Student Loan Tips: How to Pay Off Student Loan Debt?

Questions covered in this video interview on student loans:

• Introduction
• Who may need student loan advice
• Student loans during COVID-19
• Student loan forgiveness program
• Federal student loan vs. private student loan
• How do student loans impact taxes?
• Student loans data
• Student loan interest rates
• Federal student loan limits
• Student loan scams
• Expert advice on a student loan review
• Student loan expert tips
• How to pay a student loan debt in a year

Introduction

Michael: Hi guys, there's a new school year coming. We decided to raise the very important topic, talk about student loans. Today we are speaking with Betsy Mayotte who is an organizer and the founder of The Institution for Student Loan Advisors, short TISLA. Additionally, we will also speak to the student who managed to pay off $130K in student loans. I am introducing you, Betsy.

Betsy: My name is Betsy Mayotte, and I am the president and founder of the nonprofit called The Institute of Student Loan Advisors or TISLA. I founded TISLA almost five years ago now to ensure our core mission. Our reason for being is to ensure that all consumers have access to free expert, neutral student loan advice and dispute resolution. 

So I've been in the student loan industry, it feels like since the earth cooled, but for over 20 years. And I spend most of my career in a student loan compliance and advocacy position. So I have a lot of experience working with borrowers and a deep understanding of the laws and regulations that are around student loans, which sort of put me in the lucky position to be able to help people with theirs.

Who May Need Student Loan Advice?

Michael: Who shall seek your service? What kind of circumstances would the person need to seek your advice?

Betsy: Well, I get all kinds of people. I get recent grads, I get people that have had their loans for 30 years. I get people in default. I get people that are managing their loans well but are just looking to make sure they're doing it the best way possible.

I sort of categorizing the people that reach out to us into two broad categories. There's the consumer whose Google-Fu is strong. They've read all the things, they've gone to all the websites, but the federal student loan programs, in particular, can be so confusing that they just want to make sure that the strategy that they've come up with is the right one and they haven't missed anything and they haven't misinterpreted anything.

And then the other group of borrowers I get is the ones that are just completely overwhelmed. They're either overwhelmed by their debt, they're overwhelmed by the programs, they're intimidated just by the whole process. And they just want someone to tell them what to do, walk them through what the best strategy is for them.

And then I get everything in between. And then we get a small percentage of borrowers that feel like something was done incorrectly with their loans and they have an actual dispute which we'll try to help them with.

What Has Happened with Student Loans During COVID-19?

Michael: What was happening during COVID times with student loans?

Betsy: It was really unprecedented. I mentioned earlier that I've been doing this since, for decades. So I've been through my share of disasters, Katrina 9/11, and I've seen Congress and the department of education offer relief to student loan borrowers, nothing like this.

So essentially what happened is about 85% of federal student loan borrowers saw no payments due since March 13th, 2020, even better, a zero-interest accruing during a period of time. And then there were some added benefits of if you were pursuing a forgiveness program such as public service loan forgiveness, or forgiveness under the income-driven plans, that period of time actually counted as a payment. And even better, it reflects on your credit report like you were paying. 

So even though no payments are due, no interest is due, for all intents and purposes it's a forbearance. 

Congress was very specific that it shouldn't reflect as a forbearance on the borrower's credit report, it reflects as if they were in good standing and making payments. And anyone who was past due, not in default, defaults a whole other animal, but delinquent on their loans as of March 13th, they're going to find themselves that they were brought current. So all those people who were brought current didn't have any payments due so hopefully, they could focus on other needs during the pandemic.

Michael: So I assume that the coronavirus was actually very beneficial for anyone who had outstanding student loans at that time.

Betsy: So sure. I saw a lot of people where it was a lifesaver because they were negatively financially impacted by the pandemic. And then even people that weren't negatively impacted financially. I've seen a lot of people make some great progress on their loans because they've been making interest-free payments.

