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Student Loan Forgiveness 101

April 9, 2016

Student loan forgiveness (also known as cancellation and discharge of student loans) is the act of releasing a borrower from their obligation to repay all (or a portion) of their federal student loan(s), including the principal and interest. It is only provided under certain circumstances, to those with federal loans, and to borrowers who meet certain eligibility requirements. While it may seem hard to qualify for student loan forgiveness, there are a variety of options available, all of which intend to significantly reduce or eliminate student loan debt.

This introductory guide to student loan forgiveness aims to help readers familiarize themselves with the options and eligibility requirements surrounding federal student loan forgiveness and includes: student loan forgiveness categories, income-driven repayment plans, state, and city-sponsored forgiveness options, and what happens once a student loan forgiveness application is approved or denied.

Student Loan Forgiveness Categories

There are a variety of circumstances that may lead to federal student loan forgiveness. However, none are guaranteed and each circumstance may or may not apply to the borrower’s particular type of federal loan. Furthermore, certain categories of loan forgiveness mandate that applicants meet certain eligibility requirements, including items such as qualified monthly payments and qualifying employment. The following list highlights the different federal loan forgiveness categories, but borrowers should also review this chart, from the Federal Student Aid Office, to ensure their circumstance applies to their particular federal loan type (Direct Loans, FFEL Program Loans, and Perkins Loans):

  • Closed School Discharge
  • Total and Permanent Disability (TPD) Discharge
  • Death Discharge
  • Discharge in Bankruptcy (rare)
  • False Certification of Student Eligibility or Unauthorized Payment Discharge
  • Unpaid Refund Discharge
  • Teacher Loan Forgiveness
  • Public Service Loan Forgiveness
  • Perkins Loan Cancellation and Discharge
  • Borrower Defense Discharge

Borrowers who believe they may qualify for student loan forgiveness are encouraged to read more about the possibilities related to federal student loan forgiveness and cancellation. These borrowers should also contact their loan servicer (the company handling billing and services related to the student loan) to further discuss their options. Finally, if a student loan forgiveness application is placed under review, borrowers should continue to make payments on their loan to prevent it from going into default or accumulating additional interest until all final decisions are made.

Income-Driven Repayment Plans & Student Loan Forgiveness

The Federal Government’s four income-driven student loan repayment plans forgive a student’s remaining loan balance after either 20 or 25 years. These payment plans work by creating a set, monthly payment amounts that are based on what is affordable for the borrower’s income and family size. After making qualified payments for the entirety of the repayment period, the loan’s remaining balance is forgiven. Applying for an income-driven repayment plan is free with the Federal Government, and per Federal Student Aid (an office of the Department of Education), “most federal student loans are eligible for at least one income-driven repayment plan.” The repayment plans — and a few of their details —include:

  • Income-Based Repayment (IBR Plan):

The IBR Plan requires that a borrower meets certain eligibility requirements. Depending on when the loan was issued, monthly payments are generally 10 percent or 15 percent of the borrower’s discretionary income, and the repayment period is either 20 or 25 years.

  • Income-Contingent Repayment (ICR Plan):

The ICR Plan is open to all borrowers with eligible federal loans. Payment amounts are the lesser of the two options: either 20 percent of the borrower’s discretionary income or what the borrower would pay on a repayment plan with a fixed payment over the course of 12 years (adjusted according to income). The repayment period is 25 years.

  • Pay As You Earn (PAYE Plan):

The PAYE Plan requires that a borrower meets certain eligibility requirements. Payments are generally 10 percent of the borrower’s discretionary income, but it is never more than the 10-year Standard Repayment Plan amount. The repayment period is 20 years.

  • Revised Pay As You Earn (REPAYE Plan):

The REPAYE Plan is open to all borrowers with eligible federal loans, and payments are generally 10 percent of the borrower’s discretionary income. The repayment period is 20 years for loans solely dedicated to undergraduate study and 25 years when the loans have been used for graduate or professional study.

Borrowers using an income-based repayment plan may also be eligible for Public Service Loan Forgiveness. Qualifying for this plan means borrowers with a remaining Direct Loan balance will have loans forgiven after 10 years of qualifying payments, rather than 20 years. Learn more about the program and its qualifications here.

