With current interest rates so low, and so much uncertainty in the economy, clients have been asking about their student loans. Namely, does it make sense to refinance, or even consolidate, those loans? Let’s look at how student loans work in your budget, and options that are available to graduates today.
Some facts: Current student loans in the US stand at $1.64 trillion. To put that in perspective, if that debt were shared equally, each American would have an additional $4,996 in debt! Here are some current statistics on student loans:
- 69% of graduating seniors (public and nonprofit colleges) had student loan debt
- 66% of graduates from public colleges had loans (on average $25,550 as of May 2018)
- 75% of graduates from nonprofit colleges had loans (on average $32,300 as of May 2018)
- 11.1% of student loans are currently 90 days or more delinquent or in default
So once you’ve graduated from college, how do you go about paying off all of that debt? First, you need to gather the details of your student loans. If you have taken out federal student loans, then go to studentaid.gov and print out a spreadsheet so you can see what you’re working with. You’ll need to collect details like your loan servicer (where you’d be sending the payments), the types of loans, principal balance and interest accumulated. Try not to faint! You should also be able to see if the loans are subsidized (loans don’t start adding interest until you graduate) or unsubsidized (loans start adding interest immediately). Most student loans we’ve come across are unsubsidized.
If you have taken out any private loans, you can run your free credit report at annualcreditreport.com to see who services your loans, and you would need to call them to collect all of the above information. You can also ask them what sort of repayment options they offer for lower income graduates, but don’t be surprised if they just laugh. Typically, refinancing the private loan (at pretty low rates currently) is likely the only option to lower your total payments. At this time, we are only going to focus on Federal student loan repayment options.
There are primarily two loan repayment plans: a standard 10 year plan and an income driven plan. The Standard 10 Year Plan breaks down what you would pay in a monthly amount over a 10 year time period. It will most likely be the highest monthly amount for a recent grad.
The Income Driven Repayment Plan takes your current income level, family size, and federal poverty level into account. Everything is factored into a formula, and it can substantially reduce your required payment, with the possibility of having your loan forgiven* in 20 to 25 years. You should also consider some of the smaller loan forgiveness programs for teachers or public service that are available. The four income driven plans are:
- Revised Pay As You Earn Plan (RePAYE) – They take 10% of your discretionary income, and stretch the payments over 20 years. This plan DOES include your spouse’s income.
- Pay As You Earn Plan (PAYE) – They take 10% of your discretionary income, and stretch them over 20 years. This plan typically DOES NOT include your spouse’s income.
- Income Based Repayment Plan (IBR) – The new plan takes 10% of your discretionary income and stretches the payments over 20 years.
- Income Contingent Repayment Plan (ICR) – They take 20% of a higher calculated discretionary income and stretch the payments over 25 years.
It’s important to keep in mind that consolidating your student loans may be a huge mistake. It will reset the clock when looking for loan forgiveness, and you would actually lose the flexibility of paying off your higher interest loans first. All of these options should be looked at when paying off your student loans the result could be thousands in savings and increased peace of mind.
School loan rules are constantly evolving and that’s where Beyond Financial Planning comes in. We take a comprehensive approach to financial planning and we take the time to understand your individual circumstances so that we can assist you in your planning. Start planning smart, and stop being the government’s personal piggy bank.
*Loan forgiveness can create a “tax bomb” where you may be hit with an income tax bill on the total amount forgiven in the last year. This should be kept in mind when going down that route.
Check out our podcast:
