The student loan repayment decision can be confusing but is critical to your financial future. To select the best student loan repayment method, you need to consider other things before you make your decision. The good news is that the federal government offers various student loan repayment and student loan solutions. The government has created flexible repayment plans that help students stay current. This article will guide you through your options including the new items relating to COVID.
The priority within the entire student loan repayment process is to avoid student loan default. Student loan default is one of the biggest mistakes a borrower can make once they start repayment. The penalties are severe and can have a significant impact on a person’s financial future. Missing payments could impact both the student and parent depending on the type of loans. As a result, borrowers’ credit scores will decline, and the borrower will incur additional fees making the debt amount even higher.
PayForED’s Repayer helps borrowers navigate all of their options in a single tool. This includes fixed vs income-based repayment comparisons, loan forgiveness, and the various tax filing options married couples may face. The solutions are designed to help students, parents, financial advisors, and employers. Here are the steps to consider when you are developing the proper student loan repayment plan.
Organize all Your Student Loans
Due to the lack of transparency and information, many borrowers focus only on getting their degree and not the financial consequence of taking on student debt. Often overlooked is how important the debt structure is and what options will a person have once in repayment. A borrower’s debt structure for both the student and parent will dictate their repayment and forgiveness options.
This could be very different for each borrower. Having a complete inventory of all your student loans is critical for this evaluation.
Federal Loan Repayment Flexibility
The good news is that the federal government offers Income-Based Repayment plans to help borrowers stay current and avoid default. The difficulty is that these plans are only available for federal student loans. Private student loans do not have these same repayment options.
The repayment process can be overwhelming in many ways. There are currently 9 different methods of repayment to consider. Based on the starting salary and your career path selecting the correct repayment method may also impact your student loan forgiveness options. Our Ultimate Guide to Student Loan Repayment outlines the various federal loan repayment methods and can help you better understand the details of your options.
Considering Private Refinancing
For some borrowers, refinancing all their student loans could be a great choice. This is especially true since interest rates are at record lows. This strategy follows traditional thinking by focusing on interest rates and terms. In many cases, a person will save money over the lifetime of the loan repayment.
Once the borrower moves to a private refinanced student loan, they no longer can use the various federal repayment methods for the loans that were refinanced under a private loan. This means the borrower would lose the flexibility built into the federal repayment options that can help them manage their cash flow and avoid default during times in their life when the current payment is not affordable.
When to Start Student Loan Repayment
Most new borrowers will have the ability to take advantage of a six-month grace period. Depending on the type of loans, interest may be charged to those loans making the loan balance increase. This may be a good reason to start repayment soon rather than later.
If the borrower is trying to qualify for Public Service Loan Forgiveness and is starting their full-time job before the six-month grace period, this would be another reason to start early. Remember, the default repayment method is the Standard 10-Year. This will be the most expensive. There are nine federal loan repayments to consider.
Due to COVID, the national forbearance process is in place until October 1. If a person is starting a career that qualifies for PSLF before their grace period ends, they need to do a consolidation to earn free PSLF credit months during this period without any payment.
For our example, the borrower is a physician assistant who has high federal loan debt and will start their job in July. It would be beneficial to consolidate this borrower’s federal loans before they start working and select an IDR repayment method. They will have no payments until October 1 and earn 3 months of PSLF credits. If they select the grace period, then they earn no PSLF credits and will start payment most likely in November or December.
Plan for Life-Changing Events
What life-changing events can impact student loan repayment? For most people who have student loans, they will have significant changes in their life throughout the student loan repayment process. These life-changing events can be different depending on whether you are a student or a parent borrower.
Here are the most common:
- Changes in career and income
- Marital status changes and tax filing options
- Major purchases (Home & Car)
- Starting a family
- Employer change that impacts loan forgiveness
- The debt of a spouse
- Saving for other personal goals such as retirement
Student Borrower Concerns
As a student works through their analysis, understanding the various repayment options is important. Today, personal financial planning has a very short-term focus. Many recent graduates are surprised by the amount of student debt incurred and the resulting monthly payment. For some, this is their first real look at financial responsibility and it can be overwhelming.
If you properly analyze your numbers you will have a variety of repayment options. The monthly payment could vary greatly between each option. Here is where you need to select the best option for your current situation. At the same time understand the flexibility in that decision as your life will change. Some of these risks you may not even know at the time include your future spouse’s income and debt. Understanding your options before making the decision and knowing your flexibility is critical.
Parent Concerns and Student Loan Repayment
For many parents, this has become a hidden risk to their own financial safety. Since 2014, student debt for people over the age of 50 is up over 43%. The growth rate in Parent PLUS loans is 62% during the same time. Many do not realize that Parent Plus loans are the legal responsibility of the parent. If a parent has co-signed a private loan they are indirectly responsible depending on the type of loan.
As an example, many parents have co-signed a student loan for their child. This is often not discussed or identified as a risk. If you have co-signed for a loan, it is important to understand the loan co-signer release rule for the loans. Having a release will be a way to better protect yourself in the future.
Parent repayment options are more limited than the students. Proper planning may require periodic discussions with your child to minimize the risk of missed payment or default.
Conclusion
Having a short-term plan and a long-term vision for student loan repayment on each of your options is critical and not often done. Selecting the best student loan repayment method needs to consider your current cash flow, career growth, type of employer, and your tax filing status over the loan repayment time frame. Some repayment plans may last 25 years and that is why your plan needs to be reviewed each year.
The biggest issue that borrowers will face is the lack of vision and proper advice. Current advice is fragmented with each of them having different goals. The loan servicers are trying to keep you current and normally place the borrower in the lowest payment which may not be the best decision. The tax advisor is trying to keep your taxes at a minimum which may not be the best especially if you are using an Income-Driven Repayment method. While the Lenders are trying to get the borrower to refinance.
The PayForED Student Loan Repayer, available as part of our student loan solutions, helps both students and parents sort through all the student loan repayment options. It provides a holistic method for developing the proper strategy while providing objective advice.
We know the student loan repayment decision is one of the most complicated financial decisions a person will make in their lifetime. Getting the right advice early is important to a person’s financial future.
