Graduation and Student Loans

By: Becky Eason, CFP®

Congratulations to all recent graduates! You’ve reached an exciting milestone in your life, and now it’s onto adulthood. One of the first things a recent graduate should do is review their student loans. We all know how overwhelming student loans are, but the good news is that they don't have to be! There is a student loan strategy for everyone and the earlier you are aware of the best strategy for you the better. There are two main types of student loans, private and federal and your repayment strategies are going to depend on the type of loan you have, and what your ultimate goal is. 

After graduation, or once you drop below half time enrollment status, your federal student loans, and sometimes private, will enter a grace period during which time no payments are required. Generally, this is a six month period and then your loans will enter the standard 10 year repayment plan, unless you make other elections. The monthly payments under the standard plan are generally 1% of your beginning loan balance for 10 years. There are other options though for repayment so it’s important to know what fits your individual needs. 

If you have federal student loans and are entering a career in the nonprofit sector and plan on remaining in that sector for at least 10 years (it doesn’t have to be the same employer for the entire 10 years) check with your employer to see if they are eligible for Public Service Loan Forgiveness (PSLF). If you fit in that category and have a large amount of student loan debt you will likely want to consider PSLF. In order to receive PSLF you need to be on an income driven repayment plan, such as IBR, ICR, PAYE, or REPAYE and you will need to certify your income annually to determine your payment amount. PSLF requires 120 qualifying payments to be made, but these payments don’t need to be consecutive. After your 120 qualifying payments have been made you will need to certify your employment for the entire length of time. We recommend certifying your employment annually so that if you have a job change you don’t have to go back and contact all of your former employers. Once you have made your 120 qualifying payments and your employment has been verified your eligible federal students loans will be forgiven tax free!

Maybe you aren’t going to work in the public sector but still have a large amount of student loan debt in comparison to your income. If that is your case and you aren’t able to afford your monthly payments under the standard repayment plan you can still enter an income based repayment plan. It’s important to know that instead of the loans being forgiven in 10 years (120 payments), as they are with PSLF, it will be 20 - 25 years, depending on the payment plan. If you elect this type of loan forgiveness it’s also very important to know that your forgiven balance is taxable in the year of forgiveness. For many borrowers who elect this forgiveness option the forgiven balance is relatively large so you will likely want to save some money each month into a savings or brokerage account to cover what is called the “tax bomb.” 

If you have private student loans there unfortunately aren’t as many repayment options available to you. These loans will be repaid very similarly to the standard 10 year repayment plan for federal student loans. In some cases you are able to extend the repayment term to 15 or 20 years, however, this extended repayment term should only be considered if you truly can’t afford to repay under the 10 year term. This is because you will end up paying a considerable amount of interest over the extended period and you will also likely have a higher interest due to the increased risk the lender is taking on. You do have the option of refinancing these loans to receive a lower interest rate in some cases. It’s worth comparing interest rates on an annual basis to see if you could save money by refinancing. Federal student loans also allow for refinancing to a private lender, however there are federal benefits that need to be evaluated before doing so. 

Please note that we are currently in a very difficult situation than normal, with the CARES Act and the temporary deferment of federal student loan payments. For more specific information around the CARES Act and what it means for you student loans please check out our CARES Act - What It Means For Your Student Loans blog post. 

Nourishing Your Relationship with Student Loans

February is a great time for nourishing your relationships and growing your financial emotions. As overwhelming of a conversation this may be, it’s important to have an open and honest discussion with your significant other about student loan debt, as well as with any other debt you may have. For many people, debt is a leading cause of stress. That stress not only affects you but also your relationships. If you can get in front of this discussion it can save you money, time, and stress now and later in life.  

We’re at a point in history where student loan debt is at an all time high of nearly $1.6 Trillion. With that horrifying figure it’s safe to say that many relationships begin with a large amount of student loan debt from one or both parties. As a student loan borrower, you should never feel alone in your journey. There are many different repayment options available based on your loan type, occupation, income, and relationship status. Personal finance isn’t an easy thing to openly talk about, especially if you feel like you’re drowning in debt. However, an advantage of having these money conversations is to make sure that you’re both on the same page as to the best way to move forward and overcome your student loan debt. There is strength in numbers and the numbers I’m referring to in this case is a support system.

It’s important to continuously have these money conversations each year as life is always changing. It’s surprising how many life events happen in a matter of a year, whether it be graduating, changing jobs, changing your relationship status, having kids. All of these changes could potentially have an effect on your student loan repayment strategy. Schedule a money date at least annually and reward yourself with your favorite meal and glass of wine.  

Financial Check Up - Student Loan Edition

By: Becky Eason

January is a good month to give yourself a financial check up, and that includes looking into your student loans. This should be done on an annual basis to make sure you are on the most appropriate course of repayment.  

For those of you who are on an income based repayment plan, reviewing your student loans for the year might be to make sure that you’ve re-certified your income. Your loan provider should notify you of when you need to do an income re-certification, but it’s always good to set an annual reminder to confirm that this has been done. If you miss the annual re-certification deadline your interest will capitalize, which means that any outstanding interest will be added onto the principal of your loan. Depending on your repayment plan, this could result in your student loan costing you more in the long run because you will be paying interest on a higher principal balance. Another thing is that if you don’t re-certify your income, your loan payments won’t be based on income anymore so the payment is usually reverted back to what it would be under the standard 10 year repayment. And remember, as mentioned prior, your unpaid interest will capitalize which increases your overall student loan principal balance. This means that you have a higher loan balance to pay off.

Another reason to review your student loans on an annual basis is that you may have changed jobs in the past year. If you changed jobs and were previously working in a private sector but switched to a public sector job then you should see if your new employer is eligible for Public Service Loan Forgiveness. If they are, it could be worth your time to see if your loans are eligible for PSLF and determine what the difference in your payments would be. It’s also important to consider how long you plan on staying in the public sector as you are no longer eligible for PSLF if you enter the private sector. On that same note, maybe you were working in the public sector and changed jobs to the private sector. If that is the case you should evaluate whether you should go for the long term (20 - 25 year) loan forgiveness or enter the standard repayment plan. The 20-25 year loan forgiveness has a “tax bomb” at the end of the period where your forgiven balance is subject to income taxes in the year of forgiveness. This “tax bomb” is something that you want to be aware of and potentially start saving for, depending on how much you expect to be forgiven.

A third reason that you should review your loans annually is to determine if you should refinance based on your current and potential interest rates. If you have federal student loans there are important considerations to take into effect in your decision making, such as the death and disability clauses. But if you have outside coverage for situations like those or plan for those situations and you aren’t going for loan forgiveness you might find lower interest rates if you refinance to a private student loan. If you currently have private student loans it could be beneficial to shop around for lower interest rates on an annual basis. You can refinance your student loans more than just once to take advantage of lower interest rates and/or cash back bonuses. A popular website to refinance your student loans through is the Student Loan Planner website. They have many different companies that they have partnered with to offer cash back bonuses, you just have to click the refinance links that are on their website.

Student loans are very complex so it’s important to take the time to consider all of your different possibilities. If you spend the time every year to give yourself you a financial checkup you will thank yourself for years to come.