State and City-Sponsored Loan Forgiveness Programs

Student loan forgiveness programs may also be offered by particular states and cities. These local-level loan forgiveness programs are often directed at particular professions (for example physicians, health care providers, and teachers) when the city or state faces an employment shortage in a critical profession. Loan forgiveness for those with careers in science, technology, engineering, mathematics, and law are also frequently offered. To find state and city-based loan forgiveness programs, try searching one of the following databases:

  • Physicians looking to find states offering loan repayment and forgiveness, as well as scholarship opportunities, will find the Association of American Medical College’s (AAMC) searchable database most useful.

Approval or Denial of Student Loan Forgiveness

Approved: Borrowers who are approved for student loan forgiveness are no longer obligated to make student loan payments unless only a certain amount is forgiven. Additional benefits may also include a refund of past payments, the removal of any negative credit records related to default payments, and a renewed eligibility to apply for federal student aid (as long as there are no other defaulted loans). However, there are cases in which the borrower may be responsible for refunding a portion of the loan to the U.S. Department of Education, so it is important to understand and verify every detail throughout the process.

Denied: Borrowers who are denied student loan forgiveness remain responsible for repaying the remaining balance of the loan. It is unlikely that a final decision can be appealed (with the exception of false certification and forged signature discharges).

More Options

Borrowers who are ineligible for student loan forgiveness and income-driven repayment plans — as well as borrowers with private loans — will find that additional money-saving options still exist in the form of student loan refinancing and consolidation. No matter the situation, we recommend that borrowers talk to a student loan expert to find the plan and benefits that best suit their short and long-term financial goals. For questions about refinancing and consolidating student loans — both private and federal — contact the specialists at Education Loan Finance.

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Couple Met on a Dating App
2018-11-13
Student Loan Refinancing & Your Dating App

When understanding student loans or any part of the finance industry for that matter, you’ll notice similarities. One significant similarity is that all requested borrowers of a loan will have their information reviewed by an underwriter. It sounds complicated, but in reality, the guidelines of a loan underwriter’s job are relatively simple. In fact, you could say that the entire application process works like that of a dating app and the underwriter is the Tinder® that will get you there.  

Swipe Left-

On a dating app, you’re not going to swipe right on everybody. Well, we hope that you have some standards for yourself! Similarly, when applying to refinance student loans, you’ll find different criteria or standards for companies. In a dating app, it’s usually pretty superficial first. The same can be said for student loan refinancing data. You see, student loan refinance lenders will have mandatory requirements like minimum student debt, minimum credit score, and others like institution attended.   The guidelines are pretty straightforward at this point to determine if you could be a good fit for the lender. If you are not, at this time a good fit for a lender, keep trying! Work on that credit score, assuming it’s something that can be fixed. If someone swipes left, that’s okay. It’s better to determine it now, than have it not work out later after you’ve invested significant time, energy, and emotion.  

Swipe Right-

Dating and financial stability are relatively comparable. Both take a long time to build and can be destroyed with one simple mistake. To gain back stability, it could take years, but that shouldn’t stop you from living your life and doing what’s best for yourself. Though it can be daunting, there are times when you’ll hit it off! If you “matched” with the lender you’ll move on to your application process or the case of a dating app slide on into the DMs.  

Getting That “Match”

Congrats, you’ve now moved on to the next level! You’ve received your notification and will start getting to really know one another. In the case of a lending institution, it can be a bit more formal. You’ll likely be submitting required documents at the time of your application. These documents differ based on the lender. Documents that are typically requested include, W-2, pay stubs, and government-issued ID.  

The Date

Once you’ve worked your way through the application form or direct messages, it’s time for the date. Yes, the date! Here’s where your underwriter really comes into play.  An underwriter is someone that is hired by a financial institution to evaluate requested borrowers. An underwriter reviews the information that a requested borrower submits and determines if they are a good fit. Consider the underwriter your dating app, it allows you to get to know someone and learn more about them.   In some cases, an underwriter may feel that they do not have adequate information and may request that additional information be provided. This can be common in the case of adding a cosigner, being recently employed, or other circumstances. Don’t be thrown off if additional information is requested. Just like when you’re messaging, and your match throws you a curve ball. If you see it through both things could work out well for you.  

