Apparently You Can Screw Up a Student Loan Free Lunch

Well, federal student loans have been put on hold until January 31, 2022, and while that sounds like a fantastic way to deal with people struggling to pay student loans, it has good points and some not-so-great features.

In this podcast, Damon Day and I talk about how not all “federal” student loans are included and the new Republican no-interest student loan act put forward in Congress.

Transcript

Steve Rhode: we’re back with Steve Rhode, myself and Damon day, Damon. Hello.

[00:00:05]Damon Day: Hey, Steve.

[00:00:07]Steve Rhode: And this is another get out of debt guy show where we’re talking about money, credit debt. And apparently we’ve been talking a lot about student loans. You called this one correctly. So this is the victory lap for you. So what happened with student loans?

[00:00:22]Damon Day: The politicians punted.

[00:00:25]Steve Rhode: I was laughing this morning as I was walking in here to my office because, what has happened with student loans goes it’s. One of the bigger bipartisan screw ups, Right.
[00:00:36] Because initially student loans were put on hold by the Trump administration. Now the Biden administration has picked up the ball and punting, as you say, further down the road.
[00:00:46]This is the opposite of making a plan, making a financial plan, taking some sort of informed, educated decision. This truly is just punting this mess down the road. So do you have the facts there in front of you Damon about exactly what is happening with this new payment extension? If not, I have them.

[00:01:06]Damon Day: I’ll do what facts I have and then you can fill in the blanks, but yeah, they the federal student loan forbearance for COVID is instead of ending at the end of September is now been extended through January 31st, 2022. So that’s the no interest, no payment forbearance for. Some federal student loans, not all.
[00:01:26]Borrowers that have federal student loans need to always log in to your, the servicer website and make sure your loans are actually on that federal forbearance. But they do say Steve, that this is absolutely

[00:01:38] Steve Rhode: Yeah.

[00:01:39] Damon Day: the last extension.

[00:01:40]Steve Rhode: Don’t cross this

[00:01:42] Damon Day: what do you say? What do you say to that, Steve?

[00:01:45]Steve Rhode: I call bullshit on that one because everyone before has been absolutely the last extension. And here’s a little tricky thing about this as you alluded. Not every loan is covered. So we know that private loans aren’t covered by this. You got to keep making those private student loan payments, but if you have a federal family education loan, sure.
[00:02:05] Sounds like a federal loan, but they’re not covered by this. So you’ve still got to make payments

[00:02:11]Damon Day: Are you saying federal family education loan

[00:02:15]Steve Rhode: F F E L.

[00:02:17] Damon Day: a federal loan? Is that not technically a federal loan,

[00:02:20] Steve Rhode: It is, they are owned by private lenders. It is one of the messages created many years ago because it was discontinued in 2010, that loan,
[00:02:29] program. but here’s the advice.

[00:02:32]Damon Day: It says federal in the name. So how is it not a federal loan?

[00:02:36]Steve Rhode: Hey, when you’re making up your own rules, you can do whatever you want. But here is some advice that mark. Kantrowitz has offered, he said, what you should do is a default with your FFL loans and then then you’ll be made eligible for a pause on payments and interest. That’s that sounds like a bad strategy

[00:02:57]Damon Day: I don’t want a Monday morning quarterback, the guy without a better understanding of how he got to that conclusion. But and again, you can convert your FFL loan to a direct loan and then you’ll be eligible now. Don’t everybody rush out and do that because there are times you would not want to convert it.
[00:03:14] If you’ve, for instance, you’ve. 10 years already banked on IBR or something like that. You don’t want to consolidate and start that process all over, but there are other ways to do it rather than defaulting.

[00:03:24]Steve Rhode: Yeah, that’s never a good idea. Now, one of the side effects of this new pause on payments is that even though there’s a forbearance, there is no payment due interest is not being charged right now on these loans and eligible loans are enrolled automatically. If you’re on something like a public service loan forgiveness program, we’re hopefully that’ll get solved some point in the future.
[00:03:49]All the. 23 months of payments on pause, still count towards forgiveness. So if you had to make 120 payments, essentially the government’s giving you 23 months of a bonus towards getting those loans forgiven.

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[00:04:04]Damon Day: Maybe

[00:04:05]Steve Rhode: Yeah. That is

[00:04:07] Damon Day: it’s going to play out.

[00:04:08] Steve Rhode: if anything ever gets forgiven. We’ve talked about that before.

[00:04:11]Damon Day: And then what once fed loan servicing, goes down the river, who knows what’s going to happen with all this stuff and how, the tracking and it’s a mess.

[00:04:20]Steve Rhode: Yeah. So FedLoan servicing is giving up on servicing student loans along with a granite statement. Anyway, it’s about 10 million student loans and those are all going to have to be transitioned by the end of the year. At least they didn’t make everything coincide with the same date, so that’s good.

[00:04:37]Damon Day: On there’s a bit of good news too. So apparently the current administration is going to use this extra six months of forbearance to get their shit together and try to figure out how to fix student loans.

[00:04:49]Steve Rhode: they’re working on it. That’s all I can say they’re working on it, but I don’t know if you’ve heard about this. This is a new proposal by Marco Rubio, right? Republican in Congress. Student loans with no interest payments proposed by Marco Rubio. This is the loan act, the leveraging opportunities for Americans.
[00:05:09] Now you heard about this.

[00:05:11]Damon Day: Actually 30 seconds before we went on, I saw the link to the article.

[00:05:16] Steve Rhode: Okay let me tell you about this. So Rubio introduced the loan act originally in 2019 to help student loan borrowers who are burdened with student loan debt, pay off their loans faster. All right. And the act would apply to federal student loans. It would eliminate interest on federal student loans.
[00:05:33] That Sounds like a good thing. Doesn’t it.
[00:05:35]eliminate all the interest on federal.
[00:05:37]Instead of charging interest, Devil’s always in the details. There would be a one-time non-compounded origination fee that student loan borrowers will pay over the life of it. They’re loans.

[00:05:50]Damon Day: Okay.

[00:05:51] Steve Rhode: w how much do you think that fee is proposed to be.

[00:05:54]Damon Day: You’ve got to figure typically the interest is going to almost double and sometimes it more than doubles the actual principle on these 20, 25 year loans. So I would say it would be great if it was. I don’t know, 20% over the life of the loan. My close Bob.

[00:06:11]Steve Rhode: So while there’s no interest being charged, undergrad loans, 20% of the principal is the fee.

[00:06:19]Damon Day: Yes, I did not even read that. Nailed it.

[00:06:23] Steve Rhode: Okay for graduate student loans and parent plus student loans. It’s 35% of the loan amount

[00:06:30]Damon Day: Hey, you gotta pay to play.

[00:06:32]Steve Rhode: and the payments would be calculated by putting all student loan borrowers into the income based repayment plan. And they would pay 10% of their adjusted, gross income. In excess of 150% of the federal poverty line. What do you think about that number?

[00:06:50]Damon Day: It’s essentially better than it’s just like the repay right now, which is roughly 10% of the gross income. So it’s basically the same kind of a payment. And again, I’m just hearing about this for the first time, but it sounds like what he’s proposing is you have a fixed number.
[00:07:06]The interest is not compounding, which is good news. And then your payment will be no more than 10% of your gross income until that is paid off. Whether that’s 10 years, 20 years, 25 years, depending on what your income level is

[00:07:20] Steve Rhode: Yeah, it’d be interesting to see if they’re counting family income or borrower income. That’s a little quirk that we have to deal with, but.

[00:07:27]Damon Day: Okay.

[00:07:28] Steve Rhode: He can’t have a clean program. So here’s the other thing. If you’re making less than $45,000 a year, they can deduct up to 15 percentage points off the origination fee. Between 45 and 95,000 would be 10% off, 10 points off and greater than $95,000 income up to five percentage points off the origination fee.

[00:07:51]Damon Day: So they’re they’re just keeping guys like you and me in business, trying to make it as complicated as possible. I understand the sentiment there, but so now are we getting back to, so it’s going to be like a repay type program where you’ve got. Give them your income every year and get it certified.
[00:08:08] And this is what cause how’s that work. What if you graduate and you’re making 40,000 a year, but two years later and you’re making 60,000 a year. So does in your, do they add back part of that origination fee that they took off? Because you’re only making 40.

