Student loans are designed to help students pay for post-secondary education and the associated fees. It can come from the federal government, from private sources such as a financial institution or a bank, or from other organizations. Today, Merrill Chandler shares how student loans contribute to your fundability and your entire borrower profile, as well as a good installment loan portfolio. More importantly, he talks about the many landmines associated with student loans, the mistakes that we easily make – both going into student loans while they’re in deferment and coming out.
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Avoiding Student Loan Landmines
We’re going to be talking about how parents and students can avoid student loan landmines. There are many misconceptions about what’s going on there. We’ll get right into it.
In this episode, we’re talking about how student loans contribute to a good installment loan portfolio. How they contribute to your fundability and your entire borrower profile? More importantly, how many landmines are associated with student loans? The mistakes that we easily make both going into student loans while they’re in deferment and coming out. All of this whole area is fraught with landmines. We’re going to be doing that. These are for my real estate and business entrepreneurs if you are going to school and for your adult children that are engaging either in parent loans or student loans. We want you to have at least the what and how not to fail when it comes to getting your student loans.
I’m going to be going over several areas. I’m going to be offering a checklist. Go to GetFundableStudentLoansChecklist.com. You’ll be able to download a copy of this checklist that we’re going to be reviewing the highlights. It’s too big. There are too many cool things in here. I can’t go over everything with you now but I’m telling you, we’re going to hit some wonderful things to stop you from stepping on the landmines associated with your student loans. We’re going to be talking about before you get a student loan, while you’re in deferment, what to watch out for, what to be careful of, and what you need to know before you start paying off your student loans. This eBook has an entire list of student loan forgiveness programs and links to those applications and everything. It’s an awesome checklist and it may grow over time. Once you go there, just tell us where to send it. It will ask you for your email address and we will send it to you, and you can download that.Federal loans are also known as direct loans. That means they're federally sponsored. Click To Tweet
Let’s get to it. The first thing we need to watch for is what are we doing while we’re evaluating student loans? There’s a lot of confusion that’s why I’m doing this and I want you to know what you’re up against. There are two types of loans. There are federal loans or private loans. Federal are federally backed student loans, then there are private student loans. It gets into a mess but I put in the eBook some links so you can see some explanations of these. A federal loan is something that can be delivered directly from the federal government. Some of them may be federally backed but they’re from Chase or Bank of America.
Be careful when you’re looking at federally-backed versus private because there are lots of private organizations. Even SoFi, a financial technology company is offering student loans but these are not federally guaranteed. If they’re not federally guaranteed, there are a lot of restrictions. Even if they offer deferment, it’s just a regular loan and they might not have the same features. I don’t give recommendations, but when we think of all the benefits of student loans, most of us are thinking of federal student loans. These federal student loans are usually referred to as direct student loans. There’s a bunch of questions you need to ask for any loan application.
You’re going to look at it and find out what they’re offering. These are the keywords you’re going to be looking for. If you’re talking to a financial aid at the school on the phone or in person, you need to make sure you’re making the right call. All of this is in the student loan checklist. Federal loans are also known as direct loans. That means they are sponsored by the federal government. After you find out that it’s federal or private, the next question you’re asking is, “Is it deferred while I’m in education or do I have to start paying it?” You have to ask, “Is it deferred upon the termination of the final class?” Some are deferred for six months until after you finish your classes.
All of this is inside the checklist. You need to ask if it’s in deferment, when does that deferment start? What’s the class load you or your child needs to take in order to keep it in deferment? Some are only part-time, some of them can be 6 or 12 hours versus 8 hours and 12 hours is usually considered to be full-time. Some of these federally-backed loans may go down to as few as six hours to stay out of deferment. You’ve got to ask when does the deferment end. What are the conditions that your deferment status and payment begin?
To my real estate and business entrepreneurs, you need to know that if you’re doing it for one of your children, there’s what’s called an endorser. An endorser is the parent, a grandparent or a guardian who is co-signing on the loan. You need to know exactly what that endorser’s responsibilities are. When I listen to the client stories, when I have my daily and weekly meetings with my team, and they’re bringing up particular situations that clients are running into, student loans are probably the biggest pain in all of them because there are many things that they or the parents didn’t know when they took them out.
An endorser doesn’t sound like a co-signer. All of a sudden, the parents are wondering, “Why did I get a 30-day late when my child is paying off their loan?” If you’re an endorser, that means that you are a co-signer, you are a co-borrower. You are fully responsible for the entire balance of the loan and to make the payments on time. You’re also responsible if your son or daughter doesn’t make that monthly payment before it goes late 30 days delinquent. We’ll get into the ways to protect yourself against blowing yourself up.
