Every Student Loan Question Answered

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Data on Student Loans

What’s the total amount of student loans owed? 

 

The total amount of student loan debt in the United States is over a trillion dollars.

 

Yes, you read that correctly. The latest statistics from the Federal Reserve for Q3 2018 show the total amount of student loan debt in the United States alone has hit a record of $1.5 trillion dollars. To put that amount into perspective, the amount of motor vehicle loans is around $1.1 trillion dollars and credit card debt is around $1 Trillion in 2018.

 

It used to be that a car payment was your biggest monthly expense, behind your mortgage payment each month. But now student loan payments are well above the vehicle expense for a monthly budget. And with the total amount that Americans owe coming in at $1.5 trillion, student loan debt is now a permanent part of many monthly budgets.

 

Student loan debt is officially hitting crisis mode.

 

The amount of student loan debt has doubled over the last 10 years.

 

If the $1.5 trillion isn’t enough to make your head spin, then you may be surprised to know that student loan debt has doubled since 2009. If you look at the amount of debt that the Federal Reserve tracked in 2009, the country held a mere $700 billion compared to the 2018 numbers. It’s hard to believe that there was actually a time when $700 billion in student loans seemed like a smaller, more manageable amount.

 

Maybe 10 years seems like it was such a long time ago, but for many of you, it could have been when you were first starting college. It’s almost hard to imagine that the amount of debt in the United States has doubled in size just since you were first starting your journey.

 

This statistic is interesting because it sends a couple of different signals. One is that Americans need money to pay for their education.  And two, it appears to be getting easier for people to access loans for their education.

 

Do more people take out federal or private student loans? 

 

Federal Loans are more common than private loans.

Over 42 million people have received some type of federal student loan, as of Q3 2018. Direct Loans make up the majority of those federal loans, followed by the FFEL loans. There is still a small group of Perkins loan recipients (2.4 million), but those loans are no longer administered as of 2017.

The numbers for private loans are also concerning. The latest numbers, which are from 2014-2015, show that private loans for education had reached the $7.8 billion level.

If you have had to finance both your undergraduate and medical school, then there is a high chance that you have a combination of both federal and private student loans. In general, if you are applying for student loans, then the best option will be to utilize federal loans first. Then, if you need additional funding and have exhausted all of the federal options, a private loan could be considered.

Federal loans have several advantages over private loans such as the income-driven repayment plans, consolidation options, as well as forgiveness through the PSLF program. Depending on which type of federal loan you are applying for, the income requirement can be very lenient as well.

 

What’s the average balance of student loans per person? 

 

The average amount of student loan debt is roughly $35,000 per person. This amount is an average based on the $1.5 trillion divided among the 42 million student loan recipients statistics published by the Federal Reserve for 2018.

 

But when you dig a little deeper into the numbers, you can see other notable tidbits. Of the 42 million student loan recipients, almost 4 million people have over $75,000 in student loans. Roughly one out of ten student loan holders are carrying this large burden of debt.

 

The amount of the debt is not only a cause for concern, but it is a number that will have to be dealt with when you go to apply for a mortgage, a vehicle loan, or even a new credit card application. Until the student loan debt has been paid, it will follow you around and constantly rear its head as you try to purchase big-ticket items.

 

How long does it take to pay off student loans? 

 

The average length of time for student loan payoff is years, not months.

 

The amount of time that it can take the average student loan holder to pay off their amounts is a little trickier to determine. If you have federal loans and are participating in an income-driven repayment plan, then you will have a minimum of 10 years to pay that amount (generally speaking). But then there is an extended payment program that will actually allow you up to 25 years to repay your federal loans.

 

If you participate in either the PAYE or REPAYE program, then you will have between 20 to 25 years for the repayment.

 

If you are working towards the PSLF requirements, then you have also made payments towards loans for at least 10 years (120 payments) before you can start seeing the benefit of forgiveness.

 

Loan Servicers

How do I find out who my student loan servicer is? 

 

We find these websites to be useful because they help you access your federal student loan information and give you a place to start.  

 

For Federal Loans:

Start with the website www.nslds.ed.gov or www.studentloans.gov first if you are unsure who your lender is if you currently have a federal student loan. Both of these websites have detailed information on all the different types of federal loans.

