If you have a client who is currently in school or deferring loans, it is often difficult to determine what repayment will look like for them. Lots of questions come up…
- What will their monthly payment be?
- What kinds of options will be available to them?
From The Top
Let’s take a quick look at the process of entering repayment.
Once a student takes out a loan for their education, interest begins accruing immediately (unless the loan is subsidized*). Luckily, the interest is not added to the balance — it just gets tallied every month the loans are “in deferment”.
There are several types of deferment. The most common are In School or In Grace Period. The grace period is a six month period post-graduation or withdrawal where the borrower is not obligated to make payments.
There are two important things that happen by default when loans are transitioned from “Deferred” to “In Repayment”:
- Interest capitalizes: Any outstanding interest is applied to the balance
- Monthly payment is set: The loans enter a 10-Year Standard Repayment Plan, where the monthly payment is determined by the new balance.
These are the default actions. It’s up to the borrower to tell their servicer which repayment plan they’d like to be on — that’s where Payitoff can be helpful.
Once you sync your client’s loans or upload the MyStudentData file, our system will detect whether the loans are currently in deferment.
From there, we’ll tell you which loans are going to enter repayment
Once you click “Enter Repayment”, each loan listed will be put on the Standard Repayment plan with an updated payment:
This simulates the process as if the client were to enter repayment today!
From here, you can compare any of the federal programs available against the default repayment schedule, including income-driven options.
We plan to build more simulations for other common situations:
- Direct Loan Consolidation
- Cash windfalls
- Switching to another income-driven plan
We‘re also going to introduce “Undo” functionality in case you want to revert to the prior scenario.
If you have questions, feel free to shoot us an email!
*Subsidized loans are available to students with financial need. Interest will not accrue during deferment periods. Learn more about subsidized loans here.
The Public Service Loan Forgiveness program is a federal program where a student loan borrower gets tax-free loan forgiveness if they:
- have Direct Loans
- work full-time at a qualifying employer* for 120 months in repayment
- are on an income-driven repayment plan**
Let me be clear: PSLF is NOT a repayment plan!
It’s a special program layered on top of an already-complicated repayment process for student loans. After 120 cumulative payments any outstanding interest is capitalized, attached to the outstanding debt and forgiven tax-free.
This can result in huge savings for heavily burdened clients, especially new doctors, dentists or lawyers.
As mentioned, the 120 payments don’t need to be consecutive at all! They can spend a year at a private sector job, then return to public service and finish the PSLF program.
When to PSLF
Public Service Loan Forgiveness comes up a lot for financial advisors using Payitoff. Often, their clients are deciding whether it makes sense financially to work in the public sector for 10 years or pursue alternative career options.
This is an incredibly important life decision.
You’ll want to consider PSLF for the following cases:
- Your client is considering a job in the public sector with a slight pay cut
- Your client is already in public service and is in repayment
How to PSLF
If you’re planning to have your client pursue PSLF, there’s two ways to ensure a positive outcome.
1. Every year, they need to fill out the Income-Driven Repayment Plan Request Form a month before the due date to re-certify their income. If they miss the deadline — one year from submission date — their interest will capitalize!
2. They should submit the Public Service Employment Certification Form. This isn’t required, but is extremely useful in confirming all their payments qualify each year.
#2 should also happen any time they switch employers.
Once they’ve hit the 120 payment mark, there’s a third form which actually asks the government to forgive the burden.
If you’re unsure whether your client’s employer is a qualified 501(c)(3), you can search directly within Payitoff. Check it out:
Ain’t Got Direct Loans
Unfortunately, only payments made on Direct loans will count towards that 120 total. There’s another group of loans called Federal Family Education Loans (FFEL) which were very common pre-2010. If your client has FFEL loans, they can still qualify for Public Service Loan Forgiveness by doing a Direct Consolidation.
Warning!! If your client is partially through income-driven repayment with their FFEL loans, a Direct Consolidation will reset the forgiveness clock.
For example, if they are halfway through the Income-Based Repayment Plan (yes, this is different than IDR) and they consolidate, they will start from zero for their forgiveness term. Any payments made prior to the consolidation will no longer count.
The Future of PSLF
PSLF doesn’t appear to be going anywhere. All of the bills currently circulating Congress support grandfathered PSLF candidates. If your client is on track for PSLF, the government can’t legally pull the rug out from under them. PSLF is literally on the Master Promissory Note.
That said, in my view PSLF is not exactly a sustainable program — don’t expect it to last forever.
I hope this has been helpful! In a future post, I’ll be discussing the recent data around PSLF and dive into the lesser known Temporary Extended Public Service Loan Forgiveness Program.
*A qualifying employer is considered to be:
- Any federal, state, local, or tribal government organization
- A 501(c)(3) non-profit organization
- Peace Corps or AmeriCorps
- A not-for-profit that’s not 501(c)3 designated, but meets other requirements related to public service, federal, state, local, or tribal government organizations
**All income-driven plans qualify, as well as the 10-year Standard Repayment Plan. However, it makes zero sense to be on Standard Repayment since the loans will be paid off by the time they’d be forgiven.
Few things are more stressful than the uncertainty of income-driven repayment plans for student loans.
Imagine how your client feels when their financial health is tied to the government — every income change and new family addition affects their financial outcome. It’s hard to make informed decisions in this environment!
We want to help with that. Today we’re launching Payitoff Scenarios, a way to see how future life events affect your client’s income-driven repayment.
Let’s break down how it works.
Major Life Changes
Right now, we support two significant life scenarios:
- New Income
- New Family Member
When you are exploring an IDR timeline, you have the option to add any of these scenarios. Let’s look at an example.
Say your client is a soon-to-be doctor making $30k / year in residency. They’ve recently entered repayment and are expecting an income jump of $300k in 3 years. They’re on the Revised Pay As You Earn plan (REPAYE) and qualify for Public Service Loan Forgiveness.
Without the income jump, REPAYE looks like a good deal since the subsidies control the interest and the forgiven balance is far lower:
But once we add the future scenario, it becomes clear that REPAYE will ruin your client’s cash flow down the line:
Their monthly payment jumped from $106.02 to $2,587.18.
That’s insane! Since they’ve recently entered repayment, it might be a wise choice to move your client in a scenario with a monthly payment cap. How about when they enter PAYE?
Much better. This time, the monthly payment only jumped from $106.02 to $1,478.28. Now we have predictable cash flow and a lower total cost. In this case, PAYE is a clear winner.
We’re planning to introduce more life events down the line, but these two are definitely the ones that most significantly affect income-driven outcomes.
Give it a spin — we’d love to know what you think!
The National Student Loan Data System (NSLDS) is the central database for any federal aid provided in the United States. As part of the system, they allow any borrower to have access to a snapshot of all their federal loans or grants used to pay for education.
The snapshot is called a “MyStudentData” text file. It can be very handy when needing to drill into the details of a loan’s history – from origination to the current status!
We’ve already been able to help advisors gain access to this information through Payitoff Sync.
However, we’ve noticed that some advisors prefer not to send a link to their clients or aggregate accounts if they already have a MyStudentData file. Also, it is largely seen as a reliable “source of truth” when verifying federal repayment options (especially among student loan experts).
Uploading a MyStudentData File
On Payitoff, advisors can now upload this MyStudentData file and gain access to the entire snapshot within seconds. Here’s a peek of how it works:
How Do I Find This File?
You’ll need to ask your clients to follow the steps below in order to get the file:
- Go to this NSLDS site and log in with an FSA ID. If you don’t have an FSA ID, you can create one by clicking on “Create an FSA ID”.
- Press “Accept” on the next prompt.
- Click on the MyStudentData Download icon.
- Read the confirmation message and press “Confirm”.
More To Come
We’re constantly working to improve the planning process for financial advisors whose clients have student loans. We’d love to hear your thoughts on these new additions — and we have many more in store for the future!
Federal student loan repayment is complicated. There are tons of income-based repayment options and it’s difficult for any financial advisor to navigate.
- Is my client eligible for any federal programs?
- Which loans qualify for these programs?
- What are the tradeoffs of Income-Based Repayment vs Pay-As-You-Earn?
As a financial advisor, every detail of income-driven repayment is important because they each have a profound impact on your client’s financial outcome.
Quick example: choosing Revised Pay-As-You-Earn (REPAYE) over Pay-As-You-Earn (PAYE) may be a great idea due to the generous interest subsidization, but what if your client needs the limit on interest capitalization and monthly payment for cash flow reasons?
These are difficult decisions to make. Too often, financial advisors have to trudge through the mud to get answers. Not anymore!
Payitoff was built to minimize complexity and answer the tough questions around student loans, so naturally we were inclined to make Income-Driven Repayment (IDR) as transparent as possible.
Once you’ve added a little information about your client, our system automatically checks whether the loans and client profile match IDR programs. You’ll see a new suggestion when building out a plan:
When generating a new report, you’ll see a matrix that looks like this:
We factor in the exact details of each program, including any subsidization behavior and interest capitalization nuances.
