Federal Stafford loan repayment not impossible for students in the know

By David C. Smith

Human Services Graduate Student

In recent weeks, several of the leading news magazines have been featuring stories about the huge amount of soaring student loan debt and increasing loan defaults; primarily on the federal governments Stafford Loan Program. The national total for all student loans exceeded $956 billion this fall and now exceeds one trillion dollars. The repayments on 11 percent of all student loans were 90 or more days behind, up from 8.9 percent at the end of June, a rate that now exceeds all American credit cards. Here in Alaska, the 2009 3-year official cohort default rate as of Aug. 5, 2012, included 510 former students from all State of Alaska educational institutions combined. The 2010 number for UAA in the current 2010 3-year cohort is 8.1 percent of all Stafford loans are currently in default. In 2014 the government will be issuing figures for a 4-year cohort default rate.

Nearly all current student loans — 93 percent — are made directly by the government, which asks little or nothing about the borrower’s ability to repay or what sort of education they intend to pursue. As a current UAA student, you should be interested in the federally funded Pell Grant, Stafford Loans and the Perkins Loan Program.

President Obama championed easy-to-get loans during the recent presidential campaign, calling higher education “an economic imperative in the 21st century.” We now have nationally over 374,940 former college students or recent graduates in default on their Stafford student loan obligations. To be in default by definition you must be 270 days or more behind on your scheduled repayment plan.

Stafford student loan recipients get an Internet counseling session as part of their annual loan application on FAFSA and an “exit-counseling” as they approach graduation. Additionally, most universities provide a companion face-to-face counseling session under a federal student loan management program called “Default Prevention and Management: A Plan for Student and School Success.” The University of Alaska does not appear to be actively counseling its current student population on Stafford loan options.

Unlike most other types of consumer credit, student debt is extremely difficult to discharge in bankruptcy. After falling behind on repayments, a borrower typically finds it harder to obtain other types of consumer loans, or can do so at higher interest rates. Unfortunately many of the Stafford Loans involve a guarantee by the parent or grandparent under a program called Plus Loans. This feature makes the guarantee or additionally responsible for all loan repayment.

Total undergraduate student Stafford loans are capped at $57,500 and total graduate student loans under the Stafford plan may amount to $138,000 for undergraduate and graduate loans combined. The maximum annual graduate degree Stafford loan is capped at $20,500 per school year. Since the end of 2007, just before the financial crisis hit, total student debt (primarily Stafford) has grown by more than 56 percent nationally, adjusted for inflation; during that same timeframe, overall household debt — including mortgages, student loans, auto loans and credit cards — fell by 18 percent nationally.

Some articles suggest that student debt could be at the center of the next financial crisis in the U.S. What is saddest about this pending crisis is that it will likely impact millions of student borrowers throughout their lives and many parents and grandparents that have co-signed their children’s student loan packages. In 2010, about one in five households in the U.S. had a student loan-related debt of over $26,000.

The UAA had 1,976 Stafford student loans for repayment in 2008 with 100 (5 percent) in default; with the State of Alaska average now being above 8.2 percent. Typically the “private” college student loans have a much higher student loan default rate when compared with public (state) universities. Kaplan University and University of Phoenix, both large private universities have default rates almost twice as high as the typical state university.

When we look at the various repayment options currently available to Alaskan students; we have the following six options for repayment of federal student loans:

1.)   Standard Repayment: Under this plan you will pay a fixed monthly amount for a loan term of up to 10 years. There is a $50 minimum monthly payment.

2.)   Extended Repayment: This plan is like the standard repayment, but allows a loan term of 12 to 30 years, depending on the total amount borrowed.

3.)   Graduated Repayment: Unlike the standard and extended repayment plans, this plan starts off with lower payments which gradually increase every two years. The loan term is 12 to 30 years.

4.)   Income-contingent Repayment:  Payments under this plan are based on the borrower’s income and the total amount of debt. The loan term is up to 25 years.

5.)   Income-sensitive Repayment: This plan pegs the monthly payments to a percentage of gross monthly income and the loan term is 10 years.                                                                                              

6.)   Income-based Repayment: The College Cost Reduction and Access Act of 2007 introduced income-based repayment as a generous alternative to income-sensitive and income-contingent repayment, starting on July 1, 2009. It limits your repayment at 15 percent of monthly income.

All six plans are available for federal student loans, but only the first three plans are available for student/parent loans. These are primarily both Stafford and Perkins loans.

Assuming you borrow a total of $20,000 at 6.8 percent interest; switching from a Standard 10 year repayment to a 20 year Extended Repayment plan would decrease your monthly payments from $230.16 to $152.87 with a substantial increase in total interest paid. If you were to take a relatively low-paying position in an impoverished high need area; your payments could be substantially reduced to as low as $50 per month under the Income – Based Repayment Plan.

On Dec. 21, 2012, a seventh option became available: Pay as you earn. It is based upon your discretionary income and family size; and was designed for today’s poor job market. Low wage earners may end up with payments of no more than 10 percent of monthly discretionary income and/or almost no monthly repayment and the payment schedule may be seen at many sites if you Google “pay as you earn student loans.

In searching the Internet under FinAid/Loans/Repayment Plans; you will find calculators which will give you three repayment options side by side for comparative purposes. The Internet has an additional site that is “university specific” for loan default at: http://www.student loan default.findthedata.org.

If you have a Stafford, now is the time to look at your repayment options; not 270 days after you miss your first scheduled repayment. Search the Internet; the U.S. Department of Education Default Prevention and Management Team makes available a lot of valuable information to keep you on track.

Better yet, “know before you owe”  is still good advice.

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