 

You can even log in to find out your specific federal student loans that are on record and exactly how much you owe. These websites have lots of information on a variety of topics about loans and loan payments.  You’ll find these are good websites to bookmark no matter what questions you may have about your loans.

 

For Private Loans:

If you have a private loan (one loaned to you by a private organization such as a bank or credit union) these websites can still offer helpful information to you.

 

Also, if you are trying to figure out who has issued the private loans, you can always pull your credit report to find out the loan servicer. You can pull your credit report by visiting www.annualcreditreport.com.

 

What are the main differences between Federal and Private student loans? 

 

Private student loans are usually issued by a bank or private company. The interest rates, terms, and conditions are going to be different from a government-issued loan and you may need someone to cosign for you. Your income and credit rate will be important to these companies.

 

Something to keep in mind is that if you are going the route of private loans–you may be required to start paying your loans back while you are in school and you will pay the entire student loan debt. They also tend to have higher interest rates.

 

Also, the interest continues to accrue, and then it turns into principal making your loan amount grow.

 

They are not as flexible as federal loans as they are not eligible for income-based repayment plans or public service loan forgiveness.

 

Typically, a private loan will not offer deferment or forbearance without serious effects on your credit. 

 

However, private loans historically offer lower interest rates as compared to federal loans. 

 

There are several different types of federal programs. The federal programs cover the most ground by having a variety of programs (increasing flexibility) and usually, they have a fixed interest rate (which is set by Congress). Students are allowed an in-school deferment. That means you start paying these loans after you finish school or drop below full-time status.

 

They have other benefits as well, including:

 

  • Deferment/Forbearance Eligibility
  • Income-Driven Repayment Plans (IBR, PAYE, REPAYE, ISR, and ICR)
  • PSLF Eligibility

 

When deciding whether or not to take out a federal loan or a private loan, be sure to consider all of the benefits and drawbacks of each program. 

 

Repayment Plans

What’s the most popular repayment plan? 

 

Income-Based Repayment Plan is the most popular repayment option.

 

There are over 18 million who are participating in one of the income-driven repayment plan options.  The number of those participating also continues to increase each year.

 

There are several options when it comes to one of these repayment plans. It can be difficult to keep up with the different factors for each one, but taking advantage of this can save you money on your loans in the long run.

 

Again, at Financial Residency, we devote a lot of content to the income-driven repayment plans, especially since there are so many questions behind each program. While these repayment plans are only available for those who hold federal loans, these programs could be essential in helping manage your student loan repayment timeline.

 

One thing the statistics do show is that an income-based repayment plan, which allows you to pay off your federal loans within a defined 10-year payment plan, is the most popular option. Currently, there are almost 3 million recipients, of the 42 million, who are participating in this repayment option.

 

The second most popular option is the REPAYE program, followed by the Pay As You Earn option (PAYE). There are another 3.5 million who are participating in these two programs with their federal loans.

 

As mentioned earlier, each of these programs has different guidelines on when you would need to repay your federal loans. Even though 10 years is the minimum, you can also find a 20 or 25-year repayment plan, based on which program you are enrolled in.

 

What happens if I choose the wrong income-driven repayment plan if I’m doing PSLF? 

 

Not only as a borrower of federal loans do you have the option to pursue PSLF, but you also have the option of choosing an income-driven repayment plan.

 

While pursuing PSLF, borrowers have the option of choosing any of the four repayment plans available. But to really maximize your savings, you should choose the income-based repayment option which is calculated by taking your annual income, family size, and location into account.

 

The income-based plans all differ, with some only counting your spouse’s income if you file taxes jointly. Discretionary income under Income-Based Repayment, PAYE, and REPAYE are defined as the difference between your adjusted gross income and 150% of the poverty guidelines. Income-Contingent Repayment (ICR) plans count discretionary income as the difference between your adjusted gross income and 100% of the poverty guidelines.

 

Choosing the right repayment method is crucial if you don’t want to end up overpaying on your student loans. For example, a resident making $47,000 a year in Louisiana with $250,000 in debt would pay the least under the REPAYE, PAYE or IBR plans – $42,746 in total. But under the ICR plan, that figure would more than double to $98,921.

