A million thank-yous to Chris Johnson for contributing this latest post to Canyoubelievethatguy.com. This is our second post from someone other than myself in the past two weeks and I am very excited and appreciative to have an additional author contributing to the site.

 His post touches on something that has been the subject of much debate recently – and that we’ll probably hear a lot about in the coming election cycle – and that is student loans, and whether or not college education and the tuition that comes with it is affordable for the average American. Chris was kind enough to get us past the fog and rhetoric, and give us some real hard facts about the issue.  Thanks Chris! -Andrew H.

Federal Student Loan Repayment Options

I was asked to say a few words on student loans. I want to start by saying that I think it is rather funny to me that after all this time in the student loan industry, the first person to ask me about this, the first person who actually reached out for information is, like me, someone who believes we already have enough tools to build a good life. Like me, he feels the game is already more than fair and that it simply requires effort, hard work and dedication. Of all the rants and complaints about free education, he is the first to ask me about this even though I have posted no less than 40 times, mentioned in conversation no less than 100 times that for most, education is already either free, or very affordable. And he asked me the first time I  mentioned it to him. To me, this says something about the people asking for more from their country vs those who ask more of themselves. Jim Rohn said it best, don’t ask for it to be easier. Ask that you become better.

With that said, I’ll jump right into it. The Federal Government has, already available several programs that allow federal student loans to become affordable. In most cases one can eliminate interest all together. I have been in finance for almost 13 years now. For the first 11 or 12 I was a Mortgage Banker. But for the last two, I have been a Compliance Officer for federal student loan programs. There are at least 7 programs available and they all serve a specific purpose depending on the borrower and where they are in life. But there are three programs that stand out. Three that literally offer anyone the ability to absolutely make their federal student loan debt affordable. The US Department of Education’s IBR (Income Based Repayment) option. Before I jump into the details,  I think it might be best to first touch on how student loans work, why they are so incredibly difficult to pay off and ultimately why they are such a problem in the US.

When you get a federal student loan, you are not taking out a mortgage. You are not qualifying for a car loan. You are taking out a heavy debt with a high interest rate you likely cannot refinance and one that will charge you interest daily. On top of that, it will compound daily. If you understand finance then you probably know at this point, most people are paying a negative amortization loan. This means that they are making payments on their loans and are not even covering the interest on a monthly basis. They are paying towards their loan(s) and the balance is actually going up.

What’s being done about this, nothing. Why? Because service providers of federal student loans have lobbyist in Washington that are second to none. The laws are not written to protect borrowers. They are written to make money. Same thing happened with mortgages and the US threw a fit. Regulation was again placed on the industry and and the entire industry was turned upside down.

 In the US, federal student loan debt exceeds car loans and credit card debt combined.

Who was to blame, the banks, the consumer? Personally I say both and I think the circumstances of each deal would have to be considered. But what scares me is that this industry is doing the very same thing and no one is even talking about it. No one seems to think its a big deal even knowing that in the US, federal student loan debt exceeds car loans and credit card debt combined. To make matters worse, a majority of this debt belongs to our young, our future. They are entering into the professional world behind the line. I will conclude this paragraph with probably the scariest and in many cases least known fact about federal student loan debt. You absolutely cannot get rid of them ever. With exception to these federal forgiveness programs and people that are 100% and permanently disabled (after the loans were acquired), these loans do not ever go away. In fact, they are on a short list of debts the government can actually garnish from disability and social security income. And make no mistake, they will. So if they are willing to take social security income from people living off of $800 to $1,500 per month, what do you think they would do to people in the work force?

So now we know federal student loans are very difficult to pay off. We know why student loans of $40,000 take 80 years to pay off while Americans in New York and Los Angeles pay off $600,000 to $800,000 mortgages in 15 and 30 years. And yes, we now know why a specific group of individuals are upset that college is too expensive. Well now we can jump back to the IBR programs offered by the US DOE. The William D. Ford Act was passed and authorizes the government to forgive federal debt. The IBR comes with it a very specific yet very short list of guidelines. Prove your income, tell them how many people you live with and they will determine what your payment should be. Do not worry about the interest. Do not worry about paying off the loan or loans.

First, they will consolidate your loans. Then, they will set you up with a term, 120 months (10 years), or up to 300 months (25 years) and or anywhere in between depending on the income and family size. They will take between 5% and 10% of your gross annual income as payment or less, again depending on family size. They evaluate this income annually. Every 12 months you must turn in one of three forms of POI (proof of income). Pay check stubs, tax returns from the previous year or bank statements in some cases. In some cases you may even be able to use tax returns from the year before last. If you are married and use returns (1040’s) they will base the payment off the borrowers AGI (Adjusted Gross Income). If you use pay stubs there is a chance you can separate the income, meaning the calculation for the borrowers payment will be based off one persons income rather than the combined income. If you already file separate returns, this too will allow the calculation to be based off one persons income. Even when separating the income, you may still use the full family size for the calculation. I understand this can become complicated and in many cases, people do screw this up. Service Providers like Naviant (previously Sallie Mae), Great Lakes and Nelnet should offer this service (and can), and for free. They don’t unless you are aware of them and ask. And if you ask me, trusting them to do it for you is like asking the prosecuting attorney to handle your defense while trying to prosecute you. Remember, they are paid off the interest.

