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Avoid red ink with diploma: Help on way for students in debt

Choosing right options can help pay college loans

POSTED: June 29, 2014 1:00 a.m.

An executive order issued by President Barack Obama earlier this month aims to provide more flexibility to millions of student loan borrowers with low income and high debt.

But with the law not set to go into effect until December 2015, area experts say borrowers should use existing resources to find the best payment plan available now.

“We are still trying to figure (the order) out for the simple reason it is very confusing and we do not know for sure if it is going to go through completely,” said Jill Rayner, director of financial aid for the University of North Georgia. “There’s so many nuances to how it’s written, so we’re waiting for guidance from the U.S. Department of Education.”

Rayner said current students and new graduates should not wait for the effect of the law to become more clear, but should plan now for what could be a significant debt burden. She said resources designed to help students understand their debt are available online, and federal loan services are available to lend their expertise to new graduates preparing to repay their loans.

“Students sometimes think, ‘I can’t pay this back so I’m just going to avoid it,’ and that’s when they get in trouble,” she said, “but the federal servicers can actually help them.”

Brenau Director of Financial Aid Pam Barrett said she also sees lack of communication with loan servicers as a common reason for problems with repayment.

“I think the problem that we see most is students don’t stay in touch with the servicer that’s been assigned to them,” she said. “They just take the option that’s presented to them, which is the standard plan, and don’t learn about other options. (The servicer can help borrowers) try to get a better payment plan that is more in line with their income.”

The executive order, issued by Obama June 9, expands the existing Pay-As-You-Earn program, which caps monthly payments based on income. PAYE is already available to students who borrowed federal loans after 2007, but the expansion will extend the PAYE option to borrowers who took out student loans earlier.

Under the standard loan repayment plan, graduates pay the same rate each month over a 10-year-term. Under PAYE, that term can be extended to 20 years and monthly payments are capped at 10 percent of the borrower’s income. Any balance left at the end of 20 years of payments is forgiven. The PAYE option lowers monthly payments for some borrowers, but also increases the amount of interest for some.

Barrett said PAYE is just one of the repayment plans that take income and factors like family size into account.

There are also the income-based, income-contingent and income-sensitive plans. Each of these plans has different eligibility requirements, different lengths of time over which repayment is made, and apply to different types of loans.

In addition to plans that consider borrower income, the standard plan, graduated plan and extended plan are available to eligible borrowers. The number of options and complicated formulas that go into determining how they work for each individual borrower make it particularly important that borrowers communicate with their loan servicers who will help them understand not only which options are available, but how they apply to a particular borrower’s situation, Barrett said.

Rayner said borrowers should also take advantage of the many online resources available to educate themselves about student loan repayment. She said the loan calculator available at studentloans.gov is a particularly valuable tool for assessing debt, particularly when looking at different loan terms. Students can also find detailed information about their loans through the National Student Loan Data System.

“It does give you a reality check,” Rayner said of the calculator. “It shows students, this is how much your principal is, but this is how much your interest will be.”

With the announcement the PAYE option will likely be extended to borrowers who took out loans before 2007, borrowers with older loans may be taking a second look at their repayment options.

Barrett said borrowers who have already started repayment with one option can go back and change to another. She said she recommends re-examining repayment options especially after a change of income, whether that change is an increase or decrease.

Borrowers with a decrease in income may want to choose a longer-term, lower monthly payment option, but should keep in mind a longer term may lead to a larger amount paid overall as more interest accrues.

Borrowers with an increase in income may want to consider making larger payments in order to avoid interest.

Barrett said larger payments can be made without changing the minimum monthly payment.

Both Barrett and Rayner said the two most important things students can do to minimize their debt burden are to communicate with their loan servicer and to borrow as little as they can and, if possible, avoid using student loans to cover household expenses.

“It’s important to watch how much you’re borrowing while you’re going to school,” Rayner said. “Really analyze what you can cut back on and what you really need. ”

“Awareness and communication, I think, are the most important things,” Barrett said. “(And) borrow as conservatively as possible. ... Try just to keep in mind that that’s going to be repaid.”


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