is the Income Based Repayment option (IBR).  With this option your payment will be relative to your income.  This is particularly useful for those that have a low income.  If you are a high income earner, the resultant payment for this option can exceed the traditional repayment option.  Though it does allow a lower payment for those at a high income that also have high debts.  This option was designed for those at lower income levels.

The second income based option is the Income Contingent Repayment options (ICR).  This option is only available to Direct Loan borrowers.  Under this program your payment will never be more than 20% of the amount of income that you are earning above the federal poverty guidelines.  This program is designed for those that have a low income.  If you pay this low payment for 25 year, the remaining loan balance will be forgiven.

What is Student Loan Employer Repayment?

There are two things that people are searching for when referring to student loan repayment.  The first is the specific programs offered by employers that will pay off or pay down your student loan and the second is those that want to know the repayment options available for a borrower when they are paying off their own loans.  This page covers both of these topics.

Private Sector Employer Repayment

When it comes to employers many have incentives that they can give prospective employees in their compensation plan that includes the repayment of their student loans.  These compensation packages are common for highly competitive industries where there is a shortage of workers or where there is high competition to attract the best and the brightest.  There is no limitation on the amounts that a private sector employer can offer to a job candidate as part of their overall compensation plan.

Public Sector Employer Repayment

These programs are not limited to the private sector, in fact the federal government offers more student loan repayment programs than any other employer.  The federal program allows different federal agencies and departments to payoff or pay down the federal student loans of the individuals that they are trying to recruit.  Oftentimes this repayment is tied to a particular employment contract or commitment of service.  The maximum amount of student loan repayment that can be offered by a federal agency or department is $10,000 per year of employment up to a maximum of $60,000 for a single person.

Borrower Repayment

If you are paying the loan back yourself, as the borrower, then you should know that your first payment normally starts six months after you leave school (for graduation or other reason) or reduce your class load to less that half that of a full time student if you have a federal direct or Federal Family Educational Loan.  If you have a federal Perkins loan then your first payment will start nine months after the conditions above are met.  For private loans the time between graduation or leaving school and your first payment varies, you need to consult your lender and your loan documentation.

For graduate and professional studies students under the Federal PLUS student loan program the first payment is due 60 days after the final reimbursement for the loan is made.  Even though payment is due, the PLUS student can apply for a payment deferment as long as they are still attending school.  The loan will still continue to accrue interest, but no payment will be due until the student leaves school, graduates, or reduces class load to less than half the load that is considered full time for their particular field of study.

Repayment Strategy

There are many different strategies to payoff student loan debt.  These strategies include loan forgiveness programs such as those offered by the Peace Corps and certain occupations such as teaching as well as loan credits that are offered for working through numerous non profit agencies such as AmeriCorps.  If your strategy is to pay the loan yourself be certain to take advantage of loan consolidations and refinances that offer lower interest rates.  The key to refinancing to lower rates is that you want to make certain that you make a payment that does not extend the term of the loan.  Even if the loan refinances to a full term, you need to make a payment that will amortize that loan in a shorter period of time.

What is Student Loan Amortization?

When we talk about student loan amortization what most people want to know is the amount of their monthly payment, how many years they have to make that payment, and how principal and interest is allocated toward the loan from each payment.

Variables

When determining the payment we must first determine the amount that you will owe, the interest rate, and the number of years you will be making the payment.  From this we can extrapolate an monthly payment and an amortization schedule.  For example, a $20,000 loan at 5% interest over 10 years will equal a monthly payment of $212.13 per month.  The chart below shows how the payment changes each time you change one of the underlying variables of the amortization equation.  The changed variable is highlighted in the chart with the payment changing each time a variable is changed.

Amortization Schedule

The amortization schedule of the loan is simply a chart that shows how each payment of the loan is going to be allocated toward the principal and interest of the loan for each month.  The way it works is that each month interest accrues on the loan and then a payment is applied to the loan.  The interest is first subtracted from the payment and then the remaining amount is allocated toward the balance of the loan.

Notice how the payment stays the same, the interest is calculated monthly and the principal is reduced monthly by an amount equal to the payment minus the accrued interest.  The interest calculation itself varies between lenders, for purposes of this example we used a 360 day year and a 30 day month for simplicity.  Some lenders use a 365 day year and others a 360 day year, most all lenders use a 28-31 day month depending on the actual number of days in the month.

Student loan amortizations work exactly as does this example and the number of payments extends until the balance in the fifth column reduces to $0.00.  Anytime there is an interruption to the schedule, for example if you pay a little extra toward the principal of the loan, then the entire amortization schedule will change.  This is also the case if the underlying interest rate changes, if the loan term changes, or if a payment is missed.  Once anything happens outside of the original schedule, in other words, anytime an underlying variable changes, the entire amortization schedule from that point forward changes.

It is important to note on this schedule that only $83 of the original payment is begin applied to the principal reduction of the loan.  Should you want to pay an extra couple hundred dollars toward principal it would significantly change the interest calculations for payments from that point forward.  This is the reality of all amortizations schedules, making extra payments toward principal accelerates the schedule and pays the loan off much faster than it would have been paid without the extra payment.

We get this questions a lot and the short answer to it is Yes and No. There are no direct grants that will help you pay off your student loans but there is a relief program or also what is called as a forgiveness program where if you qualify you can have a significant amount of your student loans waived. While not technically a grant, these are known as ‘Public Student Loan Forgiveness(PSLF) Programs’. These student loan forgiveness programs are available to graduating students to assist them in reducing the burden of their outstanding loans. The graduating student can be majoring in any field and they can still be provided this financial assistance provided they qualify for it.

Do I Qualify For Student Loan Forgiveness?

The catch though is that the forgiveness program is not available for everyone. The PSLF was initiated to encourage individuals to work, on a full-time basis, in public service jobs. To qualify for this program, you should have made 120 payments on your Federal Student loan whilst being fully employed in public service, law enforcement agencies, teaching, doctors and nurses and other government based jobs. Just another factor to keep in mind when you decide on the direction of your career. There are some professions and jobs that bring with it a lot of incidental advantages. The field you choose to work in needs to be well thought out, after all it is something you will most likely be doing for a very long time, not to mention carrying the burden of a student loan for a number of post graduate years.

The PSLF program enables graduate students to eliminate a majority of their student loans and sometimes even pay the loan completely. This program is backed by the government and is available towards Direct Federal student loans. The following Direct Loans are covered under the Loan Forgiveness program

• Direct Stafford Loans (Subsidized and Unsubsidized)
• Federal Direct PLUS Loans
• Federal Consolidation Loans (Direct)

The above loans have to be non-defaulting loans. Besides Federal Direct Loans, the PSLF program allows other Federal student loans that have been consolidated under a Direct Consolidation loan. Therefore, all payments made under the consolidated loan will be counted for the120 payments made on a monthly basis.

These 120 payments should be made under these Direct Loan repayment plans:

• Income Contingent Repayment Plan
• Income Based Repayment Plan
• Standard Repayment Plan, having a repayment period of 10 years
• Other Direct Loan Program repayment plan, having a repayment period of 10 years

References

• http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp