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How Does Divorce Affect Student Loan Debt?

January 30, 2019

Lots of millennials are waiting longer to get married so that they’re more secure before tying the knot. The divorce rate dropped 18% in the last several years. Even so, divorce still happens. It doesn’t have to be the end of the world. Maybe your uncoupling is a fresh start, and separating your finances is the first step to setting up your new life.

 

As a millennial, many of us have student loan debt that is just part of our everyday reality. That’s true whether we’re married, single, or divorced. This is why so many people often will end up seeking out help and advice about student loans during the divorce process. Answers aren’t always clear, but we can help. There are a few things you should know to prevent any financial surprises.

 

Can’t Divorce a Servicer

Student loan responsibilities after a divorce—particularly for Federal Loans—will be dependent on whose name is on the loan. If you and your ex-spouse agree on a payment arrangement that requires one of you to help pay, if it’s not in your name on the loan, that may not be enforced by the servicer. If your name is on the loan, you’re the one they’re going to pursue for payment.  That doesn’t mean you shouldn’t try to come to an agreement that works for both of you but stay on top of which of your loans are being paid. Make sure you never miss a payment even if your ex is supposed to be paying it.

 

Repayment Amounts and Plans

With divorce, your family size changes, as does your household income. Changes to income and family size can mean changes to your monthly payment. Now it’s likely these changes will only happen if you are on an income-based repayment plan. It doesn’t mean that your monthly payment will go down, but your loan payment could go up or down. The payment amount will depend on what your spouse’s income was when compared to yours, so everyone’s situation is unique. Make sure to update the paperwork and stay current on your loans as you transition to paying your debts on your own.

 

If you’re having trouble making payments, look at different repayment options like an IBR plan so that you stay current on your loan payments and don’t fall behind. If at all possible, avoid deferment. Deferring your loans ensures that you don’t fall behind on payments, but the interest continues to accrue while you are not paying. This could extend the life of the loan and increase the amount that you owe, so it really should be a last resort.

 

Credit Score

Some people think just filing for divorce will negatively affect credit, but that isn’t necessarily true. What can affect your credit is the process of changing your bills around. For example, putting things in solely your name that weren’t previously could affect your credit score. Making big financial changes like selling a house, refinancing, or restructuring debt can also have effects on your credit score. Some of those things could be good and some could lower your score, so it just depends on your situation. For example, adding on more debt without increasing your income could have a negative effect on your credit score.

 

If you are in the process of reassessing your financial situation on your own, you’ll want to review paperwork. Gather vital documents like your credit report and score. If you haven’t checked your credit report in a while, now is a great time too. Make sure there are no errors on your credit report and ensure that you know what your score is. You may be looking to make some changes that will certainly need a credit review. Changes could include looking for housing on your own, your own mortgage, changing the car you drive, or something else that will require a credit check. Don’t be caught off guard by not knowing what’s on your report right now.

 

State Laws

The laws will either determine the debt as separate property or marital property. Now, separate property generally includes things like assists obtained before marriage like that of inheritance. Generally paraphrasing anything obtained by an individual before marriage is considered separate property. Anything that remains outside of separate property typically is marital property. Marital property is where the state laws really play a role.

 

Your remaining marital property will be divided based on if you are located in “community property” state or an “equitable distribution” state. During a divorce in a “community property” state, any marital property is split down the center at fifty-fifty. Most states tend to fall into the “equitable distribution” state law. The “equitable distribution” law says that each party has a legal claim to the asset or debt. The portion of value that is then divided to each party is determined by a number of different factors according to The Court.

 

 

Cosigners and Private Loans

Private loans can be more complex. For instance, if your ex-spouse is a cosigner, then you are both responsible to pay the debt. If he or she was not your cosigner, the debt is the responsibility or you and your cosigner, if any.

 

It might be a good time to refinance loans.

Whether you are just entering the divorce process or have already completed, see if now is the time to refinance. Get in touch to have one of our friendly advisors walk you through the process and give you information on how we can help.

 

Divorce can be one of the most stressful events a person will face, but empowering yourself with information will make it easier to navigate. Be sure to consult with a lawyer before you start divorce proceedings so that you can prepare. Do your best to work together to come to an agreement that helps you both afford to live on your own so everyone can move forward.

 

Click for Requirements to Refinance Student Loans

 

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2019-12-09
This Week in Student Loans: December 9

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:

Department of Education Proposes That New Entity Handle Student Loan Debt

On Tuesday of this week, the Trump administration and Department of Education (DOE) Secretary Betsy DeVos proposed that a new, independent entity manage the federal student loan portfolio, rather than the Department of Education’s Office of Federal Student Aid. Devos proposed the move at a conference this week, calling for a “stand-alone government corporation, run by a professional, expert and apolitical board of governors.”

 

When asked why they believe the federal student loan portfolio should be managed outside of the DOE, Devos claimed that the DOE was never set up by Congress to be a bank, but claims that’s effectively what they are.

 

In order to make this happen, laws would have to be passed that would separate the Office of Federal Student Aid from the DOE in order for it to be a stand-alone entity.

 

Source: Yahoo News

 

Lawmakers Call for Investigation of Federal Loan Discharge Program for Disabled Borrowers

With plenty of heat surrounding allegations against the U.S. government’s Public Service Loan Forgiveness Program for not making the qualification requirements clear, a new federal program is under fire from lawmakers this week – this one meant to forgive student loans of borrowers with “significant, permanent disabilities.” An NPR report recently revealed that the program wasn’t helping a large portion of borrowers who were eligible.

 

This loan discharge program is specifically meant to help individuals who have the most severe type of disability: Medical Improvement Not Expected (MINE). The Education Department finds eligible borrowers by comparing federal student loan records with the Social Security Administration records, then sends a letter to these disabled individuals and requires them to apply in order to have their loans discharged. The controversy lies in that that many of these borrowers are unable to apply or may not be aware of the notice they received. The NPR report revealed that only 36% of eligible borrowers have had their student loans discharged.

 

Source: NPR

 

Trump Calls on Aides for Plan to Tackle Student Debt

With Democrats such as Elizabeth Warren making bold claims for tackling student debt in the US, President Trump has called on his administration to put together a “blueprint” for how they will manage the student debt crisis. The Washington Post claims that Trump is calling for this plan as a method to combat “anxieties that Democrats such as Warren will tap into populist impulses that propelled his 2016 victory,” and that “he will need policies beyond his signature areas of immigration and trade to counter them.”

 

Source: The Washington Post

 

Rand Paul Wants You to Use Your 401k to Pay Off Student Loans

Senator Rand Paul (R-KY) recently proposed a legislative act that would allow individuals to use pre-tax money from their 401k to pay off student loans, or even pay for college. The HELPER Act (Higher Education Loan Payment and Enhanced Retirement), is an initiative by Paul to “reshape the way people save for higher education, driven through tax and savings incentives,” says Forbes writer Zack Friedman.

 

Key takeaways from the act would include the ability to withdraw $5,250 from your 401(k) or IRA annually to pay off debt or pay for college, the ability to pay tuition and expenses for a dependent or spouse, tax-free employer-sponsored student loan and tuition plans, and a removal of the cap on student loan interest reduction.

 

Source: Forbes

 
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-05
Student Loan Interest vs. Other Interest Types

By Caroline Farhat  

If you have student loans, you’ve probably been told at one point that it’s “good” debt. But what does that really mean? Is any debt actually good or is it all bad? Is the interest you pay on your student loans better than the interest you pay on your auto loan? 

 

As you accumulate more assets, you’ll encounter many different types of interest. It’s helpful to know how each type of interest differs so that you know exactly what you’re getting into when you borrow money. 

What is Student Loan Interest?

Student loan interest is essentially the cost you pay for borrowing the money. When you pay interest, you will be paying back the amount of money you borrowed plus the cost to borrow the money (the interest). The higher the interest rate, the more money you will have to pay in addition to the amount you borrowed. The amount you borrow is called the principal and the cost to borrow the money is called the interest. Interest is charged on both federal student loans and private student loans until the loan is paid in full. When you make a payment on a loan the interest is paid first, any amount of the payment over the interest is applied to the principal and lowers the balance of the loan. The types of rates and how interest is calculated are based on the type of student loan.  

 

Federal Student Loans: The Difference Between Subsidized and Unsubsidized

Federal student loans have fixed interest rates that are set by the government. They remain the same throughout the life of the loan. Also, federal student loan interest rates may be lower than auto loans or personal loans. Federal student loans have two different types of interest: subsidized interest and unsubsidized interest. A subsidized interest loan means the government pays the interest on the loan while you are in school or during deferment (a grace period from federal student loan payments granted for certain situations), which means the balance of the loan does not increase. Once you are out of school or the deferment period ends, you will be responsible for paying the interest on the loan. An unsubsidized federal student loan means the interest starts accruing from the day the loan is first disbursed. Although you may not be required to make payments on the loan while you are in school, you will end up with a loan balance higher than you initially borrowed. The interest on a federal student loan is calculated using the simple interest formula. Here is how to calculate the simple interest formula:

 

The principal (the amount of money you borrowed) X the interest rate = The amount of interest you will pay each year for the loan

 

Private Student Loans: The 411 on Fixed and Variable Interest Rates

Private student loans can have a variable interest rate or a fixed interest rate. A variable interest rate is based on the current market and economy and can change over the life of the loan. A fixed interest rate remains the same throughout the life of the loan. It’s important to note that rates can vary widely based on the student loan lender, which is why it is so important to do your research and only sign with a reputable company. The interest rate you receive on a private student loan is also based on certain financial factors, including your credit score. 

 

For example, ELFI customers who refinanced student loans report saving an average of $309 every month¹. If you currently have private student loans, you can check out our student loan refinance calculator to get an estimated rate and monthly payment for both fixed and variable options.² Whether you’ve taken out federal student loans or private student loans throughout your college journey, consolidating and refinancing could score you some significant savings.

 

Interest On Other Common Loans

If you’re in full adulting mode, odds are you have or are considering getting an auto loan or mortgage. Just like your student loans, these financial products come with interest as well. 

 

Interest rates on car loans can be variable or fixed rates and the rate you receive is based on factors such as your credit score and financial health. There are two ways interest is calculated on car loans: simple or precomputed. For simple interest, the interest is calculated based on the balance of the loan. If you pay extra on your car loan, the principal will be reduced and in the long run, you will be saving money in interest (woohoo). If you have a precomputed interest loan on a car, it will be calculated on the total amount of the loan in advance. This means that even if you make extra payments, you will not save any money on the interest over time. One big difference to note between student loan interest and auto loan interest is how it can affect your taxes. With student loans, the interest you pay may be a tax deduction you can take depending on your income and the amount of interest you have paid. With an auto loan, there is no such benefit.    

 

Interest on a house loan, otherwise known as a mortgage, is calculated similar to a simple interest car loan. An interest rate on a mortgage may be variable or fixed depending on which type of loan you choose. There are two major types of mortgage loans: 

  1. Principal and interest loans - You pay back the interest and the principal (the amount of money you borrowed) at the same time. This is the most common type of mortgage.
  2. Interest-only loans - This is when, for a certain period of time, payments towards the loan only go towards paying off the interest on the loan.
 

Mortgage loans are amortized, like some student loans, which means your payment goes towards more interest upfront. Then as the balance decreases, you pay less interest and the payment goes towards paying down the principal. Also, just as with some student loans, some of the interest you pay on your mortgage may be tax-deductible. 

 

Understanding Interest Can Pay Off

It’s important to understand the different types of interests and loans when determining which debt to focus on paying off first. Being strategic about how and when you pay off your debt can save you hundreds and even thousands of dollars. A good rule of thumb is to pay off the debt with the highest interest rate and then focus on your interest rate debt. Of course, if you have the option to refinance, explore that first and then develop your debt reduction plan.

 
 

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

²Subject to credit approval. Terms and conditions apply. Variable rates may increase after closing.

  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
2019-12-04
Tips for Starting Your Student Loan Repayment Journey

Once you graduate from college, leave college, or drop below half-time enrollment, it’s time to start thinking about when your student loan repayment period kicks in. Understanding the repayment process for your student loans is very important for a number of reasons – for one, if you don’t pay, your interest will accrue. Second, if you don’t pay, it will affect your credit score, which can hinder your ability to buy a home, buy a car, qualify for credit cards, take out a personal loan, or refinance your student loans.   If you graduated this past spring, your student loan repayment period will likely start around this time of year (if they haven’t kicked in already). Follow these tips to master student loan repayment and get yourself to a strong financial start after college.  

Know How to Access Your Loan Information

A good first step is to acquire your loan information. This can typically be accessed via an online login. Monitoring your loan information will be essential during the course of repayment. If you took out Federal Student Loans, you can likely access your info at https://myfedloan.org/. If you took out private student loans, check with your lender for how to access your information. Tracking your loans will give you a gage on the status of each loan, the balance you owe, as well as interest rates for each loan. By understanding the status of your loans, you can make more informed decisions about how you want to prioritize repayment, what type of repayment plan you want to choose, or even whether you want to consolidate or refinance your student loans.   

