[00:00:00] Speaker A: In this episode, we share details of a very scary letter that Moheela has been sending out to their student loan borrowers and what it actually means for your federal student loans. Let's get started.
[00:00:12] Speaker B: Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt.
[00:00:23] Speaker A: Hello. My name is Brenton Harrison of escape student loan debt and your host for the Escape Student loan debt podcast. In this week's episode, we're going to take some time to go through a really, really scary, really, really misleading letter that's been going out from mohila to people who have their loans serviced by that institution. But I want to walk you through what it actually means, because there is an action you need to take where if you do not take it, then what they say will happen in the letter will actually happen. So in the first part of this episode, we're going to walk you through the letter itself. In the second half, we're going to walk you through what you need to avoid, or I should say, what actions you need to take to make sure you're still in good standing. And the letter that we're going to go through today was actually sent to us by a listener of the podcast. And I've shared in the past that if you reach out to us on social media, we're not going to answer, like, incredibly specific questions that would betray your privacy. But if you have a topic that you want us to cover and we can de identify you, we're happy to do it. So this letter was sent to us by someone in our community who got a letter from Moheela, their loan servicer, that they didn't understand and they wanted our help walking through what it meant. We'll put a link to this in the show notes so you can kind of see an example, because if you have Moheela, you may have already received this letter, or you may receive it in the coming weeks. But if you're looking at this letter, it's saying that at the top of the letter, there has been a repayment schedule change. In the first paragraph, it says the schedule to repay one or more of your loans has changed. Please review the enclosed repayment schedule, which includes your monthly minimum payment amount, total number of payments to be made, and your due date. And I'm going to tell you what's so scary about this letter. It's that this person who sent us the the letter is paying their loans on an income driven repayment plan, and they also are aiming to have their loans forgiven through public service loan forgiveness. So their payment is something that is pretty reasonable, or I should say it's proportional to their income as income driven repayment plans are set to be. And they are also expecting to have their loans forgiven far before they've actually repaid any significant amount of their debt. So with that in mind, they're getting this letter. And in the middle of this letter, on page two, it says the repayment schedule has changed, and it shows a series of numbers. The first thing that you see is a prior principal balance of $310,000, capitalized interest of $37,000, which leads to a current principal balance of about $347,000. You then see a category that says unpaid interest of about $3,500. And it says amount to be repaid, $351,000. You then see an interest payable number that says $144,000. And at the bottom, it says total amount to be repaid, $496,482.32. So this person that thinks that they were due to have their loans forgiven under public service loan forgiveness is now being told that they're going to have to repay $496,000 in total. And then in the next category, it shows two different categories of loans. It shows, for the first loan, the number of payments at eight. It shows a payment amount at $528.19 a month. And it says that they're going to start paying that in August of 2024. And then it shows another set of loans at 120 months, and the payment for that is $4,100 a month. And that's due to start on April of 2025. So in total, this person is believing that after April of 2025, they're going to be paying about $4,600 per month in federal student loan payments. But that is not actually what this letter means, even though, for all intents and purposes, if you read the letter, it appears that that's what they're going to pay. So let me first break through these categories of what these numbers mean, and then we'll get to what this letter is actually trying to tell you will happen, even though there is no reference to it in the letter, which is part of why it's so ridiculous. First, let's start with these categories of prior principal balance and capitalized interest. We've talked about capitalized interest in this podcast in the past, but essentially, federal student loans work very differently from most forms of debt in the sense that with federal student loans, when interest accrues on a debt, it accrues in a separate category. So, for example, if you had $100 of student loans and $5 of interest accrues on that debt, you don't see a balance that now says dollar 105. Instead, you see a principal balance that still says dollar 100, and you see an interest category that says $5. They keep it in separate categories. Now, there are certain things that can happen