I hear from a lot of borrowers that are static because they've taken huge chunks off the balance of their loan during this period. So it's been really beneficial all around. The only concern I have is in my career, I've seen a lot of research projects and one of them that really resonates with me is that a big indicator of success for someone who has student loans or really any type of consumer debt, it can come down to something as simple as just being in the habit of making the payment.

So, my only concern is we will have gone when these waivers ended at the end of September, 18 months of people that may have been in the habit of making a payment, and now they're not. So I'm very curious and concerned about what the fallout for that might be. I hope I'm worrying over nothing, but I'm trying to get people to prepare for the worst and hope for the best.

Student Loan Forgiveness Program: How Does It Work?

Michael: Student loan is a totally separate animal from other loans in the United States. A lot of the items that I know about is that student loans cannot be forgiven through bankruptcy. Can you explain a little bit, give a little bit of insight, what's happening with the people that have financial trouble?

Betsy: So, I'm hearing two kinds of questions here and I'll address the bankruptcy one first. It's actually a myth that student loans are not dischargeable in bankruptcy. They are dischargeable in bankruptcy. With that said it's very difficult, but I have seen consumers successfully discharge their loans in bankruptcy, especially private student loans.

You need an attorney that knows student loans very well, and you have to file what's called a hardship petition. Now let me be clear. I'm not an attorney. This is not legal advice. So they have to file a separate hardship petition. And most courts use what's called the Brunner test, I have it written up on our website under bankruptcy discharge. So it is difficult, but it's not impossible. 

Federal student loans are even harder because the three prongs of the Brunner test are that you've made a good faith effort to pay, that if you were making payments you wouldn't be able to have the minimal standard of living. So you wouldn't be able to feed and clothe yourself.

And that things are unlikely to change in the future. And with all the lower payment options available on federal student loans it can be really difficult to meet that second prong. So now with all of that said, the chatter I hear from policymakers, on both sides of the aisle, is that 

...there's an appetite perhaps for loosening up the bankruptcy discharge provisions to make it a little easier...

… again especially for private loans, in the fairly near future. So, I will not be surprised if in the next three years or so we do see bankruptcy open up a little bit, again especially for private loans.

Federal loans are tough. What people have to remember with federal loans is that these debts technically belong to you and me, the US taxpayer. So part of the department of education's role is to protect our federal physical interest.

So that's why they have to be so mindful and so careful about loan forgiveness and discharge ability, and that kind of thing because that's coming out of our pocket. And I guess that speaks to... 

The beginning of your question is sort of, "Why are things the way they are?". And that's part of it, because these loans aren't owned by big bank A or private entity B, they're owned by you and me...

...anytime they forgive a debt, they have to be mindful that it's coming out of tax, of consumer pockets.

Federal VS. Private Student Loan: What's the Difference?

Michael: So, they are federal student loans, not private student loans. A federal student loan, as far as I remember, carries a lower interest rate than in private. Is that another myth or is that a correct statement?

What Are the Interest Rates?

Betsy: It depends. So the interest rates on federal student loans vary, depending on what year you took the loan out. And some of the older loans are variable. All the loans since 2006 have been fixed. 

Right now, right this second, if you have amazing credit and a co-signer with amazing credit, it's possible to get a private loan that might have a slightly lower interest rate than the current rates for federal student loans. Now, with that said, it's not all about the interest rate. 

Federal student loans have a plethora of protections and options for relief that you're not going to find on a private loan.

I almost never recommend a private loan just because I've seen too many people that have private loans and they run into financial difficulty and there aren't any options for them. And the interest still builds, they can't get a lower payment, it hurts their credit. They ended up getting sued by the lender.

I tend to be financially conservative just to put that out there, but I've just seen too many people where life takes a left turn on them and they're left with dumb options. So even if the interest rate is higher on the federal loan, I'll almost always recommend the federal loan over the private one for those reasons.

A Parent Plus Loan vs. Co-Signing on the Private Loan

Michael: So for those parents that are hoping to send their kids to school, would you recommend the federal student loans before going to private student loans?