 

Are you still unsure which repayment plan is best for you? You can use the student loan repayment estimator from the Department of Education and call your loan servicer if you have further questions. Doing a little bit of homework in this area could potentially save you thousands over the life of your student loans. It’s worth the time you invest.

 

What is better, the debt snowball method or the debt avalanche method when paying down debt?

 

Mathematically, the avalanche method typically is the lowest total out of pocket option for paying down debt. This holds true 99% of the time because with the avalanche method you are paying down the highest interest rate debt first, lowering the cost of your debt as you go. 

 

The snowball method does fit some situations where a borrower wants the motivational effect from paying off a few loans, for example paying off one of 7 loans can feel like a big accomplishment. However, with both methods you’re paying off your debt by the same dollar amount, one (avalanche) is just more efficient because you’re paying the highest interest rate debt first. 

 

Consolidation

How many people consolidate their federal student loans? 

 

The consolidation of federal loans is increasing.

Consolidation of Federal Loans continues to be a popular route that many federal student loan holders are clearly utilizing. And since this is one of the only ways to consolidate your loans and still remain eligible for the PSLF program and the repayment plans, then it stands to reason that the consolidation numbers will continue to grow. As of Q3 2018, almost $502 billion of federal student loans have been consolidated. This number has been steadily climbing over the years. There are now over 12 million recipients who have taken the consolidation route.

What about you and your federal student loans? Have you considered the process of consolidation? There are several benefits offered through consolidation such as the convenience of one monthly payment, eligibility for the income-driven repayment plans, as well as a fixed interest rate. There are also zero application fees for the process so you don’t have to worry about that additional expense.

 

Where can I find more information on consolidating my loan? 

 

A great resource for student loan debt, especially the loan consolidation aspect, is the studentaid.gov website. It’s a website from the U.S. Department of Education and has a wealth of information on student loans. While the site is not necessarily targeted to those with medical school debt, it is a helpful resource if you have questions about loan consolidation and what all it entails.

 

Keep in mind – as with most everything associated with student loan debt – there are pros and cons for loan consolidation. The studentaid website is useful because it breaks it down for you and presents several ways of looking at loan consolidation.

 

There are different rules in place for loan consolidation based on whether or not you have federal student loans or private student loans. You may even have both types of loans so it’s important for you to have information on both at your fingertips.

 

Why should I consolidate my student loans? 

 

Consolidation may sound like a paperwork nightmare but it is actually a big step while working towards your progress with PSLF (Public Service Loan Forgiveness).

 

Let’s back up for a moment and review why PSLF, or Public Service Loan Forgiveness, is important to you. If you have federal student loans, you may qualify to have the loans forgiven after 10 years (or 120 months) of payments if you are also working for a public entity. A public hospital or government agency are both prime examples of a public entity and many of you will find yourself employed by them at some point in your career.

 

If you think you could potentially work for a public hospital, or currently do, then PSLF could provide a major benefit towards the overall management of your student loan debt.

 

In order to continue to qualify for PSLF, you will need to consolidate your Direct Federal Loans through the federal government (not a public company such as SoFi or LendKey, for example). The consolidation of your federal loans is one of the first steps on your path to PSLF.

 

Are you unsure which of your federal loans are considered Direct and eligible for consolidation? When you log onto your federal student loan account, simply look for the word “Direct” next to the name of your loan. If you don’t see it, then most likely it will not count towards PSLF – but you can always call to verify if you are still unsure.

 

Not only is consolidation a critical step towards the PSLF, but you will have the added convenience of one monthly payment versus several. With as much you as you’re expected to remember these days, this will be one less task on your never-ending to-do list.

 

The good news? Consolidating your federal loans is free to apply and you can do everything through your federal student loan portal. You can also select which of your loans you want to consolidate – you are not obligated to choose all of your loans.

 

On one last note, consolidation applies to federal loans only. If you have private student loans then they are not eligible for forgiveness through the PSLF program or the consolidation process through the federal government. If you have any federal loans though, you owe it to your financial future to look at all facets of loan consolidation.

 

Public Service Loan Forgiveness

 

Is PSLF worth it?

In today’s world, the health of the student loan system kind of makes you wonder about PSLF’s viability. If you plan to make use of the student loan forgiveness programs, you’ll need to know a little more about how it works, and what you need to keep in mind while you are paying back your loans. 

