Congrats, college grad! You earned your 4-year degree doing all the right things – keeping expenses in check by attending an in-state school, buying used books, working a part-time job to pay the bills. What do you have to show for it besides your piece of paper that will one day be framed in your office? A hefty student loan bill. Would you believe that the average student loan debt for newly-minted grads is more than $30,000? It’s quite a burden. The good news? You have your whole life to pay it back. There are many options to tackle the repayment process effectively.
Maybe you are reading this as an established professional who is still saddled with tens of thousands of dollars to pay back. Doctors, lawyers, and other professionals require years of extra schooling, and the total debt figure can easily top $100,000. It’s worthwhile to explore the best ways to pay it back or refinance into a cheaper interest rate. You might end up saving thousands!
Let’s kick off with how to pay it back in the savviest way. In general, if your interest rate is under 4% and you are early in your career then you don’t want to be in a rush to pay down the debt. Paying interest can feel like a burden, but consider that you could put money into stock market funds within tax-advantaged accounts and likely earn a strong rate of return. There’s also the chance that a more favorable legislative policy comes about that could make loan forgiveness an option.
Loan forgiveness is a growing option for public service employees. “Public service” can include those in the military, police, public health, the public school system, and social workers. The Public Service Loan Forgiveness (PSLF) program was inked in 2007. You might qualify if you have federal direct loans (private loans don’t qualify). Qualifying applicants must also have made at least 120 payments in a repayment program. There are other nuances that we can discuss with you, but just know this could be an option.
Federal student loan borrowers can also take advantage of the Income-based Repayment Plan and the Pay As You Earn (PAYE) program. These are methods by which to pay off your federal loans. The former allows participants to repay loans based on income and family size. The kicker is after 25 years, you could have the remaining debt forgiven. The latter option limits payments on federal loans to 10% of the participant’s income. There is a forgiveness feature at the end of 20 years in the PAYE program.
Here’s the (mini) point – if you took out federal student loans and work in a public service job, there are debt forgiveness options for you. Sit down with us to see what strategy fits your unique situation. Have you noticed the rumblings on Capitol Hill? There could be more support for student loan forgiveness in the coming years – an important thing to consider!
Refinancing is often a great choice for high-income individuals with significant student loans. Those with strong credit scores and a solid income can reduce the interest rate paid on outstanding debt. Federal and private loans can be refinanced. One downside is that by refinancing to a lower rate, you will give up the above-listed repayment option benefits (if you had qualified to begin with). The refinance process is like that of searching for a better mortgage rate. Finding the right lender is important, and TFC is here to help you in the process.
Gameplan
Let’s say you graduated from medical school a few years ago after taking out $100,000 worth of student loans. Now you are making $200,000 and have been diligent about saving money and taking advantage of retirement saving options. Now you seek to get rid of that student debt burden. What to do? First, what’s your interest rate? To reiterate, if the rate is under 4-5%, then it’s not a high priority to pay off – that’s living life in a spreadsheet though. Many folks get extra psychological benefits from simply wiping out the debt even though there might be a bigger reward if you were to take that money and invest it aggressively in stocks. We get it. Here are a few steps you can take:
- Keep investing for retirement to ensure you stick to good long-term saving & investing habits.
- Pay off other high-interest debt (with higher than 5% interest rates).
- Ensure you have an emergency fund.
Once you have knocked out those personal finance pillars, become a student loan repayment rockstar. It is wise to sit down with us at TFC to review your options. There are strategies and programs out there that can save you thousands of dollars.
Here’s the point
- Student loan debt is a growing concern among Gen Z and Millennials; most students exit college with tens of thousands of dollars of debt. You are not alone!
- Public service employees could have their loans forgiven in certain repayment plans.
- Private workers can save thousands by researching refinance options.
Action items
- Sit down with us at TFC to review your situation. Your income, career, type of debt, and long-term goals all factor into what you should do.
- Gather your student loan bills and organize them by amount and interest rate to get a true sense of where you stand.
- Pay off high-interest-rate debt and ensure you are saving for retirement. Personal finance is all about developing good habits – neglecting one area (retirement savings) for another might be a mistake. Let’s work together to get you on the path to more success!
Photo by Charles DeLoye on Unsplash