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[00:08:22] Steve Rhode: No clue. I have no clue, but also if you’re making less than 150% of the federal property line, you would not make any payments. Loan. And there’s no guidance here. Do those months count? Does it matter at all? But the one thing that we know,

[00:08:39]Damon Day: That’s kinda how it is. That’s how it is now. If you’re making that little, then your payments are zero towards PSLF. Not PSLF you wouldn’t be working PSLF or IBR or repay.

[00:08:49]Steve Rhode: Here’s one thing I can say with certainty is that if you have any federal student loans, Do not refinance them into a private student loan right now. We need to wait to get some more clarity. Especially if you’re in a federal student loan and you’re getting credit for all this forbearance towards, hopefully the program will get straightened out.
[00:09:08] You’ll get your loans forgiven, but it’s better than,

[00:09:12] Damon Day: Yeah.

[00:09:12]Steve Rhode: I don’t know. That’s my opinion, sure. You could get into a private student loan and maybe you could default on them and settle them in the future. I don’t like uncertainty that much.

[00:09:21] Damon Day: Oh, yeah. I agree. 100% with you that, with everything that may or may not be happening in federal loans now would not be the time, to try to convert a federal loan into a private loan. Even if the interest rate is lower, I actually had a consult with a client, I think last week about that.
[00:09:39]And we came away from that with there’s no crystal ball, but the best thing to do at least for the short term is to wait and see, because any potential interest rate savings, you might S you know, interest that you might save in the long run. It wouldn’t be worth it. If we converted those.
[00:09:54] And then six months from now, we find out they could have gotten 50,000 and forgiveness on that

[00:09:59] Steve Rhode: Yeah.

[00:09:59] Damon Day: or something like that, who knows what’s going to come out? They weren’t going to save 50,000 going from, whatever, a 6% rate to a 4% rate or whatever it

[00:10:07]Steve Rhode: I know you got a client consult coming up. You’ve got to get on the phone with them. So let’s end the get out of debt guy show at this point and let you get on with what you have to do. And. I’ll go back to reading more about student loans.
[00:10:21] Apparently.

[00:10:22]Damon Day: Yeah. And big takeaways. If you have federal loans make sure you check your service or website at least once a month, make sure they get extended. Make sure they’re not the famous federal family education loans that are not actual federal loans. So make sure those are on forbearance. And the good news for you is you’ve got an extra six months now before you have to start making payments on those.
[00:10:43] So as the administration says, get your shit together.

[00:10:47]Steve Rhode: My last takeaway is since loans have been on pause for so long, and you really haven’t been paying attention to them, you should log in or talk to your student loan servicer and make sure if you’ve moved or you’re planning to move or whatever that they still have your current contact information. So you don’t miss any important updates or statements about your loans.
[00:11:10]All right.

[00:11:11]Damon Day: Got.

Steve Rhode

4 thoughts on “Apparently You Can Screw Up a Student Loan Free Lunch”

  1. Steve and Damon,
    Thanks for the info in this podcast.

    My “federal” loans are actually private because I took them out prior to 2010 (which was when the direct loan program started) so these loans currently do not qualify for the extension. Nelnet rep stated that I can consolidate to a direct loan at the same interest rate (6.375%) and no fees for the consolidation process. Once loan becomes a direct loan, it will qualify for Jan 31 2022 extension, and I will eventually have more options for Income Based Repayment that will allow me to make a lower monthly payment than what the Nelnet repayment options allow for.

    Consolidation seems like a good deal, but are there any disadvantages to consolidating to a direct loan that I am not aware of? Am I missing anything important here?
    Thanks,
    Barbara

    Reply
    • So you have FFEL loans then it sounds like. You can consolidate those into a new Direct loan and get access to all federal loan options, including a payment pause right now.

      There are no real disadvantages because you would be converting from a quasi-federal loan with limited options to a full qualifying federal loan.

      Reply
      • I *think* the original loans may have been sub and unsub Stafford loans which I consolidated to lock in interest rate (in approximately early 2000s?) a couple of years after I left school. They were consolidated through a private bank into 2 loans so that may be why they are considered quasi-federal loans but are still eligible now for consolidation to a direct federal loan.

        As a leading edge low-income Boomer (I’m a Yuffie not a Yuppie) who has not been able to afford a payment since well before the recession, I know I will never be able to pay these loans off. My consolidation goals are to: go on an income-based plan that will qualify me for a $0 or very low payment to stay out of default (I have never been in default ever) and to qualify for the covid extension through Jan 2022,

        Reply

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