There are also services available to assist in the evaluation and enrollment as well as management of these programs. If you seek this assistance out, under no circumstances, I repeat under NO circumstances should the consumer pay for these services until the entire process is completed. Not for any kind of application fee, not for any kind of processing fee. NOTHING, not a single dime until you are in and enrolled correctly. Even if they ask you to pay into some type escrow account, your talking to the wrong people. To add to this, these services are not a part of the program, and like the service providers borrows are already paying they do not work for, or are not a part of the federal government.

If you can manage this yourself, you should. If on the other hand you are the type of person who has a hard time with this sort of thing, or if you are not good at staying on top of things like this, I’d recommend the assistance. To receive the forgiveness or complete the program, the evaluation, like I said earlier must be completed annually, every 12 months until the term is up. Only then, when the term is up can you provide proof that the program has been completed. As a rule of thumb, I ask people this, do you do your own taxes? Or do you hire someone to do them for you? Use that same thought here. Another example I use for clients, if you get a speeding ticket, you would not hire an attorney to fight it. It simply wouldn’t be worth it. If on the other hand you hit and killed someone with your car (on accident of course) you would probably hire one. Well if you owe $5, $10 or maybe $15,k, that’s like a speeding ticket. $20, $50 or $100,k plus… Obviously I work for one of these companies. I assure you, they are quite compliant, it’s my job to make sure they are. If it is done correctly, if you are enrolled, maintain enrollment annually and keep up on the payment the government will forgive the remaining amount owed at the end of the term. You can still go into deferment or forbearance but you will not receive credit during this time towards the forgiveness. If you have an unstable income, or if you are not in a career type work environment, you may see income go up one year and down the next. No problem. The term will adjust accordingly. The best way to look at it, the higher the income, the higher the payment but the lower the term. The lower the income, the lower the payment but higher the term up to 25 years unless, you qualify for PSLF or PAYE.

PSLF is another program that falls under the IBR option. If you work in public service or non profit, the term is automatically 120 months or 10 years. This includes but is certainly not limited to: Police Officers, Teachers, Church employees, Soldiers and Nurses. Anyone paid by the state, the government or even local government like city and county employees. You pay an affordable payment, many times a payment of zero for 10 years and then your debt is forgiven. And this is not some kind of hand out, it is not a compromise. It’s simply an alternative to a standard amortization. Instead of paying off your loans, with a payment based on balance and interest, you make a payment based off income and family size and for a specific amount of time. The Government feels that they will get enough from you from the term set. They are willing to take whatever this amount comes to at the end of the agreed term. The difference here, with PSLF is that as long as you are employed by public service or non profit, you will be finished after 10 years regardless of how much you’ve paid towards your debt. Even if you’ve paid zero dollars. Another program, Pay As You Earn (PAYE) is similar, only the term is 240 month or 20 years. The PAYE program also starts at a lower percentage, meaning they only take up to 5% of the borrowers gross annual income. This program is for any employment type but the loans must have been acquired after late (end of November) 2007.

So in the end, anyone qualifies as long as the loan(s) are federal. There are private student loans as well and if you do not know what kind you have, you can ask your service provider. If you are familiar with FASFA or the DOE, you likely have federal student loans, not private. Or, if you want, my information is below. I’d be happy to assist anyone or refer them to an Account Manager that can. If you owe federal student loan debt, this is the best and most efficient way to repay them, period. The only exception, specific circumstances and loans. Parent Plus Loans are limited to one program and in some cases, the benefit is not all that great. Still worth looking into though. If you have consolidated and then defaulted, could be tough to get approved. Again, it cannot hurt to find out.

I will leave you with an example. A man lives with his wife, two children and his wife’s mother. So the family size is 5. His income is roughly $32,000 per year and is steady. I might add that with a family size of five, he could make upwards of another $5 to $7,k per year and his payment would be the same as it is now, $0 (zero dollars per month). He pays $0 per month, has been in the program 3 years and has thus far has paid absolutely nothing on his student loans. Based on his percentage increase in income every year, he will pay $0 for another 4 years. That is seven years with no payment. If he is lucky, and his income increases to what he expects, on his 8th year in the program he will qualify for a $10 per month payment. In the 10th year, his final year because he is a teacher, he will pay $40 per month. That means that he will pay $720 over a ten year period of time and on a $45,000 federal student loan. He entrusted us to manage this for him and the payment to us is $39.42 per month. Add that up over 10 years,  you get $4,730.40. So all together, he will pay $5,450.40 and he will not even have to think about interest. Not to mention, once he enrolled, his DTI (Debt to Income) ratio came down TO ZERO. His credit scores improved and his monthly affordability came up.

Compare this to what he was doing… $45,000 at 6.8%. He had just left deferment and had agreed to pay $450 per month. It would have taken him 12 years and 3 months to pay off and he would have paid $21,047.83 in interest alone. So he was on track to pay $66,047.83. Now, he will pay $5,450.40 and in less time. Show me a country that offers that, with the same amount of opportunity, same market and the same amount of citizens. Personally, I call that free education.

–Chris Johnson, VP, Compliance for Student Advocates,  September 2, 2015

Chris’s Information is included below: