New Rules For Ditching Student Loans

Some states cut back, but feds expand benefits for those in public service.

Hoping some of your student loan debt will be wiped away because you've chosen a selfless career? That may depend on what state you're from, what type of loan you have, and, of course, what profession you're in.

Most states have quasi-governmental agencies that monitor the status of federally subsidized student loans and administer loan forgiveness programs for those who follow certain career paths. Many of these agencies temporarily foot the bill for loan forgiveness before being reimbursed by the federal government. But some have been using excess revenues and state government funds to create their own loan forgiveness benefits.

Now, with loan markets in turmoil and states facing record deficits, some state loan forgiveness initiatives are on shaky ground or have been cast aside altogether.

The Pennsylvania Higher Education Assistance Agency, for example, recently cut its forgiveness programs for nurses and members of the military. PHEAA had been using money it made from activities like buying and selling student loans on the secondary market to help students wipe away loan debt. With that line of business (among others) no longer profitable, something had to give. "We've had to modify the programs we offer simply because we don't have the funds coming in that we did in the past," says Keith New, the agency's spokesman.

Others states that have cut loan forgiveness programs include Kentucky and New Hampshire.

So what's a current college student to do? First off, check what type of federal loan you've received. The most common type of loan comes from the Federal Family Education Loan Program (FFELP), followed by loans from the William D. Ford Federal Direct Loan Program.

While the loan limits are similar, FFELP loans go through a second party like a bank, while Direct Loans are taken directly from the government. If you have a FFELP loan, you'll want to consider consolidating it into the Direct Loan program, which could allow you to qualify for a wider variety of federal loan forgiveness programs. That option has been available for more than a decade. (New since August 2008 is the ability to transfer a previously consolidated group of FFELP loans into a single Direct Loan.)

You won't incur any fees for consolidating into a Direct Loan, says Sam Wilson, vice president for customer assistance at Texas Guaranteed Student Loan Corp., the state agency that oversees student loans in Texas. That's true regardless of whether you qualify for a particular forgiveness program or not. But in general, you shouldn't be shifting your loans around unless you have a good reason. "If you are seeking a benefit that is only available in the Direct Loan program and not available in the FFELP program, then you have the option to consolidate your loans in Direct in order to obtain that benefit," Wilson says.

Here's a run-down of the major types of loan forgiveness available:

The Military
The big news for members of the armed forces is that they can qualify for a freeze on interest accrual on loans made on or after Oct. 1, 2008. The benefit is available for up to five years of service, and is only for active-duty military serving "during war, mobilization or national emergency." The catch with this one is that you have to have a Direct Loan in order to qualify.

Also passed into law this past autumn was a cap on the interest rate charged to student loan-holders who become active-duty members of the military after they've taken out a loan.

For years the feds have capped interest rates for new service personnel who owed money on loans for purchases like automobiles. Now the rate cap of 6% (including fees) also applies to FFELP or Federal Direct loans current members of the military took before Aug. 18, 2008.

Another new loan forgiveness perk for members of the military only covers those who have taken out Federal Perkins loans--need-based loans funded by the U.S. Department of Education and disbursed by individual colleges and universities. Historically, military personnel with Perkins loans could get 50% of their student debt forgiven after five years of service. For those who have completed a year of service by this August, they can now qualify for 100% forgiveness of their Perkins loans after five years in uniform.

Teachers
New for those going into teaching is that the loan forgiveness provisions for both FFELP and Federal Direct loans now extend to teachers who work part-time at more than one school district or work for educational service agencies. This change should be welcomed by educators in rural areas, as they are more likely to be employed by multi-district or state-run school facilities.

The important thing to know about the government's loan forgiveness for teachers is that it only covers those working in public school systems that have been officially recognized as serving economically depressed areas (which means they're classified as "Title I" districts under the federal No Child Left Behind Act).
The subject you teach may also affect how much loan forgiveness you receive. Most eligible teachers see $5,000 chopped off their student debt after five years in the classroom. But for special-education teachers, or teachers instructing math or science at the high-school level, the forgiveness amount is much higher--$17,500 after five years. Also, teachers with Perkins loans are eligible for 100% forgiveness after five years.

Public Service
Since 2007, the government has encouraged grads to go into certain professions by offering to cancel the debt owed by workers in fields like emergency health, law enforcement, library administration, public day care and many more.

The rub? You need to be employed in public service and make all your monthly payments for 10 years before your remaining debt is forgiven. And, like other forgiveness options we've highlighted, this one is only for holders of Federal Direct loans.

The good news for FFELP borrowers is that they too qualify for a new forgiveness program for grads who go into professions for which there is a "national need." As far as the list of applicable careers goes, there's a lot of overlap between this initiative and the 2007 one, but there are some unlikely inclusions, like dentistry.

Here's the bad news about the new program, slated to start running from Aug. 14: Congress created it but hasn't appropriated any funding for it. So all you aspiring dentists out there shouldn't assume you'll be able to rely on this one, which reduces debt by $2,000 a year up to $10,000.

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Student Loans: A College Student's Key to Financial Success

Financial success may come in different forms. Financial success does not only mean that you are financially independent, or you have been able to make thousands of dollars off the stock market. To be financially successful, may mean making sure by the time you graduate from college, you are not in debt or worse off than you started.

As essential as it is to secure a part-time job to support your personal wants, you must be aware of the “hidden regressors” that come uninvited. Your first check in the mail, brings you to some degree, some feeling of accomplishment. Your adult life is just beginning, where you see the value of getting paid for work done. It goes without say that it’s at that time where you start to take on additional responsibilities. The importance of communication and being able to be reached wherever and whenever, prompts you to procure a wireless. The apparent need of getting to and from your job incurs the cost of driving insurance, gas and all other related transportation expenses. Indubitably, acquiring a job doesn’t always mean money inflow; it creates a path for money outflow. One needs to be prepared for the unexpected and the ability to be financially successful.

Credit cards: a friend or a foe? When the due date for bills draw nigh, and the checks are not coming in as often as you would have expected, many students feel pressured to use credit cards as a means of a short-term loan. This method where you plan on immediate repayment is not harmful; however, many students misconstrue that credit cards are an invention to make college life luxurious and comfortable. Wrong!

Saving is sometimes barely doable for some students, since they end up owing money to all these credit card companies. Our system is designed so that without good credit, one is limited from doing a lot of things. It is thus sagacious if we use our credit cards wisely. Use credit cards for things you know will definitely bring you a return. For example, use your credit cards to buy gas to take you to work. When you decide to use your credit cards to buy all the possible clothes on sale; and the purchase is backed by the conviction of repayment after you graduate, put the credit card back in your book bag.

Credit cards can either make you or unmake you; this is because if you use them wisely, once you graduate, it will be easier to get a loan for a new car or a lower security deposit on that new apartment. For the college students that work, there is always a possibility of saving your money, even if you can’t save a lot; you can still save a little. Try to research online, for banks that offer high interest rates on their savings account. The proliferation of online savings accounts has undeniably increased the interest rates, and thus the potential to earn more on your savings.

To be financially successful means to be free from debt, in the college perspective it is to try to avoid a post-graduation debt. The “broke college student” has the ability to be financially successful, if means are taking to save more and use credit wisely.

However, you would be forgiven for wondering why there has been no mention of the enormous impact that college loans have on a post graduate's ability to live in this 'debt free utopia'. Student loans are the biggest reason for post graduate debt. Sure you can take steps to stem the use of credit cards but the fact is that you will have had to borrow to finance your education.

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Debt Consolidation: The Pros and Cons of Debt Consolidation Mortgage Loans

Debt consolidation mortgage loans can help you lower your interest rates and monthly payments. With reduced rates, you can also pay off your debt sooner. However, reducing your equity could subject you to private mortgage rates. You may also end up spending more on interest payments by delaying payments.

Saving With Mortgage Interest Rates

Mortgage interest rates are much lower than credit card or unsecured loan rates. Consolidating your debt with a refinanced mortgage or home equity will reduce your payments simply by having a lower rate. By paying the same monthly payments, you can pay off your debt rapidly.

Your interest is also tax deductible with a mortgage or home equity loan, where your credit card interest isn’t. Student loan interest is also tax deductible and shouldn’t be consolidated for a higher rate.

Reducing Your Payments

Consolidating with a loan also allows you to reduce your payments by picking longer terms. So if your income is reduced or you have other financial obligations, lengthening your payments can give you some breathing room in your budget.

Paying More In Fees And Interest

The cost of a mortgage can be more than what you are paying in interest charges if you have a small amount of debt. To refinance a mortgage, origination fees can add up to thousands. Other types of home equity loans can cost hundreds or nothing to open. You may also have to pay private mortgage insurance premiums if don’t leave 20% of your equity in tack.

Delaying payments can also add up interest payments, even with a lower rate. For example, a loan amount of $10,000 will cost $11,587.10 in interest for a 30 year loan at 6%. That same amount will cost $5,896.71 for a 5 year loan at 20%, which is what most credit card payment plans are like.

Deciding To Pay Down Debt

Consolidating your high interest credit can help pay off your debt by providing structured payments. You can also lower your interest rates, making repayment easier. However, be aware of the costs and shop around for low rates and fees. To get the most out of a consolidated loan, choose short terms to avoid making large interest payments.

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Ask Money Builder: Repaying Student Loans Based On Income

We answer reader questions about the new income-based repayment plan.

Judging by the number of e-mails we've received since our recent story, "Grads May Soon Repay Student Loans Based on Income," it's clear that many former students are looking for ways to cut their monthly bills. Here's the basics of the new option: starting in July, borrowers can choose an income-based repayment plan that caps monthly payments on federal student loans at a percentage of how much you make. To sign up, borrowers need to call their lenders and ask for income-based repayment.

The plan does have downsides: if you're making smaller payments on the same debt, more interest will accrue, and it will take you longer to pay off the loan.

In this installment of Ask Money Builder, we'll address three of the most common questions borrowers sent us.

What if I have multiple loans? Would 15% of my pay be the maximum I have to repay on a monthly basis?

Because your monthly payments are based on your income, the total number of federal loans (such as Stafford, Grad PLUS or Perkins loans that have been consolidated with other federal loans) that you took out doesn't matter. If you have multiple loans through one lender, it is going to send you a monthly bill equal to 15% of the amount by which your income exceeds the federal poverty level (currently $16,245).

You may be in for more paperwork if you have federal loans held by multiple lenders. Federal law compels lenders to coordinate and share information about your loans; your monthly payments, therefore, may be spread across multiple debts but in total will not exceed the 15% cap.

If you have federal loans that are held by different lenders, you may want to consolidate your loans before you sign up for income-based repayment. The interest rate you're paying will probably stay the same, but at least you'll only have to write one check a month, which should minimize the chances that either you or your lender will make a mistake.

For more, please read "Tips on Consolidating Student Loans."

Do you know how the government plans to monitor increases and decreases in income?

It's not surprising that some borrowers are worried about what happens if they sign up for a new repayment plan and then lose their job. First of all, it's important to know how your lender knows how much you make. To register for the program, you'll have to sign and file IRS form 4506 T as proof of your adjusted gross income for the company holding your federal loan.

If you lose your job or take a pay cut six months later, most lenders will let you change your repayment schedule as long as you have proof of the change. For example, you may be asked to provide a letter from your former company's human resources department to show that you were laid off.

Even if your lender won't budge, you still have some options, says Mark Kantrowitz, publisher of FinAid, a Web site that tracks the student loan industry. "If worst comes to worst, you can consolidate your loans into the Direct Loan Program, which will allow you to choose an income-based repayment plan," he says.

What about those lucky enough to get a raise? While there aren't rules that say you have to increase your payments the moment your income rises, lenders will know come tax time how your income compares with last year's and adjust your monthly bills accordingly.

If you do get a raise, you should consider making a bigger monthly payment, even if technically you don't have to. "Lenders want you to stay in repayment for as long as possible," Kantrowitz says, because the longer you take to pay off your loan, the more they make in interest.

I am the cosigner on a student loan through Sallie Mae from seven or eight years ago. How will income-based repayment affect me?

If the loan required a cosigner, it is most likely a private loan. Stafford loans, the most common type of federal loan, do not require cosigners. But because Sallie Mae handles both federal and private student loans, some borrowers have a hard time figuring out what type of loan they have. Income-based repayment is currently available only for federal loans.

Forbes recently wrote about parents who cosigned a student loan and are now worried that their children will not be able to repay it.

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