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© THE STUDENT LOAN REVIEW 2020

An Illumint Project

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Washington, D.C.

  • Kevin Mahoney, CFP®

What Do My Student Loan Terms Mean?

Feeling intimidated by some of the student loan conversations you hear? Learn more about a few terms you may want to factor into your own repayment plan


About the author: Kevin Mahoney, CFP® is a fee-only financial advisor in Washington, D.C. Kevin's work with his clients focuses on paying off student loans, buying a house, investing savings, and budgeting. Kevin is the founder & CEO of Illumint, a virtual financial planning firm specifically designed to help couples and young families with their financial decisions.

For young professionals and busy parents who desperately want to repay their student loans, keeping up with different student loan terms and options can feel like a daunting task. Newspaper articles, blog posts, and even our own friends often toss around phases such as “federal loan forgiveness,” “student loan consolidation,” or “private loan refinancing” without explaining the numerous details that those terms often carry. With that in mind, we’ve compiled -- thanks to some of the best student loan resources online -- a brief list of terms that you may want to factor into your own student loan repayment plan.

Debt Avalanche

Dori Zinn at Student Loan Hero writes about one approach to paying off your student loans in an effective manner:

“The debt avalanche method requires you pay down the loan with the highest interest rate first while paying the minimum balance on the rest of your loans. So if you have loans at 7.9%, 6.5% and 4.0%, you would work on eliminating your loan with the 7.9% interest rate first, regardless of the balance. Once you’ve paid it off, you’ll then focus on the 6.5% loan before the 4.0% loan.

If you have many different kinds of the same debt, such as student loans, debt avalanche might be best for you. Having many different student loans with varying interest rates can be hard to constantly track. Paying the minimum balance every month may not be making a sizeable dent in your payoff plan.

Instead, continue making payments on all your student loans while paying as much as possible to the loan with the highest interest. Then devote that extra cash to the loan with the next-highest interest rate.”

Private Loan Consolidation

The Institute of Student Loan Advisors Corporation (TISLA) cautions against viewing private and federal loan consolidation as similar:

“Private loan consolidation is a very different animal than federal loan consolidation in that it is more of a traditional refinancing option that borrowers with good credit can use to obtain a lower interest rate and/or longer term and lower payments. Private loan consolidation can also be a way of having your co-signer removed from responsibility for the loans. You should only attempt private loan consolidation if your credit, including your debt to income ratio, will garner you a lower interest rate or other more beneficial term. Private loan consolidators can be picky in who they choose to accept for consolidation. Those companies with more lenient credit criteria tend to have higher interest rates.

While you can consolidate federal student loans into a private consolidation, we almost always recommend against this.”


Recertification

Clint Proctor at Student Loan Planner discusses an important element of income-driven repayment (IDR) plans:

“Once you’re on an IDR plan, you’ll need to recertify your income and family size each year. Here’s what will happen if you don’t recertify by the deadline:

  • On REPAYE, you’ll be removed from the plan and be placed on an alternative repayment plan.

  • On PAYE, IBR or ICR, your student loan servicer will assume you have a family size of one and will change your monthly payment to whatever it would be on the 10-year Standard Repayment Plan.

  • Under REPAYE, PAYE and IBR, any unpaid interest will capitalize (be added to your principal).

Your student loan servicer is required to let you know your recertification deadline date well ahead of time. Once you know this date, don’t sit on it. Recertify as soon as you can at StudentLoans.gov or by using the paper form.”


Loan Forbearance

Jillian Berman at Marketwatch called attention to the shortcomings that accompany one student loan repayment option:

“Experts generally advise borrowers consider forbearance only as a short-term last resort. When borrowers use forbearance, their payments pause, but interest continues to accrue on their debt and capitalizes — the unpaid interest on a debt is added to its principal — once the borrower exits forbearance.

As a result, borrowers often see their debts balloon. What’s more, borrowers in forbearance are not earning credit towards having their debt discharged under Public Service Loan Forgiveness or other programs.”

Form 1099-C

Kim Porter at U.S. News explained how you can tell whether the IRS will count any student loan forgiveness you receive as taxable income:

“Student loan forgiveness is a program for federal student loan borrowers, and it has similar tax consequences. Borrowers can choose from four income-driven repayment plans that base monthly student loan payments on income and family size. After you make on-time payments for 20 to 25 years, the government will forgive any remaining balance, if applicable. But borrowers will still have to pay taxes on the forgiven amount. If you're unsure whether this applies to you, watch for a Form 1099-C in the mail, which should record the settled or forgiven amount. Before you try settlement, think about where you'll get the money to foot the tax bill.”

Federal forgiveness programs like Public Service Loan Forgiveness (PSLF) excludes the amount from taxable income, and you won’t have to claim it on your federal tax return.

Negative Amortization

Over at Forbes, Ryan Frailich called attention to one issue associated with small monthly student loan payments:

“Income-driven student loan repayment plans are a great way for those just coming out of school to have a manageable monthly payment. The flip side of a small payment is that it may be smaller than the interest that is accruing, so you end up having negative amortization. That’s financial planner speak for “You owe more today than you did last month, even after making a payment.” This is fine if you are going for a forgiveness program, but may lead you to having to repay far more in the long run than if you were on a standard repayment plan.”

Ungrouped Student Loans

Alicia Adamczyk wrote for Lifehacker about why you need to understand how your loan servicer is applying your payments:

“One way to pay off your student loans faster is to, well, make extra payments. But rather than applying additional funds to interest payments only, you can request that they be applied to the principal balance.”

“Another key for this method of repayment to work is to ask your student loan servicer—the company you’re paying each month, for example Navient, Nelnet, FedLoan or Great Lakes Educational Loan Services, among others—to ungroup your loans so you can apply extra payments to the loan of your choosing.”