Some people say during this period, “How long do I need to keep the loan?” Some people want to pay the loan off. If you’ve been to my bootcamp or to my mastermind, you will know that you’re going to get the most points by allowing to pay on those student loans for 24 months. That gets you through the 24 months lookback period. It gives you a solid payment history before you go to pay it off. I know some people gift their children the payment of a student loan. There are all kinds of situations that people run into, but it’s best fundability-wise that both you as a parent or as a student get that recorded for 24 months. After the 24 months, pay it off if you have the means to do so. Keep making 24 consecutive payments to pay that off.
What To Do While Your Loan Is In Deferment
One of the questions you need to ask during the engagement of this loan is, “What does the credit score of the student borrower need to be for the endorser to be removed?” They do have programs, especially the federally-backed ones where after X number of payments, the endorser can be removed. It varies by lender or program. That’s one of the vital questions you need to ask. It’s in the checklist that you can download at GetFundableStudentLoansChecklist.com. These are the outlines for how to prepare. What do you need to ask about a loan to know the terms that you’re under before you engage the loan? Let’s talk a little bit about what to do while your loan is in deferment. This one is catch as catch can. As you know the administration for COVID has extended the student loan moratorium, both the 0% interest is being applied. They’ve extended that through December 31st of 2020. The thing we need to have dialed in and where we’re on the bullseye is how do we treat the student loan while it’s in deferment.
You’ve got to ask the question, “Am I accruing interest while it’s in deferment?” Some do, some don’t. There’s a moratorium temporarily but this episode is going to have a shelf life. You’ve got to know, are they accruing interest during deferment? Some of them don’t do it during deferment when the six-month program starts. They start accruing after the six months or from the time where you terminate the term of your education after six months. During that six months period, they may be applying interest. It’s a vital question to ask your student loan provider. What do we do while you’re in deferment? If they are accruing interest and many do, what most of us don’t understand is let’s say it’s $10,000 student loan. You’re going through four years of school and that balance is accruing because the interest is accruing.
On your borrower profile, it shows that $10,000 was the original loan amount but it shows the current balances of $11,000, $12,000, $13,000, and slowly growing. Nobody knows except for our bootcampers, masterminders and my clients that the percentage you grow above the original loan amount is accounted by FICO. This was one of the questions that we asked at FICO World. Their Chief Scientist, Ethan Dornhelm said that the FICO scoring algorithm does not account for accrued interest. If you’re above the original loan amount, it’s bad juju on revolving accounts and on installment loans.
While your loan is in deferment and it’s accruing interest, you want to do what you can to make payments and you’ve got to authorize this. One of the questions you need to ask your servicers if you make payments, does it come out of deferment? Most of them will allow you to make interest-only payments. One of the things that’s going on in the COVID environment is that they’re saying that during these 9 months, 12 months student loan interest deferment where payments are not required, the federal government is encouraging people to take advantage of that and reduce the amounts. That is a bold and smart move even if it’s in deferment. Make sure you talk to your servicer that you can make payments without triggering it out of the deferment status.
If you could make payments, at least make enough to keep it at 100%. Your current balance cannot be higher than your loan amount. If you allow it to go there, the greater the percentage, the less valuable you are to a lender. FICO is not saying, “This is a special case.” Students get to accrue that. All the underwriting software is looking at what was the original balance and go, “They’re letting that balance grow.” Make enough interest-only payments or make enough to keep that at least 100% so that the loan amount and the current balance are the same. I encourage you, especially if making a payment doesn’t trigger it out of deferment status, then get it down and just keep it at 95%.
Pay a little extra, get it down to 95% which is beneficial to you and make your fundability look much better. Get it at 95% and then start making interest-only payments if at all possible. The whole point of student loans is that we don’t have to pay them until we get a job. I’m telling you, four years of allowing interest to accrue on a loan and your current balance is way above your original balance, FICO doesn’t have a student loan exemption. We’ve got to take care. Parents, if you’re supporting for a birthday present or a Christmas present, if you will pay down to 95% and make those interest-only payments, and get those kids balance under 100%. It’s the greatest Christmas or birthday present that you can give them. Some of us don’t have that ability to do so, do your best. However, by hook or by crook, you want to create that your current balance is no higher than your original balance, then FICO algorithm will be very forgiving. If you can get it down to 90% or lower, it’s even better. Those are the main things we need to do in deferment.