Know When Your Payments Start

Immediately following graduation, you’ll likely have a grace period, or a period of time before your first payment is due. This can vary depending on the type of loan you have, and they can be different for each loan. Subsidized and Unsubsidized Federal loans have a six-month grace period. Perkins loans have a nine-month grace period. There is no grace period for PLUS loans; however, if you are a graduate or professional student PLUS borrower, you do not have to make any payments while you are enrolled at least half time and (for Direct PLUS loans first disbursed on or after July 1, 2008) for an additional 6 months after you graduate or drop below half-time enrollment. Private student loans will have differing grace periods so contact your loan servicer for more details. Knowing when your loan will be due is imperative to starting off on the right foot when it comes to your student loans.  

Weigh Repayment Options

When you take out federal student loans and your grace period is complete, you will automatically enter the Standard Repayment Plan. This plan allows you to pay off your debt within 10 years, with the monthly payment remaining the same over the life of the loan. If standard repayment doesn’t work for your budget, you may want to consider some other options, or perhaps even refinance your student loans. The federal student loan program offers the following Income-Based Repayment plans: 
  • Graduated Repayment Plan – Gives you a smaller payment amount in the beginning and gradually increases the payment amount every two years.
  • Extended Repayment Plan – Allows you to pay the least possible amount per month for 10 to 25 years.
  • Revised Pay As You Earn Repayment Plan or REPAYE Plan – Bases the monthly payment on you (and spouse’s) adjusted gross income, family size, and state of residence.
  • Pay As You Earn or PAYE – Monthly payments are based on your adjusted gross income and family size. You must be experiencing a financial hardship to qualify. You must also be considered a “new borrower” as of 10/1/2007 or after, or be someone who received an eligible Direct Loan disbursement on 10/1/2011 or after.
  • Income-Based Repayment or IBR – Monthly payments based on your adjusted gross income and family size. Must be experiencing a financial hardship to qualify.
  • Income-Contingent Repayment or ICR – Based on your monthly adjusted gross income and family size. Typically chosen if an individual can’t qualify for the Pay As You Earn Plan or Income-Based Repayment.Any changes to your income or your spouse’s income will affect your student loan payment. For example, if your salary increases, your student loan payment will as well. If you are married, both your income and your partner’s income are combined. Two combined incomes will increase your total income, likely increasing your monthly payment. 
  Keep in mind that each repayment option will have positives, negatives, as well as eligibility requirements. Research each option before making a decision, and consider contacting your loan servicer if you have questions or need more information.   

Automate Your Payments (If you can)

Setting up automatic payments will make student loan repayment less of a hassle, will avoid late payments, and may even score you an interest rate reduction. Just be sure you have enough money in your account month-to-month to endure the payments without overdrawing.   

Make Extra Payments

When you make your monthly payment, it will first apply to any late fees you have, then it will apply to interest. After these items are covered, the remaining payment will go toward your principal loan balance (the amount you actually borrowed). By paying down the principal, you reduce the amount of interest that you pay over the life of the loan. Applying extra income by making larger payments or double payments will reduce the total amount you’ll end up paying.   

Reach Out for Help if Necessary

If you’re having trouble making your monthly payments, particularly on your federal student loans, contact your loan servicer. They will work with you to find a repayment plan you can manage or help determine your eligibility for deferment or forbearance. If you stop making payments without getting a deferment or forbearance, you risk your loan going into default, which can have serious consequences to your credit.   

Weigh Refinancing & Consolidation Options

If you have multiple student loans that are all accruing interest at different rates, you may want to consider student loan refinancing or consolidation to make repayment more manageable. The federal student loan program offers student loan consolidation, in which they combine your loans into one loan with a weighted average interest rate, rounded up to the nearest 1/8th percent. You can also consolidate your federal and/or private student loan with a private lender through the process of refinancing. Refinancing your student loans is much like consolidation, however it offers the opportunity to start new repayment terms and possibly lower your interest rate. Keep in mind that refinancing with a private lender may cause you to lose access to certain federal student loan repayment options that are listed above.   

Look Into Loan Forgiveness

If you work in a public service position or for a non-profit, you may want to consider the Public Service Loan Forgiveness program or another loan forgiveness program offered by the federal government. Other options exist for volunteers, military recruits, medical personnel, etc. Some state, school, and private programs also offer loan forgiveness. Check with your school or loan servicer to see if you may qualify for student loan forgiveness.  

Earn Your Tax Benefits

If you are paying your student loans, you may be able to deduct the interest you pay on your student loans when filing your taxes. Deductions reduce your tax liability, saving you money and serving as a nice tradeoff for having to pay interest on your student loans.    Repayment of student loans can be a long, difficult journey – but by taking advantage of your resources and staying determined to pay off your debt, it is manageable. If you need more information on paying back your student loans or the options that are available to you, contact your loan servicer.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.