Long Term

If your date worked out well for you, it’s likely you may want to go on another one. Fortunate for you, when it comes to student loan refinancing you can always continue to refinance your student loans through other vendors to get the best interest rate available. Once you’ve completed the application process and worked with an underwriter if needed, you’ll either receive an acceptance or a notification with details as to why your loan was not approved. When you’re dating well, there could be many possibilities. One of those possibilities could include getting ghosted. Regardless, we hope that it’s the beginning of a long and happy relationship for you both!  

10 Facts About Student Loans That Will Save You Money

2018-11-02
Our Simplest Guide To Student Loan Refinancing: Part lll

This is the third part of our Simplest Guide to Refinancing. If you’re interested in student loan refinancing and want to know everything there is to know—in simple terms—about refinancing, check out part 1 and part 2. We’ve talked about the benefits of refinancing and process to refinance your student loans, so let’s take a look at what prospective lenders will be reviewing when looking to refinance your student loan debt.  

Refinancing After Claiming Bankruptcy

  Bankruptcy is a challenge when it comes to refinancing. Many people may find it challenging to refinance student loans after a bankruptcy for some time. It could even take as long as ten years for a bankruptcy to clear from your credit report entirely. Bankruptcy doesn’t clear student loan debt unless an exception is made, therefore it’s best to look into refinancing before a bankruptcy. If it’s too late for that as an option, that’s okay it may just be harder to qualify for student loan refinancing after bankruptcy. Check with lenders to see what they can offer.  

Debt-to-Income Ratio

  Debt-to-income ratio or DTI is the amount of money you owe versus the amount of money you make. This equation gives lenders an idea of what you should be able to afford as far as payments and additional debt amounts.   What’s a good DTI? Some sources note 36% or less as the acceptable debt-to-income ratio. It varies based on a lender’s underwriting criteria, but having less debt and more income will qualify you as lower risk for lending. You’ll be considered a lower risk because you have a more disposable income to dedicate to your debts.  

Credit Score and History

  Traditionally a “good” credit score is about 680 or higher. Most lenders won’t qualify you for refinancing if your credit score is below 660, but that’s not always the case. If you have a low credit score don’t hesitate to refinance, but be aware that the better your credit score the better rates you’ll receive from lenders.  If you didn’t know, your credit score is impacted by your credit history. So what is your credit history? Well, it’s exactly that, a history of your credit.  Credit history keeps track of how long you’ve had credit and if you’re a responsible lender. Obviously the longer you’ve had credit history the better, but we can’t all have credit as children - unless your parents added you as an authorized user to a credit card when you were born. Even if you don’t have perfect credit and a long credit history, it’s worth checking to see if refinancing might be right for you.  

Employment

There are a few things to consider regarding employment as you refinance your student loan debt. Lenders will likely look at your income from your job, the length of time you’ve worked there, and job history. If you have a job offer or promotion, you can get a job offer letter to submit that might help the lender understand your employment situation. People with long job history (and one with few gaps), higher income, and good earning potential are less risky for lenders. If you don’t hit all of these criteria, you might still be able to refinance. Without using a cosigner it’s in your best interest as a borrower to be employed to qualify for student loan refinancing.    

Questions to Ask During the Refinancing Process

Housing market and student loan debt
2018-10-31
Home Sales Drop Could It Be Due to Student Debt Crisis?

An eager young couple working together to afford their first home, a young family moving back in with the in-laws, or a recent college grad moving back home after school. These are the stories that have become oh so common in the United States. As the student loan debt crisis in America continues to grow, the homeownership rate has fallen specifically in younger generations. Student loan debt has increased to $1.5 Trillion in 2018 according to the Federal Reserve Bank.  The sales for homes continues to decline hitting its’ lowest number since 2015 according to a study by National Association of Realtors. According to the survey, more than seven in ten student loan borrowers believe that student loan debt has impacted their ability to purchase a home or take a vacation.   Many adult children have had to move home and put off their own dreams to pay down education costs like student loan debt. The daydream of one day buying their first home is becoming just that, a dream. Due to the immense amount of debt acquired during college, it just doesn’t seem possible for people to own their own homes. Let’s take a look at factors affecting borrowers and how they are dealing with housing due to student loan debt.  