Betsy: I would. And I love that question because there's another sort of myth out there that happens with parents in particular. So if they find that the loans that the students can take out on their own are not enough, they often will look at co-signing a private loan that the student takes out because they want the debt to be in the student's name and they don't want to affect their own debt to income ratio.

So that's why they'll lean towards the private loan versus the parent plus loan that would be in their name alone. The problem with that is that by co-signing on the private loan, that affects their debt to income ratio exactly the same way that a parent plus loan would. So, they're equally liable for that private loan.

And then I go back to, there generally aren't any lower payment options or options for relief for the private loan. So if the student can't pay once again, the parent's credit is affected and now there's no option. Again, that's why generally…

...if parents have to take money in their own name, they're almost always better taking a parent plus loan rather than co-signing on the private.

How Do Student Loans Impact Taxes?

Michael: The person takes out the loan, either private or federal. How does it affect someone’s taxes during the repayment period and what's happening to the taxes of the borrower?

Betsy: So, there is still a deduction up to certain income levels. It's tiered, like most of the deductions are, up to certain income levels on the amount of interest you pay during the tax year. You can take that as a deduction if your income hasn't exceeded that level.

Your best friend, when it comes to student loan deductions and credits, as well as other higher education credits is what's called Publication 970. 

So that's 970@irs.gov. And that has all the gory details of all the different deductions you can take for student loans and other higher education credits. But in general, for student loans, you get a deduction for the interest that you pay over the year.

How Many People Take Student Loans?

Michael: Colleges cost really a lot of money today. Pricing is very hard. Could we have any statistics as far as what is the percentage of students that are actually taking student loans?

Betsy: Well, I can tell you the average student loan debt on the national level is around $37,000 right now, which that's growing every year. I can tell you that there are 45 million student loan borrowers if you include those with private loans, state loans, and federal student loans.

About 40 to 43 million of those are federal student loan holders. And we've now exceeded 1.5 trillion total in student loan debt. The vast majority of that being federal student loans, which is a lot, which is more than the total credit card debt in the United States.

Another statistic that might interest you is how old student loan borrowers are. I think a lot of people assume that student debt is still a young person's issue. But if you look at the data, half of all student loan borrowers are over the age of 30, a quarter is over 45 and the fastest-growing population of consumers holding student loan debt are the over 65.

So we shouldn't just be concerned with people not being postponing buying homes or having families. We need to be worried about people being able to save for retirement or being able to retire at all.

What Are Student Loan Interest Rates?

Michael: Student loans... As far as I remember, the interest rate on the student loan was the lowest among possible borrowing possibilities.

Betsy: So, Congress is the one that sets the interest rate for student loans. So prior to 2006, the student loans were at a variable interest rate that would adjust every July 1st, and depending on what type of loan it was, it could go as high as eight and a quarter.

If the loan was taken in the eighties or early nineties, it could go as high as 14%. In the early 2000s the rates got crazy low, I saw some under 2%. So what a lot of borrowers did at that point is they consolidated to lock-in that crazy low rate.

Then in 2006, Congress changed interest rates and for a long time, Stafford loans were at 6.8%. So for the next like six years, if you took out a Stafford loan, it was at 6.8%. Plus loans were I believe 7.9%.

So that went on for a long time. And then I want to say 2015, but don't quote me on the year for this part. But somewhere around there, they made it so every year the rate would change. So if you took a loan out today your rate would be X, but for the loan, you took out next year the rate would be Y and it's all based on the treasury bill auction at the end of May. So, you know interest rates don't stay static for a whole year.

...it's possible that sometimes the federal student loan interest rates are lower than what market rates are, but I've also seen it where they're higher than what the market rates are.

What Is the Limit for a Federal Student Loan?

Michael: What is the limit on taking out a federal student loan for a regular family? Does parents' income get validated? What is a federal student loan the maximum amount that the person can take out?