 

You’ll also need to know when it’s best for you to take advantage of the student loan forgiveness program. Ultimately, it will be up to you to decide if PSLF is worth it. You’ll want to consider a few factors. 

 

First, decide if you’re ok with making payments for 10 years, while your loans are growing because you’re not paying down interest; on a program that has extremely strict rules. 

 

Then, review the math. In some cases, it’s actually better for physicians to pay off their student loans shortly after residency. 

 

How many people are working towards PSLF? 

 

The number of PSLF participants is growing.

 

We spend a lot of time discussing the Public Service Loan Forgiveness program, or the PSLF, here at financialresidency.com. There is quite a bit of detail behind this program, and we encourage you to research it as much as possible.

 

Since this program is now hitting the 10-year mark, there is a lot more data to be able to examine. Remember, you have to have paid a minimum of 120 payments to be eligible for the loan forgiveness, so we are now starting to see an increase in recipients as the program has matured since its inception in 2007.

 

Currently, there are about 875,000 borrowers that are also listed as “PSLF borrowers” in the national student loan database. When you compare this number to the overall 42 million that we mentioned earlier, then that number suddenly becomes a tiny fraction of the overall amount.  

 

What about you, are you currently working towards the PSLF guidelines? The good news is the data shows you are definitely not the only one.  The numbers are increasing each which would indicate that more and more people are beginning to realize the advantage of this program.

 

Perhaps you, like many others, may have recently read reports about the disappointing numbers being reported regarding the limited number of loans being forgiven. Truthfully, even when you break down the numbers, we believe the benefits of the PSLF program are only beginning to be realized. Don’t let any recent reports discourage you from pursuing this in the future. It is still a viable option for those who are willing to work in a public setting.

 

Why was PSLF created?

 

PSLF was created to incentivize individuals to work in public service, particularly in nonprofit.

 

Here is a brief snapshot of how student loan forgiveness programs have evolved. 

 

  • The ICR was the only income-driven repayment program until July of 2009.
  • When ICR started it was 20% of your discretionary income (or expected payment over 12 years)

 

For some individuals, there were some other payment options that were lower. They were going to extended repayments. 

 

These allowed people to get a lower monthly payment. However, they didn’t qualify for PSLF, even if they had Direct Loans. 

 

Then other programs were introduced.

 

  • In approximately July 2009, the IBR Plan (Income-Based Repayment), was introduced
  • In 2012, there was PAYE (pay as you earn)
  • In 2015, we had REPAYE 

 

These allow you to pay a smaller percentage of your discretionary income. They also allow your loans to be forgiven sooner and they actually qualified for Public Service Loan Forgiveness. 

 

Why do I need to submit the PSLF certification form every year? 

 

An important step in receiving the loan forgiveness through PSLF is to submit an Employee Certification Form. You can find all of the information for filling out the form, where to send it, what information is needed, etc. by going through the Department of Education website. The form is easy to fill out and shouldn’t take too much of your time.

 

Either this form can be submitted annually OR you could technically wait until the 10-year mark to fill out the entire record of the last 10 years of your employment. I highly encourage you to submit this annually, though. You will thank yourself after 120 payments have been made and you are ready to realize the PSLF benefit.

 

Let’s be realistic about trying to remember the details of your employment over the past 10 years. Many of us can barely remember what we had for dinner last night. It may be a little too ambitious for you to put yourself in the position where you have to track the details of 10 years all at once.

 

Do yourself a favor and mark it on your calendar and set an annual reminder on your phone! You do not want to jeopardize your PSLF forgiveness because of simple paperwork that could easily be filled out once per year. Not only will you be checking off an important task, but it will also allow you time each year to evaluate your federal loans and confirm that they are still eligible for PSLF. An Annual Certification Form also gives you the opportunity to verify the institution you are working for is considered an eligible public entity. That’s pretty important!

 

What will happen if your employer made a mistake filling out your forms for PSLF?

 

It regularly happens, some detail or date is wrong. You might never even know what the exact problem is because the form will be summarily rejected. That means you must become a detective in order to figure it out.

 

What do you think the future of PSLF looks like?