In our example above, you’ll see that the client spends the same over the life of REPAYE and PAYE, but ends up with a slightly worse tax bomb at the end of the term due to differences in government subsidies.
In the Income-Based Repayment case, the total paid is much larger because they are on the older IBR plan, which utilizes 15% more of their discretionary income (vs 10%) with a 5 year longer term. In this scenario, the client would be paying more but be debt free three years sooner.
Public Service Loan Forgiveness is a big question mark for many financial advisors. If you’re considering IDR for your clients, it’s important to run a PSLF scenario so your client can view the trade offs of working at a for-profit vs non-profit organization.
First off, it can be difficult to tell whether your client qualifies for PSLF or if they ever worked in a place that did.
Within Payitoff, you can now search to see if your client’s employer qualifies as a 501(c)(3), which are eligible organizations for the plan:
When you get into PSLF, it’s crucial that your client stays true to it. You’ll want to have annual check-ins to ask how repayment is going and if it matches the plan. Under PSLF, your client needs 120 qualifying payments to elect tax-exempt forgiveness.
You can export the PSLF report for future reference when discussing progress with accumulating these 120 payments.
Public Service Loan Forgiveness may seem like a large unknown for many advisors, but it absolutely has huge benefits. If your client is a doctor in residency working in a non-profit hospital, this choice can be a big factor on their financial well being.
Right now, the software makes a fair amount of assumptions about income growth and family size. We want to introduce the following to our IDR tool:
- Income Prediction: plan multiple income scenarios and family sizes so your client can see how life changes affect their repayment and goals.
- IDR Timeline: similar to our prepayment forecast, we want every IDR plan to have an associated timeline so the client can see exactly how their payments progress over time.
If you’re in our beta, you have access to this right now. If not, we’ve opened up a few spots so you can try it out and let us know what you think. We’d love to hear your thoughts!
Thanks to Nicolle Matson
As a financial advisor or coach, it can be tough to track down loans and credit cards for a client when developing a debt reduction plan.
This process currently involves interpreting an assortment of bank statements, building out a templated Excel spreadsheet, and sometimes managing phone calls with loan servicers. It’s is a major time sink!
We’re not big fans of wasting advisor’s time, so we’re excited to announce a new feature: Payitoff Sync!
How It Works
Advisors on Payitoff can have their clients sync their debt in minutes instead of needing to collect it manually. Check it out:
Minutes (Not Hours)
The basic flow looks like this:
- Advisors generate a secure, one-time-use link that expires in 3 days.
- Advisors share the link directly with the client.
- The client uses the link to connect with their debt accounts directly.
Every single student loan servicer, bank or credit institution is covered (including the National Student Loan Data System).
We’ve partnered with Quovo to manage the connection with the banks, so we’re not storing any sensitive client information — authentication is handled directly with the institution. Nice!
When Can I Use It?
Right now! If you’re a part of the beta program, you already have access to this feature from the client loan dashboard.
If you haven’t signed up yet, there’s still a few spots available in the program. We’d love to know what you think!
Prepaying on student loans is tough. The loan terms are often so long that even putting an extra $100 in every month doesn’t feel rewarding. It takes years and years to see the benefits. It’s not easy to stay motivated that long!
Adding Fuel to the Fire
Instead of just thinking about the time you are debt-free, let’s look at the possible gains once you are.
Say you’re paying $565 / month on your student loans and you add $100 every month to your highest interest loan (typically called the Avalanche method). Depending on the loans, you could be debt-free 2 years, 3 months faster with that prepayment — what could you do during those years?
You could take that $665 / month and put it in an investment account to earn interest. Just after the 2 year mark, you’d save:
- $18,649.12 at 1% interest
- $19,501.37 at 4% interest
- $20,182.64 at 7% interest
Holy smokes, $20,182.64!! You could put that towards a down payment on a house or keep it for retirement. By prepaying, you’re actually giving yourself the time to earn more cash. And that’s freaking powerful.
Imagine two universes:
- You keep doing what you’re doing. You’re debt free in 8 years
- You add $100 extra / month. You’re debt free and have $20k in 8 years
Which do you prefer?
At Payitoff, we love coming up with ways to beat the system and help you pay off your student loans more quickly.
We noticed that a lot of people have trouble figuring out how much extra money to put towards their student loans every month. Most people pick this number based what they think they can afford every month. Sometimes, folks just randomly guess.
We run nerdy simulations to figure it out!
How It Works
Putting an extra $1 towards your loans will lead to interest savings in the long run. Let’s look at an example:
Given a loan with a $10,000 balance, 6% interest and a monthly payment of $100, you’re charged $3,897.58 in interest over the life of the loan.