Betsy: For loans that are issued to students, so the Stafford loans, they have an annual loan limit and that's based on what year they are in school. So it starts out pretty low for a dependent undergraduate student. It's $3,500. And then as they progress in school, that annual loan limit gets higher.

And then there's also an aggregate loan limit. So, if they happen to stay in school, if it takes longer than four or five years for them to complete their undergraduate degree, then they're going to bump up against that aggregate limit as well.

Now, once you pay down some of that it opens that amount back up again. For graduate students, they get Stafford loans and that aggregate limit is... I'm sorry. The annual limit is much higher and their aggregate limits are almost $140,000 for the Stafford loans.

And then beyond that graduate students can also get the graduate plus loan and there is no aggregate limit for that, and the annual limit is whatever the cost of attendance is for the year minus any other aid that they've received.

So it's not uncommon, especially for people pursuing medical, in the medical profession, to see someone with three or 400,000 in federal student loans. They don't look at the borrower's income in any of those situations. 

There's no credit check at all for the Stafford loans. There's a mild credit check on the plus loans, but they're really only looking for a big whammy. 

I call them the big whammies. So a judgment, a default on another loan, a write-off within the last five years. They don't look at that income, they don't look at a credit score. Now for parent plus loans, it's the same thing. There's no annual limit. The limit is the cost of attendance minus any other aid the students received and there's no aggregate limit and there's no ability to pay components.

So they don't look at debt to income ratio. They don't look at the credit score.

Unfortunately, what I see is it's not uncommon for a family where they hold more in parent plus loan than their total household income is. So it's a sticky wicket though because I have some policy ideas that could help ameliorate that, but you have to be careful because if it wasn't for parent plus loans, it would make college access and choice impossible, especially for the middle-class.

So there are some people that say, "Get rid of parent plus, let it all go to the private market. The private market won't give them loans they can't afford to pay back." But again, you don't want to get rid... You don't want to make higher education access and choice just something that the 1% can get. So it's a sticky wicket from a policy perspective.

What Are Student Loan Scams?

Michael: What are the scams that you may have run into related to college loans, taking out loans, with payments? What is your experience?

Betsy: I'm so glad you asked this question. Student loan scams are another reason that I started TISLA, was so consumers had a safe place to go and maybe were less likely to be victims of these scams. So they've been around for a long time. They seem to be upping their volume and activity lately. And there's really sort of two types of scams. 

There are scams where they promise to make you eligible for a forgiveness program or get you a lower payment and they do it for a fee and sometimes that fee is quite high.

There's usually an initial fee plus a monthly fee. It's not illegal in and of itself to charge for student loan advice. It should be in my opinion, but it's not. Where it becomes illegal is where they misrepresent what they're able to do, or if they charge upfront for their services.

And the bottom line is all these programs are free. You can do them yourself easily as a consumer, just by either talking to your loan servicer or logging into studentaid.gov, or working with a free resource. But even without the free resources…

...there's not a person or entity on the planet, including me, that can get you a better deal on your student loan, or lower payment, or access to a program that you can't get yourself easily by doing a little research and working with whomever your loan holder is. 

So the scams promise that stuff. The other ones they take advantage of, and especially now, they take advantage of any discussion about possible broad student loan forgiveness. So right now, what they're touting is, "Oh, we can get you into the Biden loan forgiveness program." There's no such thing, but this is not a new tactic.

We heard it in the last administration and the last administration never talked about loan forgiveness, but there were scams about the Trump forgiveness program. And before that the Obama forgiveness program. So not a new song, with slightly different lyrics. 

But anybody that is asking for your passwords to your accounts, sometimes they ask for power of attorney, they'll charge you usually somewhere between $6.99 seems to be a sweet spot as an upfront fee, and then $39 a month after that, a lot of people think that's their monthly payment, and what that really is is a fee. 

But they have logos that look like the department of EDS. They have websites that are really similar to legitimate student loan servicer websites, all the tricks. The federal trade commission has been working really hard to crack down on these entities.

