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You Owe What?

Even as student debt mounts, new federal repayment options beckon.

By Mary Ellen Flannery

 
Lucas and Andra Schrauben (left) love their jobs! New teachers—Lucas is in his first year and Andra is in her second—the couple works in Michigan where they plan to buy a home and start a family.

But combined student debt is holding them back. Together, they owe more than $150,000 in college loans.

“I always got good grades, worked hard, saved, and now I’ve got a great job—but I can barely afford [a new home],” says Lucas. “I’ve got this idea of the American Dream and I’m still going to realize it, but it might be a sliver of it or it just might take longer to get there.”

Unfortunately, the Schraubens aren’t alone. U.S. college students borrow a staggering amount of money to pay for education. Last year, the average college graduate owed a whopping $26,000 on student loans — a 5 percent increase from 2010. Meanwhile, the total amount of student debt in this country has topped $1 trillion.

Thanks to programs created in the last few years, there are new repayment options for federal student loans. While this doesn’t mean you won’t struggle to pay for that new (used) car, or that oh-so-brief beach vacation, it does mean there is light on the horizon for debt-burdened teachers.

Pay As You Earn, a new program from the Department of Education is expressly designed for recent or soon-to-be college graduates (like Tomorrow’s Teachers readers!) “If you make more, you pay more. If you make less, you pay less,” said U.S. Secretary of Education Arne Duncan in a recent radio interview. “This is a huge step in the right direction.”

Other options include the federal Teacher Loan Forgiveness (TLF) Program, especially for teachers in high-poverty schools, and the Public Service Loan Forgiveness (PSLF) Program, which lifts some of the burden from teachers, school librarians, school psychologists, and other employees in public schools.

“We want to bring that great talent into teaching, into the public sector,” Duncan explained. “It’s a big opportunity that didn’t exist [in previous years].”

Since Lucas financed an undergraduate business degree and a master’s degree in education with about $30,000 in federal loans, not private-lender loans, he qualifies for these kinds of federal repayment programs. For him, the Income Based Repayment (IBR) Program made the most sense: It consolidated his loans into one lump sum, and tied his monthly payments to a more manageable percentage of his take-home income.

As a result, Lucas pays $200 a month, instead of $400. The extra cash will help the Shraubens save more toward a down payment and will provide a big chunk of their monthly mortgage payment.

Andra didn’t qualify for federal loans. Although she worked while attending community college and Western Michigan University, she made ends meet through private-lender loans. And the $120,000 she owes in loans makes her ineligible for federal repayment programs. “She just works to pay for gas and her loans,” says Lucas.

How much will you owe?

Let’s say you graduate next year owing about $26,000 (the national average) in unsubsidized federal loans with an average interest rate of 6.8 percent. You’ll be a new teacher, not married, and earning about $40,000 a year at the best job of your life! Here are a few of your options, according to the federal government’s debt calculator:

1. Standard Repayment: $420.78 per month for 10 years (that’s 120 months) for a total of $48,333.74.

2. Income-based Repayment (IBR): You may qualify for an estimated monthly payment of $291.00. (Quite a bit less than the standard option!) After 10 years of payments, which may be adjusted according to fluctuations in your income, you’ll want to check out the Public Service Loan Forgiveness Program.

3. Pay as You Earn: Even better, under this newest option, you may qualify for an estimated monthly payment of $194.00. As with IBR, this payment will go up if your income goes up.

Glossary

We know that the language of loans can be a little confusing. This glossary points to some of the most common terms—with definitions provided by the Project on Student Debt at The Institute for College Access and Success. For more words and definitions (as well as debt-related news and opportunities to advocate for better repayment options), visit the Project at projectonstudentdebt.org.

Accrued Interest: The interest on a student loan that begins to accrue (accumulate) after a student completes school. This interest is charged on the principal (dollar) amount of the loan.

Capitalizing Interest: Adding accumulated interest to the loan principal rather than having the borrower make monthly interest payments. Capitalizing interest increases the principal amount of the loan and, therefore, the total cost of the loan.

Consolidation Loans: Consolidation occurs when a borrower with multiple loans requests that all of his or her loans be consolidated into one loan. Repayment begins 60 days after discharge of prior loans; certain deferments are authorized.

Default: Failure to repay a loan in accordance with the terms of the promissory note.

Deferment: The temporary postponement of loan payments.

Delinquency: Incidents of late or missed loan payments, as specified in the terms of the promissory note and the selected repayment plan.

Discharge: The release of borrowers from their obligations to repay their loans. Borrowers must meet certain requirements to be eligible for discharges.

Forbearance: An arrangement to postpone or reduce a borrower's monthly payment amount for a limited and specified period, or to extend the repayment period. The borrower's interest is charged and accrues during forbearance.

Grace Period: A six-month period before the first payment must be made on a Stafford Subsidized or Stafford Unsubsidized loan. The grace period starts the day after a borrower ceases to be enrolled at least half time. During the grace period on an Unsubsidized loan, accumulating interest must be paid or it will be capitalized.

Interest: A loan expense charged by the lender and paid by the borrower for the use of borrowed money. The expense is calculated as a percentage of the principal amount (loan amount) borrowed.

Interest Benefits: Under the Subsidized Stafford loan program, the government covers a borrower's interest payments during the in-school and grace periods, and during any authorized deferment periods.

IRS Offset: When other collection efforts fail, the Department of Education turns over a defaulted borrower's account to the Internal Revenue Service. The IRS offsets the debt against the defaulter's income tax refund.

Loan Principal: The total sum of money borrowed.

Origination Fee: A fee charged and deducted from the proceeds of a loan before the loan is disbursed. In the federal loan programs, the origination fee is paid to the government to offset its costs.

Prepayment: Any amount paid on a loan by the borrower before it is required to be paid under the terms of the promissory note. There is never a penalty for prepaying principal or interest on federal student loans.

Promissory Note: A legally binding contract between a lender and a borrower. The promissory note contains the terms and conditions of the loan, including how and when the loan must be repaid.

Rehabilitation Loans: When 12 consecutive payments have been made on a formerly defaulted loan, it can become a rehabilitation loan. Once a loan becomes rehabilitated, it becomes a new loan.

A borrower again becomes eligible for participation in federal financial aid programs.

Variable Interest: Rate of interest on a loan that is tied to a stated index and changes annually every July 1 as the index changes.

 

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1-Mar-13