The Feds

Is it possible that student loan borrowers have been placed in tough financial situations in part because of the Federal government’s model for the loans they provided during the 90s and 2000s? The Federal Government provided Stafford and Perkins loans to everyone at the same rate regardless of credit history. If you took out a loan with a private borrower, that lender would evaluate your ability to pay that loan back and would provide you with an amount they saw as acceptable. When providing loans to everybody regardless of credit history, the risk to the borrower is increased. Private institutions operate under guidelines and regulations that require they have “some skin in the game” to prevent risky lending.   Many borrowers see public service and not-for-profit jobs as a promising opportunity. Borrowers accept jobs in the public and nonprofit sector hoping to have their Federal student loans forgiven, not realizing the stringent requirement for eligibility to the Public Loan Forgiveness Program.  A recent report released on Septembers 19, 2018 by the Federal Student Aid a Department of the U.S. showed that 99% of borrowers have been rejected for the program. News of the rejection has borrowers feeling helpless with a lack of financial literacy.  

Transparency

Only one in five borrowers understood all the costs including tuition, fees, and housing according to the NAR survey. Borrowers were using loans for tuitions costs and did not fully understand the amount in which they were borrowing. The lack of responsibility on the borrower can be on part due to the lack of financial understanding and education. Financial literacy continues to become a recurring theme throughout the student loan debt crisis. Many borrowers lack the financial know-how for the most efficient ways to pay down student loan debt. The financial knowledge needed to handle debt, and the rising cost of college tuition has not worked to the advantage of student loan debt borrowers. According to the survey, 32% of student loan borrowers had defaulted or entered into forbearance on their student loan debt.  

Financial Literacy

Forbearance, deferment, Income-Based Repayment, and student loan grace period are commonly used when paying down student loan debt. What most borrowers don’t know is that unless you have a specific type of federal student loan debt, interest is accruing during this time period. The interest that accrues on your loan during these repayment periods can really end up costing you in the long run. In addition to the lack of knowledge on how to handle the debt, borrowers are unaware of opportunities like student loan refinancing.  

Paying Down Debt & Housing

Now that we understand a bit more about how student loan debt has gotten to where it is now let’s see how borrowers are dealing with the debt and what their housing situations look like.  

Moving Back Home

We all know at least one or maybe two young people who have moved back in with a family member after graduating from college. It has become fairly common for college graduates to move back home due to the vast amount of debt and “empty nest” syndrome parents often face. What can differ between households is whether the graduate pay rent to the family or friend in which they have moved in with.  

Renting

According to the National Center for Education Statistics student loan debt has grown from 5% to 30% of all household debt. Since 2008 the cost of college has risen. This increase in debt has caused an increase in renting. Equifax surveyed millennial renters asking why they didn’t buy a home and 55.7% of respondents listed “student loan debt/not enough money saved” as their reason for renting.  If a student loan debt holder can afford a mortgage payment typically they cannot save for the down payment that is required.   Potential homebuyers are having trouble finding homes they can afford according to CNBC. Due to this difficulty, many people are finding themselves renting for longer periods than they would have hoped. National apartment occupancy sits at 95% as of 2017.  

The Housing Market

As mortgage rates continue to increase so too, does the cost of homes. Both these factors continue to cause a drop in the sales. For example, sales of single-family homes, co-ops, and condominiums have dropped 3.4% from the prior month. Houses have become unaffordable and those with student loan debt cannot find the additional savings for the down payment needed. This drop in home sales could have a strong effect on the market.  

Looking Forward

 

Employer Benefit Programs

First-time homebuyers should not feel discouraged as there are still many options available. Employers have been stepping up to help employees who are carrying student loan debt by offering benefit student loan debt assistance programs. These programs help borrowers receive resources that they need to pay down debt faster. In addition, the programs give employers the ability to share contributions towards the student loan debt of their employees.  

Student Loan Refinancing

Borrowers with above 650 credit score and steady income may qualify to refinance their student loan debt. Refinancing student loan debt would allow borrowers to select their repayment terms and could offer a lower interest rate. A lower interest rate on student loans could save thousands over the life of the loan.  

Education

Secondary institutions and lenders need to better educate borrowers on terms and best practices on paying down debt.  The more resources that can be provided to borrowers the better off that borrower is. In addition, borrowers should not count on qualifying for the Public Student Loan Forgiveness program. Financial literacy also should be addressed to students at young ages. The more we can educate our youth of responsible lending the better off the United States economy can be.  

Learn More About the State of Student Loan Debt in America Today

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