 

There are those who claim that PSLF isn’t a sustainable program, so there are some changes being considered. The changes currently being considered won’t affect the current borrowers, who would be grandfathered in because they have already taken out loans and started making payments toward forgiveness on their student loan debt. Historically, that is how Congress has helped current borrowers as the rules for student loans change.

 

Some of those borrowers who are making choices based on the PSLF program are lawyers. I can just imagine thousands of angry lawyers filing valid lawsuits after being booted from a program they’ve been participating in.

 

That is not a pretty picture!

 

It’s the new borrowers who have to be on the lookout for changes. The new changes will affect someone new to PSLF, and any future participants. I think the government will keep the program together, but something that I’ve always thought about is the tax angle.

 

I feel that if there are any changes made to the program it will not be tax-free, which will be a huge problem for physicians with approximately $300k or more in student loan debt!

 

Default, Deferment, and Forbearance

How many people are in default on their student loans?

 

Defaulting on student loans continues to grow.

While it is harder to find the statistics surrounding private loans, the federal student loan data shows us the trend is growing with the number of defaults. A federal student loan that has gone into default is one in which a payment has not been received in over 90 days. In 2018, over 5 million loan holders have gone into default. This means that about $97 Billion of student loan debt is not currently being paid.

The other piece to this statistic is that the rate of default has more than doubled since 2013. This tells us that more and more people are struggling to make at least one payment towards their federal student loans. With the burden of student loans continuing to grow, it is doubtful this trend will reverse anytime soon.

Defaulting on a loan is rarely a sound financial solution, yet so many people clearly see it as an only option. Before you find yourself in a situation where you could be facing default, this is the time to ask if you have exhausted all of the options available to you as a federal student loan recipient.

 

How many people are in deferment?

Deferment and forbearance have increased over the years.

The words deferment and forbearance might conjure up images of contracts and attorneys but these are actually very real scenarios that many student loan holders are finding themselves needing to learn.

Deferment of a student loan simply refers to postponing a student loan payment, without having to pay the interest during the deferred time period. There are several scenarios where this might happen. You could be enrolled in school, you could be a deployed member of the military, or you could qualify for economic hardship. Currently, there are over 3 million federal student loan holders that are utilizing the deferment process. Most notably this amount is almost made up entirely of in-school deferment.

Forbearance is another word used often when talking about student loans. Forbearance is a slightly different scenario than the deferment of loans. It is more of a temporary suspension due to administrative paperwork for the loans, financial or medical hardships, or several other scenarios. You are also responsible for paying the interest, which is accruing during this time period. When you participate in a residency program (notated as “mandatory”), you can qualify for the forbearance on your student loans.

Keep in mind that while it may be tempting to temporarily suspend your payments, the time period that you are in forbearance will not qualify for the PSLF program. You would most likely be better off applying for an income-driven repayment plan then opting for forbearance.

The majority of recipients who are classified under “forbearance” is due to administrative paperwork. Less than 900,000 recipients are classified under the mandatory forbearance guidelines.

Should I put my student loans into forbearance? 

 

The word “forbearance” just sounds depressing. It honestly sounds like something you would want to avoid altogether. There is a reason why it has such a negative connotation associated with it.

 

Think of forbearance as a temporary suspension of payments towards your federal student loans. Many physicians who are completing their residency will qualify for the forbearance option of their federal loans because it falls under the “financial hardship” category. The time period for the payment suspension with student loans is 12 months.

 

Sounds fantastic and exactly what you need when you can barely pay your bills each month, right?

 

Truthfully, forbearance is rarely the right option for your federal loans for a couple of reasons.

 

First, the months (or years) your loans are under the forbearance option, they will not count towards your PSLF qualification. While the 12 months of suspended payments may help your wallet in the short-term, it will only add to the length of time it takes for you to have your loans forgiven through PSLF.

Secondly, the application for the forbearance option is a manual process. It’s not going to happen automatically and it is a process you have to get involved in.

Instead, you are better off putting the energy of that application to see if you’re eligible for income-based repayment or another that best suits your situation.

 

There are basically four different types of repayment plans to choose from, and they are all run through the Department of Education. These four plans are known as PAYE, REPAYE, ICR, and IBR. Each one has various guidelines and you can review each of the parameters by going to the website for information.