Let’s talk about before you start paying your loans back, there’s another checklist and this one is vital to you not stepping on the funding landmine. First of all, for students or parents, you work it out. If your income is consistent enough to guarantee that you don’t bounce one of these payments, the best way to protect your financial reputation and pay down your student debt is to set up an automatic draft so that you do not miss a payment and your student loan servicer is in charge of doing it. They will not fail you. You cannot miss one of those payments. Put it on auto-draft. That is the number one way to protect your fundability.
Number two, if you do not set up an automatic draft, then you need belts and suspenders to avoid the landmine of credit score penalties. Once this goes out of deferment and into payment status, one 30-day late is going to drop your score 30 to 100 points. It’s going to remain there counting against you for at least four years. It will stay on your credit profile for up to seven unless you’re one of our clients who are working out how to do an audit and a dispute of that particular negative entry. To stay out of harm’s way, you want to set up where you and your endorsers, students and parents are getting email and/or text notification from your servicer that the payment is due and/or late.
There are two email notifications and you want to make sure this doesn’t go to your junk mail. You’ve got to get it out of your junk mail to make sure that you don’t miss it. You need to know that the payment is due. Most servicers provide this. It doesn’t just go to the student. It goes to the endorser, parents, grandparents or otherwise. It goes to both of you so that you are aware and as family, guardianship or whatever it is, you are in communication. You also want any late notices. Sometimes they send it after 5, 15 up to 25 days. They may send you a late notice that this has not been paid. It cannot just go to the student. It’s got to go to the endorser as well.
You would not believe how many people that when they were students they got the student loans and they hide it from a spouse or parents, and they co-signed on this. All of a sudden, the parent or the co-signer has now a derogatory account because the student didn’t have the money and was too embarrassed to talk to the endorser. It shows lots of bad blood because this can harm your profile significantly. If you’re going to be an endorser upfront, then when it’s time to start making payments, you as partners need to make sure that you get the payment due notifications. I prefer belts and suspenders or text and email, and any late notification so that the endorser has the capacity to protect your profile.
You don’t want embarrassment or shame on one party to negatively affect it for at least four years. Those are the things you need to do as endorsers to protect your interests. The same with students, you’ve got to protect your profile. Your credit profile is the most powerful asset that you have coming out of school and getting started in the world. You can also set up payment dues on your calendars. My coaching bootcamp and mastermind clients, you all know that you must find out what constitutes a 30-day notice. February of 28 days may not mean March 2nd. It may mean 28 days. You’ve got to find out what 30-day late means so that you have all the time in the world to plan and create the best plan for you to repay these loans without derogatory indicators.
Two channels of communication and after 24 months of faithful payments, you may be able to reduce your monthly payment amounts by refinancing your loan. Once you hit that 24 months lookback period, you can refinance the loan and consolidate. If you’re a solutions client then talk to your team about this. Let’s say you have five loans but you don’t want to consolidate them down into one, you may step it. You may take five loans, consolidate it down into three loans, and then consolidate down into one loan. Each of these periods being at least 24 months. You’re maximizing your fundability. You’re maximizing the FICO algorithm to give you a full 24-month lookback period on each one of these loans. You can consolidate more than once. I’ve had clients with twenty-plus loans, and we step them down into consolidating. The payments don’t change but many times the interest rates might. You can get lower payments or shorter terms based on the conditions. You are able to take a look at it every 24 months and see what the best thing is for your fundability and perhaps even saving money on your payments.
The federal government offers income-driven repayment plans that can provide relief by capping your payments at a particular percentage of your income. That percentage of income may be based on what you are doing for a living or what your ability to repay is. There’s a link in your checklist. You can go to StudentLoans.gov and recertify every year. You may be able to get a percentage of your income rather than a flat repayment amount, but you have to recertify every year to make sure that those conditions still exist. We’re going to be doing more and more episodes on particular credit instruments and how to avoid the landmines and how you can give a blessing to the fundability of your borrower profile.
Your checklist is GetFundableStudentLoansChecklist.com. Tell us where to send it and we’d love to get this to you. There are a number of forgiveness programs. I just want to review these and go through them. The links are all in your list for the various loan forgiveness programs. They give you a link so that you can go read from the horse’s mouth themselves as to how to apply. These will take you to application pages, etc. The first one is what’s called the Public Service Loan Forgiveness Program. For the vast majority of these, every one of these to be forgiven, it’s got to be federally backed.
It’s not one of the private loans, that’s a bank only loan. Just because it comes from Chase, you’ve got to make sure is it federally backed or is it a Chase private student loan? The Bank of America is not going to forgive you a loan. It’s giving you a loan so you can use it as a student. For public service, if you work full-time for US federal state, local or tribal government, city, county, state, federal governments, and nonprofit, 501(c)(3), you have a direct loan and you made 120 payments, and you’ve been paying it as a percentage of your income, after that 120 payments which is ten years, they will forgive the balance of the loans.