For the same loan at $101 per month, you’re charged at little less: $3,837.03 in interest. That’s a savings of $60.55 over the life of the loan. Not bad for an extra buck!
What if we add an extra $2? The interest charged is even less at $3,778.42. That’s a savings of $119.16 over the life of the loan.
Sounds great — more savings! That’s true. An extra $2 goes a long way.
However, the difference in savings between adding $0 and $1 is $60.55, but it drops to $58.61 when we compare the savings of $1 vs. $2.
That’s definitely good, but not as good as the original change in savings.
When we look at the relative savings, we get a much better picture of how each dollar of prepayment affects our outcome. As the extra payment increases, the relative strength of interest savings decreases.
Internally, we are simulating thousands and thousands of scenarios like this to find the point just before your interest savings flattens. With a little math and some creatively applied algorithms, we’re able to find the best possible approximation given your situation.
If you haven’t tried this out yet, sign up today and give it a whirl!
We’ve all been there. It’s so easy to throw your bar tab on the credit card or defer that student loan payment. It’s only a little money, right?
Whoops, that’s wrong! We’re giving up control every time we choose to add to our debt. Someone else is picking up that tab. We owe them and they own us.
The next time you spend money on a credit card, remember one thing:
With a 20% APR, this purchase is at least 20% more expensive than using cash
Five dollars for a cappuccino? More like six. A hundred dollars for groceries? Try $120.*
Dave Ramsey describes how easy it is to fall into the debt trap:
In fact, Americans have wandered into so much debt that the average household credit card balance is now $7,996, up 5% from 2016. It’s nothing to be ashamed about — everyone is doing it!
We’ve become so OK with debt that we fail to realize how much it controls our lives.
With high monthly payments, what are the odds that you’ll be able to just quit your job and work on a personal project?
With a six figure student loan balance, how are you going to save for a house? Are you going to rent the rest of your life?
Manageable debt that we can pay down every month is a fine vehicle. It’s great if we can afford to pay off the balance at any time. Flexibility with credit is not a bad thing.
Once we start to have trouble making payments or never see the balance dropping, it’s a sign that the debt has become a bad thing.
If you find yourself in this situation, that’s okay! Most everyone has been there at some point in time. The only way to beat it is to FIGHT it!
Taking control means putting in the effort. It’s time to figure out how much your debt is costing you (or you find someone who can).
Stop using your credit card. Grab some scissors, literally cut the card and stick to cash. Calculate your actual student loan cost and pay a little more each month. Find communities who can support your efforts and hold you accountable.
Originally published at medium.com on September 19, 2017.
Maybe your credit card balance never changes. Or your student loan balance is somehow growing. Sound familiar?
You’re on the debt treadmill, my friend. The debt treadmill is the feeling that you’re paying monthly payments and still aren’t getting out of debt.
Here’s three easy ways to hop off that nasty workout and chip away at the debt.
1. Cut out a little thing
Each month, cut some expense and use it towards your loans. Instead of ordering Seamless or going out, head to the grocery store and make meals for the week. I’d recommend Budget Bytes, which tells you the actual cost per serving.
Do this for one week out of the month and calculate how much you’re saving.
Take half the amount you’ve saved and put it towards your debt, whether it’s credit card, student loans or auto loans. Save the other half for a rainy day. Rinse and repeat each month and you’ll notice your balance going down.
2. Do a side hustle
Find something that you love doing. It does not have to be anything related to your regular job. In fact, it’s a lot better if it isn’t.
Dedicate two nights a month to this activity. If you like driving, sign up for Lyft and try it a couple nights a month. You can get creative here — think of anything you do that you often give away for free, then try charging for it.
Use the profits from this directly towards your debt. You’ll notice soon enough that your balance is creeping down. If you enjoy it, try working four nights a month.
3. Stop using any debt
One of the best ways to stay away from high balances is to stop using any debt. You’ll have a tough time paying down that credit card if you keep using it at the bar every weekend. Looking to buy a new car? Well, you better save up, because you aren’t getting out of debt by taking on a car loan.
Stick to cash. Using our cash forces us to come up with a realistic way of spending money. Go to the ATM before going out and force yourself to only use that cash. Try it for a few months and you’ll notice those balances actually going down.
While it might take a little time, these minor adjustments will make a huge difference.
In fact, paying just $20 extra dollars above your minimum payment (for a $3,000 credit balance at 17% APR) would save you $2,645.50 on interest and be paid off 14 years faster!
If you have more suggestions, please feel free to leave a comment here 🙂
Originally published at medium.com on September 14, 2017.