Student loans are often portrayed as the albatross around our generation’s collective neck. National student loan debt skyrocketed just as the economic crisis hit, making for a perfect student loan shitstorm. As a financial advisor specializing in young professionals, almost all my clients have student loan debt, but what many don’t know about student loans is that there are so many options for paying (or not paying) them. They’re one of the most flexible types of debt available if you understand your options.
Are your loans private or federal?
This is really important. Why? Because private and federal loans are totally different animals. Federal loans have lower interest rates, are much more flexible and have more repayment options. Private loans, on the other hand, are a pain. The servicers aren’t nearly as flexible, the payment plans are less accommodating and the interest rates are generally much higher. Find out what type of loans you have by going to the National Student Loan Database and clicking on “Financial Aid Review.” You’ll need your Department of Education PIN. Don’t have that? Go to the Federal Aid Website to request a duplicate or set a new one.
If you’re not earning money, then you don’t have to pay federal loans
Yeah, that’s right. I know it sounds crazy, but that’s what the federal government says. There’s a bunch of options if you’re not making money like economic hardship and unemployment deferral. The Income Based Repayment or Pay as you Earn for newer grads plans base your monthly payments on your income and the monthly payment that corresponds to no income is $0. Your interest will accrue, but what are you going to do? You’re not making any money, so you have to just let it go.
If you’re not rolling in dough, your federal student loans can be forgiven after 20-25 years.
If you’re deemed eligible for a repayment plan that’s based on your income, then making monthly payments for 20-25 years, depending on the program, is enough to waive the entire balance of your loan. So, let’s say for example, you earn $40k and owe $100k in federal student loan debt with an interest rate of 8.25%. You sign up for the Pay as You Earn program, a repayment plan offered to relatively new grads, which caps payments at 10% of discretionary income and forgives loan balances after 20 years. Your monthly payment would start out at $188. If your income increases at 5% per year, then by year 20 of your repayment, your payments would have increased to $621. Even though you will have paid $89,061 by year 20, and not your full balance, the rest will be waived. You’re done paying. You would have to reapply for your payment plan on an annual basis for 20 consecutive years, but you’d save a ton of money. The savings increases as loan balances do.
It might not be good financial strategy to pay off student loans as fast as possible
Federal student loans are generally lower interest rate debt than say, credit cards. Check your interest rates to compare, but it often makes sense to pay off credit cards or other high interest debt first. Also, if you’re on an income based repayment plan, then it doesn’t make sense to pay any additional funds to your loans if you won’t be able to repay them off before the date they’ll be forgiven. They’re going to get forgiven anyway, so why throw in extra payments that won’t get you any further ahead?
You can still live your life and be fabulous even if you have a ton of student loan debt
If you’ve got federal loans and you want to do something crazy like sail the ocean blue or go backpacking in Australia for a year, then go for it! If you’re not making money, then you won’t have to pay them anyway (see #2). There’s also a 3-year deferment period per loan that you can take advantage of during the life of the loan. Just be careful with this option because it can affect your eligibility for loan forgiveness if you’re on an income based plan. Be sure to talk to your lender. The point is, it might feel like you’re suffocating under a crushing amount of debt, but you have a lot of options. Just make your monthly payments and keep on keepin’ on. Don’t think about that total number you owe because there’s nothing you can do about it except get on the right payment plan, make the monthly payments, and keep living your life.
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