 

These monthly repayment plans (for your federal student loans) allow you to set up a monthly payment plan that is based on your current income, location, and family size. The length of repayment is anywhere from 10 years to 25 years, depending on which plan you choose. If you can find a monthly payment that works for your current situation, then you can avoid the forbearance option altogether and still work towards your PSLF qualification.

 

Although rates of forbearance have steadily risen over the years, It’s important to know that it’s not your only option when it comes to managing monthly payments. If you need help to make your monthly student loan obligation, then a repayment plan is going to be a better option for you over the life of your loans.

 

Refinancing

Should I refinance my student loans during my Residency? 

 

Several financial terms are thrown around when it comes to student loans. One of them you will hear quite often is a reference to refinancing. Similar to a refinance of your home mortgage, you can potentially combine all of your loans into one payment with the goal of having a lower interest rate or a lower monthly payment. It sounds like a great deal on paper, but it may not be in your best interest.

 

One quick search of the internet for information regarding student loan refinancing, and you’ll quickly realize how many companies are out there trying to lure you in with promises of lower rates. As tempting as it is for a lower payment, there are consequences to a refinance option that you need to be aware of when it comes to student loans.

 

The moment you refinance your federal loans, the loans will lose eligibility for forgiveness through PSLF. Unless you are 100% sure beyond any shadow of a doubt that you will not be participating in the PSLF, then you do not want to refinance your federal loans.

 

You should, however, consolidate your Direct Federal Student Loans in order to remain eligible for PSLF.

 

You should also take the time to compare how much you could potentially have forgiven through PSLF versus the amount of your loans you would want to refinance.

 

For example, a resident making $50,000 a year with $400,000 in student loans at 10% interest would pay $42,746 total under the REPAYE plan. After 10 years of working for a public entity and meeting the 120 months of payments threshold, the loan balance of $523,730 would be forgiven through the PSLF program.

 

Using that same example, if they chose to refinance their loan for a 10-year term at 4.5% interest, they would pay $497,520 in total. Yes, they would save $136,859 on interest but would end up paying over $450,000 more versus the PSLF route. When you see the math in black and white, it makes it easier to discern which plan is better for you. In this case, the PSLF is a clear choice.

 

Should I Refinance to Lower My Monthly Payment?

 

We’re working towards PSLF right now, but my payment went up 60% this year despite an only 30% increase in our income. We can’t afford the new monthly payment of $800 a month. Would it be worth giving up on PSLF and refinance my loans, or should I continue applying for deferment?

 

The Skinny:

Married, 2 kids, 3 out of 5 years residency complete

$240k in federal student loans on REPAYE

 

Refinancing $240,000 in loans will likely raise your payment, somewhere between $2,500 and $2,700 on a 10-year or roughly $1,500 on a 20-year, depending on your rate. If you refinance, you will lose the option of using PSLF or income-driven repayment plans in the future. This is an irrevocable decision to solve a short term problem.

 

Unfortunately, switching to PAYE or IBR won’t help lower your payment right now because the cap is the 10-year standard amount (for you, that is around $2,500-$2,700). This could help once you’re attending if your household income jumps over $360,000.

 

The best option is to find the money in your budget by lowering your expenses or making more money. 

 

Another, not so great option, is to dip into savings or take on additional debt to help cover the extra expenses. Hopefully, after you are attending you can use your extra income to rebuild. For the next 2 years, you may need to switch into survival mode and rebuild later. It might seem counterintuitive to take on debt to make the payment, but the savings by staying on PSLF could help offset the cost. 

 

Finally, I suggest checking with a CPA to see what filing your taxes as Married Filing Separately does to your tax situation, and then comparing the tax difference to your student loan payment difference. If this lowers your monthly payment enough, you might be able to keep your loans as federal loans with a payment that is more affordable. 

 

When should someone use a variable and when should someone use a fixed rate when refinancing?

 

With all the private student loan refinance companies, they all typically offer variable and fixed rates. I typically do not like variable-rate student loans, especially since we are in a fairly low-interest-rate environment. However, as interest rates increase, variable rate student loans do become more attractive. 

 

I typically recommend borrowers who are aggressively paying down their loans, over 2-5 years, consider a variable rate. However, many times you can refinance into a fixed-rate loan with a rate close to the variable rate loan, without the risk of rising interest rates. 

 

Ryan Inman