In April, we put on a broad social media campaign with over 40 other entities, including the Federal Trade Commission participating. The Consumer Finance Protection Bureau did some of their own stuff to warn people about these student loan scams.

Expert Advice About Student Loan Review

Michael: We ask you to look at one of the reviews on our site. We have an interview with the consumer that has left a review on this consumer. Her name's Michelle. To get a little bit more details about your experience ECMC.

Michelle (the reviewer): So, all of a sudden they just started calling my phone one day, a couple of years ago, and they were super persistent telling me that I owed money and all this stuff. I actually checked my credit report and it had been reported as a closed account.

So I'm like, "Okay, why are you calling me about a closed account? Why you're telling... Why are you being so persistent calling me four or five times a day about a closed account?" And they told me that they have every single right to do that. It's legal. They have the right to get me for whatever payments they needed. It was awful.

Michael: What can you advise the person who left this ECMC review?

Betsy: We have a policy here at TISLA, to be neutral when it comes to other companies. But that said, ECMC, is a legitimate federal student loan servicer. They tend to take loans in a couple of different situations. Either the department of education assigns them loans or for federal loans that have defaulted, they can be transferred over to ECMC or an organization like ECMC.

The consumer has no choice in most cases when their loans are transferred. So I actually hear what your consumer said quite often. They're upset because their loans were transferred to ECMC or somebody else. They said, "Oh, I never authorized this." Fortunately federal student loans, you don't have the authority to stop it or to request it. The best thing, if someone's not sure about…

...if they get a bill for a student loan or a call, and they're not sure about it, the first thing they should do is to log onto their account at studentaid.gov.

That's the department of education's website. And it's like the clearinghouse for federal student loans and it's got a ton of really helpful information. But more importantly, in this scenario, it's going to tell you, do you have any open federal student loans, and if you do, who is currently holding them.

So for this consumer, I would have her log on to studentaid.gov and it should show if there's a loan that's currently being held by ECMC. And if there isn't, then I would contact the department of education because it could, maybe it's a scammer that's name isn't ECMC, but something really close to ECMC.

So that's again, the first thing I would do. If you feel like your loans are already closed, you can contact the department of education ombudsman's office, which is also, you can either just google student aid department of education ombudsmen, or you can find their contact information at studentaid.gov and you can file a dispute with them and they'll look into it and see if you have an open loan or not, or if it should have been closed.

Student Loan Tips Shared by Expert

Michael: What tips would you give to consumers that are involved to start taking out the student loans, either for themselves or for their children?

Betsy: First of all, and in no particular order...

...you should never borrow anticipating forgiveness. 

I see a lot of people, unfortunately, that are borrowing now because they think that president Biden is going to do broad student loan forgiveness. That's a big mistake. I think the chances of that are slim, but regardless you should never borrow anticipating forgiveness.

When you borrow student loans, you should anticipate paying back every penny of that, as well as that interest. And if you end up getting forgiveness awesome, but you should plan on paying back every penny and then some. I also want to see consumers think about student debt in a different way. 

I think regardless of how financially savvy you are, you see a number like oh, $50,000 in student loan debt or $100,000 in student loan debt. And I don't think our brains can really process that the way it needs to be.

I want people to start thinking about student loan debt in how much their payments are going to be, and for how long that is. 

So back of the napkin, for every $10,000 you borrow, you can anticipate a payment of around $125 a month, every single month for 10 years. So when the student is first starting school, the other thing we assume, it takes 70% of undergraduate students five years to complete their undergraduate degree.

So whatever you're borrowing in year one, or you think you might have to borrow multiply that by five. And then for every 10 grand, let's do $125 a month and then take a step back. Am I willing to pay that? So let's say you come out with 50 grand. So that's what? $600, $700 a month? Is that something you're willing to pay every single month for 10 years? And if the answer is no, then you need to start looking at it, at other options.

And there are other options you can go part-time and work more and pay more of it out of pocket. You can go to a lower price school for the first two years and save a lot of money that way. Here's another fun fact for you.

