Paying for college is one of the biggest expenses many Americans will face. And if you borrow loans to cover the cost, repaying that debt can be a big financial burden.
The median length of time it takes to pay off a federal student loan is 15½ years. A lot can happen during that time. There are a host of repayment plans to fit your needs at every stage of life, and it’s critical to consider your options as circumstances change.
We’ve compiled some common life scenarios. Select the one that best fits your stage of life and learn how it could impact paying off your school debt.
Graduating soon?
The Education Department gives newly minted graduates a six-month reprieve before student loan payments kick in. Take this time to research which repayment plans are available. The standard 10-year repayment plan — the default for new grads — may be best, but there are a wealth of options. The Education Department’s Federal Student Aid office has a loan simulator tool that lets you see how you can lower your payments or pay off your debt faster.
The new Saving on a Valuable Education plan, commonly known as SAVE, could be a good fit if you are not making much money out the gate, especially if you have only undergraduate loans. The plan requires undergraduate borrowers to repay no more than 5 percent of their discretionary income — 225 percent of earnings above the federal poverty line ($14,580 for an individual in 2023). People with debt for both an undergraduate and graduate degree would pay a weighted average between 5 percent and 10 percent.
SAVE forgives the balance of debts below $12,000 after 10 years. If you owe more, the repayment period rises by one year for every additional $1,000 borrowed before you hit forgiveness, up to a maximum of 20 or 25 years. For example, if you borrowed $14,000, it would take 12 years of payments before your balance is forgiven.
If you land a job at a nonprofit or in the public sector, be sure to check out Public Service Loan Forgiveness. The federal program offers debt forgiveness to people who work in public service for 10 years while making payments on their loans.
Enlisting in the military or working in a public service field?
There are a host of educational benefits tied to military service, including various student loan repayment programs. Enlisting in the Navy or Army will make you eligible for up to $65,000 in cancellation if you agree to three years of service.
Members of the military are also eligible for Public Service Loan Forgiveness, a federal program to entice college graduates to go into teaching, law enforcement and other public sector jobs. To qualify, people must make 120 on-time monthly payments for 10 years to have the remaining balance canceled. They also must work for the government or certain nonprofits and have loans issued directly by the federal government. And they must be enrolled in specific repayment plans, primarily those that cap monthly loan payments to a percentage of their income.
Got a new job or promotion?
First, congrats. A new position with higher income can help you pay off your loan faster, if that’s a goal. It could also increase your monthly payment if you’re on an income-driven plan. This is a good time to call your student loan servicer and check out the Education Department’s loan simulator tool that lets you see which repayment plan is the best fit.
Going back to college for a second degree?
If you are eyeing a second bachelor’s degree or a master’s, there are a few things to consider. Before you take out loans for graduate school, ask your employer if the job offers tuition reimbursement or tuition benefits to cover some of the cost. If you need to borrow and already have debt from your undergrad, you can defer your payments while you are in school.
Moving to a new state?
Your student loans may be the last thing you’re thinking about as you pack up your life and high-tail it to another state, but state-based loan forgiveness programs could lift some of the burdens of your education debt. Forty-seven states and the District of Columbia offer residents debt relief in exchange for work in public service fields, such as social work or teaching. Requirements vary from state to state, but many places have income caps and expect borrowers to live and work within their borders for several years.
Starting a business?
It can be harder to save money or access credit to launch a business when you have student loans. A high debt-to-income ratio can affect your creditworthiness while keeping up with your education debt payments can siphon off dollars to cover start-up costs. Still, you could lower your monthly payments through an income-driven repayment plan to save more cash.
Just lost your job?
If you’re facing financial hardship because of a job loss, there are a few options. You can postpone payments through forbearance, but keep in mind the interest will continue to accrue on your loans during the pause. Borrowers receiving unemployment benefits or actively seeking work can also qualify for an unemployment deferment in which payments are postponed without interest accruing.
Another option is to enroll in income-driven repayment, which could set your monthly bill at zero depending on your earnings. If you are already in an income-driven plan, be sure to submit proof of your loss of income. Your student loan servicer, the company charged with collecting payments for the Education Department, can walk you through your options.
Getting married?
While neither you nor your spouse is liable for each other’s federal student loans, your union could affect how much you pay a month. If you are enrolled in income-driven repayment plans that tie your monthly bill to your earnings, you could wind up with a higher payment.
One of these plans, Revised Pay As You Earn, will calculate your monthly loan payment based on your combined adjusted gross income and loan debt, regardless of how you file taxes. But that plan is being replaced by the new Saving on a Valuable Education plan, commonly known as SAVE, which excludes spousal income for people who file separately. Keep in mind that if you file jointly the Education Department could reduce your payments to account for your spouse’s education debt.
Some borrowers also are able to deduct a portion of their student loan interest when filing their taxes. But you could lose eligibility for the deduction if you and your spouse earn more than $165,000 together.
Still, combining households can also free up some cash to help pay off your loans faster, said Isabel Barrow, a certified financial planner with Edelman Financial Engines. “Marriage can reduce your expenses because now you’re looking at sharing a home, sharing utilities … and that can impact how aggressively you’re paying off your debt,” she said.
Having a child?
Kids are expensive and can drain your discretionary income. On the bright side, the more little people you add to your household, the lower your student loan bill could be on an income-driven repayment plan. Such plans calculate your monthly payments based on your earnings and family size.
