Loan Repayment Protection
Loan repayment protection programs help you repay your education loans if you experience financial hardship. Both federal and private loan repayment protection programs are available, including the income-based repayment plan, economic hardship deferment, forbearances and SafeStart. (See also tuition refund insurance.)
There are several federal programs that provide repayment relief for borrowers who are having trouble repaying their student loans.
SafeStart provides an interest-free line of credit that borrowers can use to make up to 12 quarterly "draws" during the first five years after graduation. Each draw covers three monthly payments on the borrower's student loans, for a total of 36 months of coverage. Draws are paid directly to the lenders that hold the loans. The draws are repaid interest-free over a five year repayment term. (Draws can also be repaid during the draw period and will restore the line of credit.) The required payment is $20 or 1/60th of the total draw, whichever is greater, until the total draw is paid in full. There is no prepayment penalty on the draws, so borrowers can repay the draws quicker if they wish.
In order to obtain this "financial hardship protection", however, borrowers must pay an up-front commitment fee of 4% to 9% of the loan amount when the loan is borrowed. (The commitment fee may be paid in 12 monthly installments starting when the loan is disbursed.) The commitment fee depends on the college, the amount of coverage and the counseling services elected by the student. The fee does not vary by year in school or field of study. Since the pricing will be the same for all students at a school, students who are majoring in fields or pursuing degrees that are less employable may derive a greater financial benefit from the program.
Financial hardship protection is only available to SafeStart customers after they have graduated. Borrowers who drop out without graduating are not eligible. Borrowers must also be able to demonstrate financial hardship in order to draw on the line of credit. Financial hardship is defined as either unemployment or having total monthly student loan payments that are greater than 10% of gross monthly income.
Coverage is currently limited to undergraduate Stafford loans, but will be expanded to include undergraduate and graduate student loans (including Stafford, Grad PLUS, Perkins and private student loans). Protection can be obtained for 25%, 50%, 75% or 100% of the loan balance with a corresponding adjustment to the commitment fee.
The SafeStart program parallels many aspects of the federal loan programs. If the school closes before the borrower graduates or the loan is cancelled, the commitment fee will be refunded without penalty. If the borrower receives a death or total and permanent disability discharge on their student loans, the repayment obligation on corresponding draws will be cancelled.
The company says that the financial hardship protection will save borrowers money by avoiding the capitalization of interest that occurs with the federal programs and by avoiding any extension of the repayment term. (The SafeStart program is intended to allow borrowers to stick with a standard 10-year repayment term, but can be used in conjunction with alternate repayment plans. The shorter the repayment term, the less interest that will be paid over the lifetime of the loan.)
The SafeStart program also includes financial literacy training to borrowers while they are in school and debt management counseling after they graduate. To the extent that this proactive counseling is effective it will save the company money, so they have a strong financial incentive to improve the effectiveness of the training and counseling programs.
One of the main benefits of the SafeStart program is that it provides students with peace of mind. Many students worry about their ability to repay their student loans or get a job after they graduate. The SafeStart provides them with an additional safety net (for a fee).
Two types of borrowers should think twice before using SafeStart:
Performing an accurate cost/benefit analysis of the SafeStart program is complicated because it necessarily involves calculating the net present value and modeling the expected value of the program's benefits. Prospective users of SafeStart are unlikely to consider all of the factors that affect the financial value of the program:
Additional financial considerations include:
To some extent a detailed financial analysis is besides the point. Rather than focusing on the financial tradeoffs, prospective users of SafeStart should consider whether the peace of mind this program provides is worth the cost of the commitment fee.
There are a few other issues that prospective users of SafeStart should consider before enrolling:
SafeStart was founded in 2009 by Jeff Weinstein and Carlo Salerno. They were lead analysts on postsecondary education when they worked at the US Government Accountability Office (GAO).
For more information about SafeStart, write to BridgeSpan Financial LLC, PO Box 13352, Arlington, VA 22209-3352, call 1-202-449-9616, fax 1-866-492-0537, send email to email@example.com or visit www.yoursafestart.com.
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