There are other student loan forgiveness programs. There is teacher forgiveness. There are criteria for how long you have to work as a teacher but if you become a teacher, there is a loan forgiveness program. There’s a school closure discharge of your loan. It will be forgiven if the school has dissolved. Those are the things you need to check. If you’re reading this and you’re already in your repayment mode, and Nelnet, Sallie Mae or whomever is receiving payments, but your school no longer exists, then there are certain criteria. Go check it out. If they closed that school, then there may be a discharge available to you. I don’t wish this on anyone, but if you have been partially or permanently disabled, then there is a disability forgiveness program. There’s a discharge due to death. If the death of a student or of the endorser, then the loan can be forgiven. Follow that link to find out if you’ve had a tragic loss in your family and you need to know the details.
There’s a borrower defense to repayment. Meaning you can make a case as to why you don’t fit in any of the other criteria, but you need a break. You can make a case to the federal government where it says, “A borrower may be eligible for forgiveness to attend a school if the school misled them or engaged in other misconduct in violation of certain laws.” If they did not give you what you said you paid for or it was a scam, you have to make a case given this particular thing. Borrower defense means, “I went to the school in good faith and it went sideways.” You can make that case. That is a valid loan forgiveness program.
There’s a false certification discharge. Over the last ten years, when the federal government made trade schools a part of the student loan process, trade schools went up overnight. There were hundreds of trade schools offering IT. The big ones have distilled out and the market is a little smaller there now, but in the beginning, everybody wanted to be a school because it was free. You provide the class, the students pay for the class. The students are on the hook. It’s free money for anybody who wanted to offer education to students.The whole point of student loans is that we don't have to pay them until we get a job. Click To Tweet
If there was something amiss with that particular school, not the deliverables of the school, that’s the borrower defense, but if there was a false certification, it was not a legitimate school in the beginning, then there’s redress there as well. In rare cases, there’s discharged due to bankruptcy. This doesn’t happen often. Part of the reason why they don’t allow you to put a student loan in a bankruptcy in most cases is that since you’re going to be a tax-paying participant in the economy, they can withhold any of your tax returns that would normally go to you and pay it towards your student loan. They don’t let you discharge in the bankruptcy. They will collect from the tax returns that you have monies owed to you after you’ve submitted your taxes.
If you owe a student loan and it’s in arrears, they will capture that. I believe that there is a section on the 1040 long-form that you can pay your student loan with your tax return by checking a box. Meaning make a payment towards. That’s an additional thing that you can add there and make it part of your overall financial plan to take your tax returns. Especially if you’re over 24 months in payments and you can’t refinance, then you can use your tax return as a contribution to the retirement of that student loan debt. Finally, one was an unpaid refund discharge. I’m going to read this one to you from the links. I’m using the Federal Student Aid website, “If you withdrew from school and the school didn’t make the required return of loan funds to the loan servicer, you might be eligible for a discharge of your federal student loans.” If you left school and it’s prorated, and the school did not give the money back to the feds, that’s on them, not on you. That’s one of the ways in which you can review your status and check to see if forgiveness program applies to that.
The thing I’m going to tell you is that I’m always building this content. I’m going to give you a little hint. The place to go will never change, GetFundableStudentLoansChecklist.com, but I would check back in a month or so. This checklist which is extremely powerful is going to be flushed out even more. Come back, put in your email again and we’ll send you and you’ll get the new copy because I’m going to be updating the same link. It may just be a couple of pages longer but I’m committed to having everything I can possibly give you. This is what we have so far. A lot of things are going on with COVID, with the federal government, what they’re doing with the student loans, the moratoriums and deferments they’re putting on it.
If you have any questions, go to our Facebook Get Fundable page and just chime in. My team and I, we monitor our Facebook every single day. If you have thoughts, questions, comments about this episode, open up your Facebook and search for Get Fundable. You’re going to see my bright and shiny face and click on that link. Put in comments and we will give you a shout out. We’ll answer your questions and we’ll explore that there. It has been my pleasure to review and deep dive into student loans, what the landmines are, and how to protect against them.
I wish I had done this years ago so that my clients wouldn’t have had the problems that they have now had they’ve read these. Remember the only way to become f*able is to work on that borrower profile and your borrower behaviors. How you treat your student loans is going to project good or bad messages to your current and future lenders and I want them to be awesome and totally f*able messages. You have a great day and we will see you on the inside.
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