The money you save on your monthly student loan payment could help fund a 529 college savings plan for the kiddo. However, before you pour money into a college savings plan, financial experts say parents should first look at paying down their student loans and saving for retirement.
“Focus on your own financial needs first,” said Monique White, head of community at Self Financial. “Then you can start saving for your kids. Your children can always borrow for college or you can borrow to help pay for their education.”
New moms and dads can also have their federal student loan payments temporarily postponed through forbearance while taking parental leave. Working mothers and parents on leave with loans originated before 1993 are also eligible for deferment.
Getting a divorce?
If you took out federal or private student loans before your marriage, the debt will not be considered a shared obligation upon divorce, unless you’ve indicated otherwise in a prenuptial agreement. Things can get tricky, however, if you took out loans during your marriage. That debt could be divided up based on factors such as your incomes, the length of your union and where you live. All communal assets and liabilities are equally split in the country’s nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Just like combining your finances can affect your student loan payments, separating them can, too. If you’ve been filing your taxes jointly while enrolled in an income-driven repayment plan, your monthly student loan payment could be reduced after a divorce because of your lower household income.
Want to help your child pay for college?
Your son or daughter has their sights set on a local community college, your state’s flagship or a tony private school in some bucolic setting. The money you’ve been socking away since junior was still in diapers may be enough to cover the entire cost. But if it isn’t or if you never had the financial bandwidth to save up, you still have options.
You can apply for a federal Parent Plus loan, which are often easier to get than loans from a bank or other private lenders. These federal loans do have origination fees and come with higher interest rates than the loans the government offers students. What’s more, debt forgiveness options for parent loans are not as generous or extensive as what’s available for students.
If you’ve built up a lot of equity in your home, you could also do a cash-out refinancing to tap some of that money. Borrowing not your jam? Many colleges offer installment plans that allow families to spread out payments over a certain period. You typically have to pay a fee to enroll in these plans.
Buying a home?
Your student loan payment history and the amount you owe can affect your ability to purchase a home. Missed payments can impact your credit score, while a high balance and monthly payments can make it difficult to save for a down payment and increase your debt-to-income ratio.
A high debt-to-income ratio could make it harder to qualify for a mortgage. As a result, financial planner Monique White at Self Financial suggests borrowers pay down as much of their student debt as possible before applying for a mortgage.
Buying a car?
Just like with buying a house, your track record of paying your student loans and amount of debt can play a role in getting financing to purchase a car. Falling behind on your education loans can hurt your credit and make it difficult to qualify for a good interest rate on a car loan. And owing a lot on your college loans can make it difficult to save up for a car.
Still, if you can afford it, set aside a few dollars a month to save for a car while making minimum payments on your education loans. And try to pay down your student loans to lower your debt-to-income ratio.
Wondering whether to consolidate or refinance your loans?
Student loans can carry interest rates that are often higher than what you can get on a mortgage or car loan with good credit. If you have a steady income and good credit, a private lender or bank can refinance your education loans to lower the interest rate. But there are trade-offs. Refinancing your federal student loans through a bank will mean you’re no longer eligible for federal repayment plans that offer loan forgiveness, said Isabel Barrow, a certified financial planner and director of financial planning with Edelman Financial Engines. The federal government also offers more options for borrowers having trouble keeping up with payments than do private lenders.
People with federal student loans can also consolidate the debt, but the interest rate on the new loan would be a weighted average of the interest on each loan. Say you have three loans with interest ranging from 6 percent to 8 percent. Once the debts are consolidated, the rate could stand at 7 percent. For people with older bank-based federal loans, consolidating into a Direct Loan could make them eligible for more federal forgiveness programs.
Facing high medical bills or another financial hardship?
If you are struggling with an unexpected big expense like high medical bills, you can request a temporary suspension of your federal student loan payments through forbearance. The pause is good for up to 12 months at a time, but if you are still in dire straights at the end of the term you can request another forbearance. There is a cumulative limit of three years. Keep in mind that interest will continue to accrue on your loans.
What if none of these apply?
For those without major plans on the horizon, it may be a perfect time to throw extra money at loans to pay them off faster. But before you attack your debt with every dollar, there are a few things to consider, said Isabel Barrow, a certified financial planner with Edelman Financial Engines. She said there is no need to pay down your debt quickly if you are eligible for loan forgiveness based on your military service or work in the public or nonprofit sector.
And if you’re not, you should take a look at your other non-education debts, said Monique White, head of community at Self Financial. She advises borrowers to first pay off any outstanding credit card debt to build or bolster their credit score, which will be a critical factor in future financial plans. Building an emergency savings fund should also be a top priority, she said.
After that, borrowers should turn their attention to retirement savings, Barrow said. If your employer offers a retirement plan, prioritize contributing at least as much as the company will match before making extra payments on your education loans. This is especially important for young workers who can capitalize on compound interest.
“Starting early with a 401(k) retirement plan makes it a lot easier to save over time,” Barrow said. “Ideally, we want young people putting in 10 percent [of their earnings], if not more. But if you want to get rid of your student loans quickly, you can still make that a priority while investing in your retirement by at least hitting the match.”
Illustrations by Janice Chang. Text editing by April Bethea. Visual editing by Reuben Fischer-Baum and Kathleen Rudell-Brooks. Copy-editing by Frances Moody. Additional support by Riley MacLeod, Tara McCarty, Kanyakrit Vongkiatkajorn, Julie Vitkovskaya and Ashleigh Wilson.
Credit: Source link