Three-quarters of students change majors or schools, which is why it ends up taking five years to complete. So with that in mind, it almost doesn't matter where you go for that first year or two, as long as the credits are going to transfer to your school of choice. And again, that can be a way to save a lot of money, but again don't think about the total. 

Don't go into it blindly. Think about the monthly payment and how much you're willing to spend on that monthly payment.

Consumers should start planning early, get an idea of what your payment is going to come in October. And if you're not going to be able to afford it and start looking at what your options are now and submit any paperwork you might need to submit, I would argue by the first week of September, just to make sure you get ahead of that tidal wave.

Michael: Thank you Betsy for your insights. It was a wonderful experience chatting with you today. 

How to Pay Off a Student Loan Debt in a Year?

Michael: Now we're going to talk with Enyioma, who has become a successful pharmacist. And also she managed to pay off $130,000 in student loans in just one year, showing everyone that it is possible. With a little bit of hard work and dedication, you are able to overcome the burden of the student.

Enyioma: I was born in Nigeria and moved to the US when I was 11 and went to school as an international student all the way through pharmacy school. And after that, I did a residency. As an international student, I had a lot more loans than my American counterparts because I couldn't get federal loans. 

So I had international loans and the rates were much higher. So I had to figure out a way to make sure that I didn't become saddled with debt for the rest of my life. So yeah, once I started working, I made sure to prioritize that and made sure I paid off my car first and then decided to go ahead and pay off my loans as soon as possible, just because I would like to pursue financial freedom. My goal is to be financially independent by the time I'm 40, so eight years from now. And I'm hoping that it comes to reality.

Michael: How did you end up with such high student loans?

Enyioma: So pharmacy school, for the most part, if you're not going to a state school can be pretty expensive since it's a post-grad program. And my school was about $30,000 to $36,000 a year.

I took out just the bare minimum, the amount required, but because I was an international student, my interest rates were extremely high. So one of them was 13%, 11%. And then one of them was 5%. So, that's why the interest rate just ballooned. So I ended up borrowing about 90, $96,000, I think, and then ended up at $130,000 by the time I was done just from the interest alone. Not because I did anything else.

Michael: So, how did you manage to pay off the loan in one year?

Enyioma: Honestly, you just have to double your income basically, is what you have to do. You can decrease expenses as much as you want, but at a certain point you're going to have to pay for food, shelter, and clothing, and all those things. But I ended up picking up as many shifts as possible at my workplace.

I would work for 21 days straight. I would do 18 hours shifts and just back to back and just do as much as I could. But I had a date in mind that I knew that this was going to be over as soon as you're done paying this off. So I didn't care how exhausted or tired I was. So in one year, I literally doubled my usual salary just in order to pay off the student loans. And that's literally the only way I could do it.

I cut expenses to the bare minimum. I would pension save and barely use my phone data so that I could not have a high phone bill, a very little traveling, all that stuff was good. But if I had not been able to pick up as many shifts at work, as much as possible, I don't think that it would have made as much of a difference with just cutting expenses alone.

For students, I would just encourage you to seek out as many scholarships as you can, even if it's a thousand dollars scholarship or a $500 scholarship, even if it seems minute and trivial, any tiny dollar amount will help. That could be the amount of money that you use to pay for food and your semester for gas. And that's what I did in order to make sure that I borrowed the minimum.

So seek out as many scholarships as you can. And just search, talk to your Dean, talk to your teachers, anybody that can help you find someone and you never know the worst thing that they can say is no, but the best thing that they can say is yes. And now you have extra money that you didn't know you could have.

Conclusion

If you plan on taking a student loan, research your options and make sure you are ready to pay off your debt every month. Seek free student loan advice before making your decision on available options. As our expert, Betsy Mayotte points out, “nobody should have to pay for expert and unbiased student loan advice.”

We hope this expert interview was useful for you. Please share the video with someone you think may need student loan advice and like the video. For more expert tips, you are welcome to subscribe to our YouTube channel.