OK so I have graduated from college, now what is the most efficient way of paying off my student loans?
I have received a few questions about the best way to repay my student loan.
PS – DON’T MISS THE WARNING AT THE END OF THIS!
Please note that there are pro’s and con’s to each option of paying off your loan and will affect each family’s unique circumstances differently, so we would suggest that you consult with a financial professional that is familiar with College Planning before deciding what you want to do so you can to see what the impact is on your greater financial plan long term.
Refinancing my loan
It might or might not be in your interest to refinance your student loan. We encourage everyone to always do the math and consider all options (including whether the interest will be tax deductible or who will have to cosign) before they refinance.
This can become quite complicated as most students end up with a number of different loans with various conditions and rates by the time they leave college. Terms will depend on your credit score and ability to repay as well as who might cosign on the loan.
Make sure that you know what you are leaving, before you go to another loan and what that might mean for you – the grass is not always greener on the other side.
If you are going to cosign on a loan as a parent (which obviously includes risk) or help someone with payments, it might make sense to look at other options like a mortgage or HELOC when you take all the numbers and consequences into account.
Without endorsing any company, here are some people who are currently advertising that they refinance student loans. Please understand all the fine print before making any choices.
https://www.sofi.com/refinance-student-loan/
https://www.lendkey.com/private-student-loans/?sk=organic
https://www.citizensbank.com/student-loans/education-refinance-loan.aspx
Federal Student loan options:
Income based repayment
This type of repayment allows you to base your payment on how much income you earn, and then adjust as you earn more.
Income-driven repayment plans help borrowers keep their loan payments affordable with payment caps based on their income and family size. There are now four types of these plans available: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and Income Contingent Repayment (ICR).
Your monthly payments will go change as you move forward and will depend partly on your income and the size of your family. As your income increases, so could your payments increase.
See more at StudentLoans.gov
Loan forgiveness
The loan forgiveness programs could be valuable depending on where you think you will be working and for how long. Public service employees can qualify for full loan forgiveness after making 10 years of monthly payments on their federal student loans. Those in the private sector must make 20-25 years of monthly payments on their federal student loans to have their remaining balance wiped away.
Ask your loan servicer for complete details about how to take advantage of this program. Here is some guidance:
- Government, military service, emergency management, public safety, law enforcement, public health, public education. (In addition, military personnel on active duty will be able to defer payments on their loans, and service members who are returning to civilian life will be able to defer payments for more than a year.)
- Social work in a public child- or family-service agency; public interest law services, including prosecution or public defense or legal advocacy in low-income communities for a nonprofit organization; public child care; public service for individuals with disabilities; public service for the elderly.
- Public library sciences, school-based library sciences and other school-based services.
- Certain employees at nonprofit groups, as defined by the tax code, and full-time faculty members at tribal colleges or universities.
CAUTION:
Although the loan forgiveness programs sound tempting, each person should do ALL the math and weigh up their career options and what their limitations might be in order to seek loan forgiveness. I have seen a number of people with potential to pay off their student loans much quicker than using a loan forgiveness program because they have not limited themselves to a career within the confines of the program.
It could be MUCH more lucrative to earn an extra $20,000 – $50,000 a year and rather pay off your entire student loan than to restrict yourself to a career where you will be earning less and beholden to someone else just because you want loan forgiveness. Bear in mind that today very few people work for the same company and even in the same industry for 10 or 25 years.
See a financial professional who understand all the options and could work out the math and consequences for you before you make a decision.
Example: Recently I had a client who was offered a loan forgiveness program. At first it sounded pretty good to him – Until we did the math and read the small print!
He was told that for his current $120,000 outstanding with his various loans, that he would only have to pay a percentage of his income for 10 years, but these payments increased and the eventual loan forgiveness amount would be a total of $77,000. At that point he would be hit with a tax consequence for the loan forgiveness amount. His starting payment would be $418 per month, but it would eventually end with an estimated payment of $1,324 per month.
In the meantime the interest rate that was accruing was pretty steep with an effective rate of 6.5%
Although every situation is unique, we were able to come up with a plan that beat the forgiveness plan by $40,000 and still give him the flexibility to work wherever he wanted to.
Dave Coen is CEO of College Planning America and a Registered Representative – Sageview Advisory
714-813-1703 davec@collegeplanningamerica.com
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