Your Guide to Repaying Student Loans

Transitioning to the real world is stressful enough but adding on the immediate acquisition of large amounts of student loan debt is especially intimidating. Unfortunately, that is the situation many recent graduates and their parents are faced with every year. The fact of the matter is, student loan debt has become a national issue. In 2019, the national student loan debt reached 1.41 trillion dollars. TRILLION!

Yes, it is daunting. Yes, it is overwhelming. And no, you cannot just ignore it until it goes away. The good news is, you can get through this. There are millions of people who have gone through what you are going through or are going through it right now, along with you. Student loan debt is not a unique problem, which means there are many methods of dealing with this issue that have proven effective and even life changing.

Let’s look at some best practices that can help you lessen the burden of student loans.

1. Understand Your Student Loan Repayment Plan.

This may seem obvious, but the loan process and the required repayment process are not always straightforward. Applying for a loan to go to college feels like another box to check in the process, but those numbers on the page become very real – very fast.

Lenders, both federal and private, have a wider variety of loan repayment structures available now than ever before. The variety is beneficial because it gives the borrower more flexible options that may work better for them, but it can also make the loan repayment process more confusing.

There are generally four types of plans, though some lenders may offer more: Standard, Extended, Graduated, and Income-Based.

Standard loans are straightforward. You pay a fixed amount each month for 10 years. Plan for it now, and you can keep the same plan for the entirety of the loan.

Extended plans lay out the payments over a longer period, with the most extended plan being 30 years. You will have a lower monthly payment since the money is spread out. However, the totality of the loan will be greater because you are paying interest for a significantly longer period.

Graduated Plans start with a lower monthly payment that rises as time goes on. The assumption here is that you will make more money as you get older, so you have the lowest payment right as you’re entering the job market. There is a catch to this one, though. While the term is still the standard 10 years, you end up paying more over the life of the loan because you accrue interest on the balance of the loan. The loan will stay larger for a longer period, since smaller initial payments leave a larger balance for longer.

With Income-Based plans, you agree to pay a percentage of your income, usually 10%, which means the monthly payment will fluctuate with your salary. There are, however, some federal programs that can grant you loan forgiveness, such as Pay as You Earn and Revised Pay as You Earn. Qualified borrowers can be eligible to have their loan forgiven at 10, 20, or 25 years, depending on certain factors like their job field, the type of degree earned, and how timely you were with your payments.

Got all that?

Luckily, the tips to repay whichever plan you have are much more straightforward.

2. Take Advantage of the Benefits Offered Through the CARES ACT if You Have a Federal Student Loan.

As we stand in unprecedented times, having a job to earn money to pay back your student loans is now harder to come by than ever. The CARES Act has automatically suspended payments for all FEDERAL student loans effective now for a six-month period that ends September 30th, 2020. You do not need to do anything for this if you have a federal loan, you simply do not need to pay your monthly payments until the end of September.

As an added benefit, you can still make your monthly payments if you so choose, and it will be applied directly to your principal, so you’ll be making a bigger impact with the same monthly payments than you normally would make. If you choose not to pay during this time, rest assured that you won’t be accruing interest during the six months, as interest rates have been recalibrated to 0%.

Also, borrowers who work in public service who are enrolled in the Public Service Loan Forgiveness Program will not be adversely affected by the six-month suspension. The Public Service Loan Forgiveness Program, which offers borrowers who make 120 student loan payments on time a chance to have the rest of their loan forgiven, will keep accruing during the said six months.  That means everyone will get the six months of credit while it is suspended.

Another important note is that after the CARES Act expires, or for those with Private Student Loans, you can apply for a student loan deference or a student loan forbearance if you find yourself legitimately unable to make the payments.

Both a deference and a forbearance delay your payments when you are unable to make them. The biggest difference is that a deference can be interest-free, so that you aren’t accruing interest during this time, while with a forbearance, interest is accruing on the balance of your loan during the period it is in effect.  While both are great lifelines for people who have encountered hard times, they both effectively “kick the can” down the road, rather than solving the long-term issue.

3. Enroll in Autopay.

Enrolling in autopay has a multitude of benefits when it comes to repaying your student loans. First, it makes sure that you’re never late or missing a payment due to your own error, and that’s important! Late or missing payments can affect your credit as well as your eligibility for loan forgiveness. Additionally, many lenders – both Federal and private – offer a small reduction in your interest rate if you sign up for autopay. Making all your payments on time is a two-point swing. In addition to not having your credit negatively affected, the payments will build up your credit history and improve your score.  This will help you down the road if you choose to research refinancing options.

4. Maximize Your Tax Deductions Through Your Student Loan Interest.

Your student loan payments are not tax-deductible in totality. However, the interest that you pay on your student loans is tax-deductible on your federal taxes. If you make under $70,000, or $140,000 for your household, you can deduct up to $2,500 of your student loan interest that you paid in the previous year. If you make more than that, the maximum amount you can deduct goes down slightly.

5. Find Ways to Pay More Than the Minimum.

Easy to say but hard to execute, paying more than the minimum amount is the best way to pay down your student loans. Yes, you need to procure money to pay beyond the minimum, and that is its own task. But if you can do it, you would effectively be shortening the life of the loan and decreasing the amount of interest on future payments. It is imperative that you signify that you are paying extra specifically towards the principal, because a second automatic payment can just be applied to the next month’s payment if not explicitly noted.

6. Take Advantage of Money-Saving Apps.

Related to #5, this is a way to help save extra money to pay beyond the minimum. There are many ways to build a saving balance, like putting every $10 bill you get into a savings account. In the digital age, there are new apps that can help you save. Research money-saving apps to find which one would be the best fit for you. The most popular apps include Digit, Clarity Money, and Quapital. These apps help you set goals, budget, and manage your money in a consolidated format.

7. Volunteer.

A great way to earn extra money for your student loans is volunteering through the Shared Harvest Fund. Candidates need to enroll at Shared Harvest Fund and complete a profile that includes choosing what type of social causes you’re interested in volunteering for. In return, you can receive a stipend of $250 - $1,000 a month.

8. Refinance Your Student Loans.

Always keep an eye on what student loan interest rates are being offered, as they can fluctuate. If you have a job with a steady income, a history of on-time payments, and a good credit score (generally a good credit score is 650+), then you may be eligible to refinance your student loans. When applying, you need to decide what your goal is. Do you want lower monthly payments, or would you rather shorten the term of your loan and save on interest? Some people may be able to achieve both.

9. Snowball Your Payments.

If you have multiple loans that you are in the process of repaying, apply any extra money and effort into the loan with the smallest balance while paying the minimum amount on the rest of your loans. Once the smallest loan is paid down, roll over the money you had allotted for that 1st loan over to the next smallest balance, building momentum towards that loan’s balance. Repeat this process until you are down to one loan and making monthly payments on it equal to the amount you had previously put towards all the loans you once had combined.

Discuss these tips and options specific to your situation with a CERTIFIFIED FINANCIAL PLANNER^TM practitioner. A CFP^® can help you map out a plan that can get you on the road to regaining control of your student loan debt.

Author: Allegheny Financial Group | May 2020

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The information included herein was obtained from sources which we believe reliable. Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.