where that separate interest category can be added onto the principal. And when that happens, it's called capitalizing. So instead of $100 in the principal category, $5 in interest, the $5 would capitalize onto the hundred. And now your principal would say 105. That's very important when it comes to how interest accrues on your federal student loans, because as long as those interest categories are separate, they will continue to calculate interest just off of the principal. But if the interest capitalizes, they're now calculating those numbers moving forward off of a higher number, which means more interest. So it's saying in this case, that their current principal balance for their loans is $310,000, but there's a separate category of interest that is $37,000. And if that interest capitalizes, then the principal balance will now increase from 310 to 347. You next see accrued unpaid interest. So this letter makes it very confusing, but this is a similar type of structure where that interest is sitting in a separate category, and they are assuming that it's going to be capitalized onto this new loan. So they're saying, in total, the amount to be repaid is 351,000. Now, that's what they're saying this person owes in the loan before they start their new payments that are due to start in August and April. The interest payable is listed there because that is the estimate of how much additional interest this person will pay over the total repayment period of this loan. So while they owe $351,000 in this example, over the course of their repayment period, that 351,000 is going to see an additional 144,000 of interest accrue, so that by the time that this loan is paid off in full, this person would have paid a total of $496,000. Now, the next part is what actually gives us a clue to what's happening in this letter. Even though it's not mentioned in the letter and it says the repayment plan, this person is on the income driven repayment plan. And these numbers that you see eight payments and 120 payments, that doesn't have anything to do with how much forgiveness credit this person has. It's saying that's how many months they will have to pay this amount before the loan is repaid in full. So when you see eight and when you see 120, they're saying that it's going to take 120 months of payments or ten years exactly to repay this loan in full. Now, I went through all these numbers and all this information so that you would understand what it means, but the reality of it is you don't really need to pay attention to these numbers in the first place because this letter, even though it doesn't say it in the text, is alerting the borrower to what their payments would be only if they forget or refuse to recertify their income and family size with their student loan servicer. If you signed up for an income driven repayment plan, you're aware that when you signed up for that plan, you had to tell your student loan servicer the number of people in your household. You had to give them access to your most recent tax return so they could use those two bits of information to calculate your payment under that income during repayment plan. You are also aware that every single year, on the anniversary of the date that you signed up for that plan, you have to provide your student loan servicer with updated income and an updated family size so that they can recalculate your payment for the upcoming twelve months. Well, there are certain consequences depending on the type of income driven repayment plan you have, where if you fail to recertify your income, there is a certain consequence. And when it comes to the income driven repayment plan, that consequence of failing to recertify your income and family size is that you get kicked off the payment for the income driven repayment plan and you get placed on to the standard ten year repayment plan. So even though this person is paying nowhere near this right now, even though they're aiming to have their student loans forgiven, what their student loan servicer is telling them in this letter is if you don't tell us updated income, then on these particular dates you are going to switch from the payment for the income driven repayment plan to the standard 120 month payment that's actually needed to pay off your loan in full. And in that case, for this borrower, that is $4,600 in total. But as long as they recertify their income, not only will they not have to worry about their payment jumping to this level, if they're following everything they need to do under the income driven repayment, and under this case public service loan forgiveness, they will pay much less than what's listed and they'll have their student loans forgiven far before that 120 months expires. After the break, we'll tell you the consequences for failing to recertify your income under the other income driven repayment plans and hopefully give you some peace of mind so you can shred this letter if you ever receive it.
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[00:10:06] Speaker D: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
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[00:10:57] Speaker D: Dot welcome back.
