Student Loan Payments Paused (again)

President Biden signed a bill two days ago extending the student loan payment pause until August 21, 2022. This is nice but it will likely not last forever.

Part of prudently managing student loans is making sure you have a plan to repay what you borrow when the student loan payment pause ends. Any financial plan should start with a solid grasp of your Budget and a full Emergency fund! While it may seem counterproductive to start with saving before paying down student loans, let’s discuss why these two planks make the best foundation.

Two Tips Before Paying Off Student Loans: 

Start with a Budget

It’s not enough to track expenses. That’s not a budget, that’s a list. A good budget provides insight into your household’s relationship with money! Specifically, the money you work so hard to earn.

As for student loan repayment, use your budget to identify areas where you can create additional cash savings. That way, you can make student loan payments above the minimums as soon as the payment pause ends. Any extra payments help reduce the repayment period, which cuts down on the cumulative interest of the student loans.

Use your budget to identify your monthly expense figure. That number is important because it will serve as the foundation for your emergency fund.

Build your Emergency Fund

An emergency fund is, as the name implies, a savings account you use when you need cash unexpectedly. Your monthly expense number is the starting point. You want to have three months of your monthly expense figure in cash. If you spend $10,000 per month, you need $30,000 in the emergency fund. Having an emergency fund can hedge against having to go into more debt in the event of an emergency. It allows you to be prepared for the unexpected and avoid an emergency setting you off track financially.

You may be wondering how using a budget and having an emergency fund helps you pay down student loans. Using your budget and emergency fund to springboard past student loan repayment and into building up wealth allows you to maximize your financial situation and prepare for the payment pause to end! Imagine adding $1,000 a month to your retirement account or your child’s college fund instead of paying back your student loan lender. Or borrowing money for a vacation only to use the cash you accumulated ahead of time to immediately pay it off!

If you’re struggling to make progress on your emergency fund or just can’t quite get your budget to work, consider these two highly recognized student loan repayment strategies. We all know the feeling; it can hang over our heads like a storm cloud. But remember, student loans are the cost of getting an education. So it just comes down to learning to manage it well and work to pay it off in a way that makes sense for your financial goals.

As you’re thinking about how to pay off your current student loans, you may be wondering how to prioritize? 

Two Proven Student Loan Repayment Strategies:

Snowball method

The snowball method prioritizes paying off the lowest balances first. There’s a positive psychological boost to be had by zeroing out a student loan account, which can then be used as a springboard to tackle the next chunk of student loans. It’s not financially preferable if you have a lot of high- interest rate student loans, but it can be a good approach if you have small amounts of student loans with several lenders.

Avalanche method

This approach prioritizes the highest interest rate first, regardless of the student loan balance. The goal is to minimize the amount of interest you must pay while you work to retire the loans. That’s because interest paid is money that doesn’t reduce how much you owe; it just goes into the company’s pocket that lent you the money. The avalanche method is the mathematically optimal way to pay off student loans but may not be right for everyone.

Paying off your student loans starts with a firm grasp of your spending and savings habits. If you’ve already accumulated a high amount of student loans, you don’t want to add to the pile! Once that’s done, paying off the student loans is a matter of staying motivated! For many households, student loan debt can be the biggest monthly expense (after their mortgage) and it takes forever to pay off. Degrees of all kinds can come with a hefty price tag of tens of thousands of dollars. If you or someone you know has over large amounts or lingering student loan debt, there are some ways to retire it! Here are four options:

Four Ways to Retire Your Student Loans:

Refinance the Student Loans

This option may be suitable if the loan carries a high interest rate (7% or greater), have high monthly payments or wish to combine multiple loans. Refinancing consolidates those loans into one new loan with a single payment. You’ll have to consider the size of your monthly payment amount versus the length of your loan; taking longer to repay the loan means a lower monthly payment, but that also means paying more in interest over the life of the loan.

Income-Driven Repayment (‘IDR’) Plan

This strategy is best if most of your loans are federal and your loan balance is high relative to your income. The plan restructures your debt based on your income, family size, state, and the type of federal loan you have. The IDR reduces your monthly payment amount based on these factors.

There are four IDR plans to choose from. In general, they each call for a monthly payment between 10% and 20% of your discretionary income. To learn more about IDRs, visit this information page from StudentAid.gov.

Seek student loan forgiveness

If you work full-time in the government or any public service job, you may be eligible for Public Service Loan Forgiveness (‘PSLF’). If you’ve made 120 consecutive monthly payments (10 years), you may be eligible to have the remaining balance of your loan forgiven. Importantly, your loans must be federal; private loans aren’t eligible for the PSLF program. For more information about the PSLF program, visit this information page from StudentAid.gov.

Student loans can equal a lot of money but eliminating that level of debt is doable! For some inspiration, here’s a link to just one story: she paid off $100k in loans making less than $50,000 per year in New York City. Not exactly the cheapest ZIP code in the US!

Bankruptcy

And while it is a last resort, it may be the right move if you’ve exhausted all of your other options. Here’s what you need to know:

• Many people think bankruptcy doesn’t get rid of student loans. The truth is, it isn’t easy, but it can be done. 
• To get rid of your student loans when you declare bankruptcy, you would need to prove that repaying them would cause you undue hardship—meaning you wouldn’t be able to maintain a basic standard of living if forced to keep paying your loans. 
• Next, you would file a separate complaint that would sue the holder of your student loans in what’s called an adversary proceeding. 
• Student loan holders, including the federal government, almost always oppose the borrower, meaning you would likely spend a lot of time and money making your case. Again, it’s hard to do but not impossible. Take, for instance, a woman in California who recently had $350k+ federal student loans discharged by acting as her own lawyer. 

The encouraging news is the law in this area might be changing for the better. There’s been a push by the Biden administration to make discharging student loan debt easier. It would stop the government from opposing some clear cases of undue hardship for federal loan holders. 

In addition, the Fresh Start Through Bankruptcy bill currently in the Senate would make it easier to discharge federal student loans. Neither of these options has passed, so we’ll have to wait to see what happens there. If you have questions, please call me, and let’s take a look at your student loan options. I’m always here to help however I can. You may hop on my calendar using this link.

Takeaway:

Consider using all the methods listed above such as:

• Establishing an emergency fund
• Creating a budget
• The snowball method
• The avalanche method
• Refinancing 
• Income-Driven Repayment Plan
• Student loan forgiveness
• Bankruptcy

We know that all of this is overwhelming and it's why our firm wants to help you. You may schedule a call with one of our trusted advisors here.