Strategies for Paying Off Student Loan Debt
If you have 6 figure student loan debt, you’re not alone. Increasingly, more and more people graduate college with a student loan balance similar to a mortgage. This month I sat down with Lauryn Williams, CFP® to discuss some strategies for paying off your student loan debt. Be sure to listen to episode 009 of my podcast to hear the interview.
Where should I begin?
Before you even begin to think about the best strategy for paying off your student loan debt, the first step is to take inventory of all your loans. You want to know what type of loans you have, their interest rates, the years to pay off, whether they’re with private lenders or government loans. Grab a pen and a piece of paper and separate them into two columns, private loans on one side and government loans in another. The strategies for paying these off can be different, as you’ll see in the paragraphs below.
Government loans vs. Private Sector Loans
One quick way of knowing if you have a private loan is if you have a cosigner, as there are no cosigners with government loans. The reason that you want to separate your loans is because government loans have much more repayment options, such as standard repayment (fixed term), graduated payment (lower at first, payments increase every two years), Extended Repayment Plan (25 year term), and other income based repayment plans. Private lenders may not be as flexible, so it’s important to take this into consideration before you implement a repayment strategy.
Consolidating vs. Refinancing
These two words seem very similar. However, there are some key differences. Consolidating your student loans typically refers to your government loans. You can consolidate your loans on studentaid.gov and pay an average of all your interest rates and only have one payment. Similarly, you can refinance your loans, which is consolidating them to some extent, but you can include both your government and private loans. Typically, this is done by lowering the interest rate and or extending the term in order to make payments more affordable. You should strongly consider the fact that if you refinance government loans with a private lender, you will lose all the government benefits. For example, the several repayment options. Another big one is what happens to your student loans when you die. With government loans the debt dies with you, but with private lenders they’ll still come and try to collect from your estate, which could significantly diminish what’s available to your heirs. This is where financial planning comes in and can be very valuable.
Student Loan Forgiveness
If you have government loans and sign up for an income-based repayment plan, the payments you make may not necessarily cover the full amount of interest that was due on the loan. However, the government will forgive whatever balance you have after 25 years. The amount forgiven will become taxable income and must be claimed on your tax return in addition to whatever income you had that year. There are some exceptions to this, like if you make payments under the Public Service Loan Forgiveness Program, then the debt forgiven will not be taxable. If your debt will be taxable, you need to plan and start saving money now in order to have enough on a side account to pay off your tax bill at the end of your loan term.
No two student loan repayment plans are considered equal. Be sure to do your research, consult with a financial planner, and take into consideration your income, your future plans and aspirations before you make a decision. If you’re married, be sure to take a team approach because your student loan repayment plan will affect your overall finances and having a plan that you’re both on board with will be more effective.
If you’d like to hear more about student loan repayment strategies be sure to listen to episode 009 of my podcast, where I interview Lauryn Williams, CFP®.
Have a Question?
Send me an email at Luis@onmywaytowealth.com and let’s get started on pursuing your financial goals together. To get bi-monthly financial tips for Gen Xers sign up for my newsletter and subscribe to the podcast.
Investment Advisor Representative of Retirement Wealth Advisors Inc. (RWA), 89 Ionia NW, Suite 600, Grand Rapids, MI 49503 (800) 903-2562. Investment Advisory Services are offered through RWA. Build a Better Financial Future and RWA are not affiliated.
This information is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, medical, or tax advice. You are encouraged to consult your tax advisor, doctor, or attorney.