[00:10:59] Speaker A: Before the break, we told you about this ridiculous letter that you might receive from Moheela that does not share any context about why they're sending it or how you can avoid making these payments come to pass. But now that you know what it means, let's talk about the consequence of failing to recertify your income under the various income driven repayment plans. If you're looking on screen, and we'll put this article in the show notes, you're looking at a page from studentaid Dot gov Dot. The top of the page it says, what if I don't recertify my income and family size by the annual deadline for my income driven repayment plan? So first, let's jump down to the bottom and let's look at the consequence for failing to recertify under the pay as you earn plan, which, as we covered in our last episode, is now closed to new borrowers. But there are still millions of borrowers who are on the plan, the IBR plan, which is the income based repayment plan and the income contingent repayment plan. It says, and I quote, if you don't recertify your income by the annual deadline, you'll remain on the same IDR plan, but your monthly payment will no longer be based on your income. Instead, your required monthly payment will be the amount you would pay under a standard repayment plan with a ten year repayment period based on the loan amount you owed when you initially entered IDR plan. You can return to making payments based on income if you provide your servicer with updated income information, and if your updated income still qualifies you to make payments based on income. Additionally, if you don't recertify your current IDR plan, you may lose future eligibility for that particular IDR plan. Learn more about IDR plan eligibility so we've talked about eligibility for those plans, but to just break down this information in layman's terms, it's saying exactly what we talked about before the break for these three particular plans. If you do not recertify your income and family size, you will technically still be on that plan, which means that for each month you pay, you'll be accruing credit under those IDR payment plans, whether it's 20 or 25 years that you need before your payments or loan balances are forgiven. But even though you're technically still on the plan, until you give your loan servicer that updated information, they're going to make your payment what would be needed under the standard plan to pay off your loan in full within a ten year repayment period. So it's a heavy consequence for failing to recertify. But they're also saying that as soon as you update it, they will revert back to an income based payment as soon as possible. That policy, however, is different under the save plan. Under the saving on a valuable education plan, it says, and I quote, if you don't recertify your income by the annual deadline, you'll be removed from the plan and placed on an alternative repayment plan. Under the alternative repayment plan, your required monthly payment is not based on your income. Instead, your payment will be the amount necessary to repay your loan in full by the earlier of a ten years from the date you began repaying under the alternative repayment plan, or BDEZ, the ending date of your 20 or 25 year save repayment plan period, you may choose to leave the alternative repayment plan and repay under any other repayment plan for which you are eligible.
So what does this mean? It's saying, unlike the other three plans where it really doesn't matter the status of your forgiveness credits or the status of your loan balance under the save plan, there's actually a test that they're going to run. They're going to calculate two different numbers. The first number is functionally the same ten year repayment period because it says ten years from the date you began repaying under the alternative repayment plan. So they take that loan balance, they take that ten year test, which is functionally the same payment that we talked about with the standard repayment plan. But let's flip the scenario and let's say that you've been paying on income driven repayment plans for 18 years. You sign up for the save plan and you only have undergraduate loans. Well, that means that you would only have two years left. And while it would seem like, oh, I only have two years left, so my payment should be lower in this calculation, it would actually be more because now they're going to look at that loan balance and they're going to say, two years is shorter than ten years. So we're actually going to figure out, because it's the earlier of the two dates, how much this person would need to pay off their loans in full within two years, which is going to be a monumental number. That's even higher than what we saw from the person before the break. So while before the break, this person was told that they were going to have to pay $4,600 a month to repay their loans in ten years. You can imagine what that number would be if they had to pay off all 350 something thousand dollars in a two year repayment period. It would be an astronomical number. Now, they do say that you can leave this alternative repayment plan and repay under any other repayment plan for which you are eligible. So in this scenario, this person would likely have a really good incentive to just recertify their income, or they would have the ability to jump to a standard repayment plan for ten years or an extended plan for a longer period of time. But they are essentially saying that no matter which payment plan you choose, you do not want to be in a scenario where you fail to recertify your income on your annual recertification date. So while you might have gotten this letter and freaked out because the wording of the letter is very confusing and it doesn't provide proper context, I hope this episode gave you some peace of mind to let you know that as long as you just tell your loan servicer what you're making, tell them your family size, give them access to your most recent tax return when appropriate, and there are some instances where it's not appropriate, then you'll be perfectly fine. This letter is a worst case scenario. That they should share in the letter is a worst case scenario, but unfortunately, they chose not to. But that's why we wanted to do a quick episode on it to tell you what to worry about, and in this case, what not to worry about. I'll see you in a couple weeks.
[00:16:38] Speaker B: From escape student loan debt this was the escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their.
[00:16:50] Speaker A: Dream of achieving home ownership.
