How to Pay Off Student Debt
All right, well we've wrapped up talking about consumer debt really with that focus on credit cards and now we are going to tackle the bane of so many people's existence and that is student loans and how we can get out of that kind of debt. So we're gonna kick if off with student loans covering how to find them in the first place. I know that actually sounds very strange, but you would be shocked how often people actually do not know the full situation. We just talked about with facing your consumer debt you have to know all of the information, the numbers, who owns it, where it is. Well and you can't do that until you find them. And for so many of us you had to take out multiple student loans from a variety of lenders in order to pay for college, so it can be confusing figuring out how to track them down. Then we're going to get into the difference between federal and private loans. This really also is a shout-out to anybody who is currently in college or maybe parents with children w...
ho are in college or just about to go to college, I really wanna get into the difference between federal and private and which one you really should give preferential treatment towards and max out before you turn to the other. Spoiler, it's federal. And then programs for repaying your student loans. What exists out there, what opportunities do you have depending on the type of job that you work or your financial situation in order to get a handle on repaying those loans in the first place? And then a couple of hacks, we all love a good life hack, so I will be talking about different ways outside of repayment programs that you can be paying down your student loans faster or kind of thinking back to debt snowball, debt avalanche and maybe coupling that with a couple new unique techniques. And then wrapping up with a little bit of doom and gloom, but what does happen if you don't pay your loans. So first, you gotta start by making a list. Again, facing the numbers. And you have to know who your lender is, the outstanding balance due, so that principle balance of your debt, what your monthly payment is that you're required to pay every single month. I want you to know the interest rates on all of those loans. And then what type of loan is it? Is this a federal loan or is this a private loan? And in addition, what type of payment plan am I currently on? Now generally the default is a standard 10 year repayment plan, unless you've gone ahead and signed up for something else, but you just wanna double-check and make sure you understand the terms of your loan and exactly the repayment plan. And if there's any confusion about that please reach out to your student loan servicer, so whoever owns that loan, get in touch with them and ask them what the situation is. But generally when you log in that information should all be right there for you. But where do I find them? Well for federal student loans you can go to the National Student Loan Data System, which is at nslds.ed.gov. What you are going to need is your Federal Student Aid number in order to log in. If you don't know what that is you could ask your parents, maybe your parents have that information for you, or whatever legal guardian may have helped you sign up for loans in the first place. And if they don't just say you forgot and the system will help you figure it out for you. Now private student loans are not gonna be housed in there, that's just a government-backed website that's only linked to federal loans. So one option for private loans is actually to pull a copy of your credit report. Since this is a private loan it should be getting recorded onto your credit report. And again, with annualcreditreport.com, as I mentioned in the credit scoring segment of this bootcamp, that is a government-backed website, it is not going to ask you for your credit card information, it is totally free, and you by law are entitled to a free copy of your credit report from each of the three bureaus. So that being Experian, TransUnion, and Equifax, once per year. So you can get in there, look at your different credit reports, and see if there are any private student loan lenders on there of which you may have been unaware to begin with. Finally, ask your parents or legal guardians. Maybe they have information about loans that were taken out in your name. Another reason I highly encourage you to ask them is maybe they took out loans for you, such as a Parent PLUS loan, in order to help get you through school and they might be expecting your help in repaying that. So you wanna make sure that all of that information is something that you have as you're getting ready to formulate your attack plan on paying off student loans. So federal versus private. As I said as a little bit of a teaser in the what we're covering, federal student loans are always the better option. So you want to prioritize maxing out those options first before you ever turn to a private loan to fill in the gaps. Now the reason federal is better is because there are certainly more repayment options for you as you're going through the years out of college trying to repay them. And I'm gonna dig into what all of those are during this segment. There are even forgiveness programs, so if you pay your loans for a certain period of time the remainder is going to get forgiven. The interest rates are often lower, not always, but often if you're talking about loans that you took out while you're in college. There are the opportunities for subsidized loans, which means that the government is going to be paying the interest that accrues while you're in school. This is one of the best options for you, because it reduces the amount of interest you're going to have to pay over the life of your loan, so that's a really great opportunity if you can get it. And then there's the option for things like deferment or forbearance. And those are opportunities for you to essentially press the pause button on paying your student loans if something comes up, a temporary hardship, maybe it's a medical emergency or for some people it's also deployment if you're in the military, there's different reasons why your loans might be deferred or in forbearance or if you've gone back to school could be another reason you get your loans deferred. So that's an opportunity that you can have with federal. You can't just say, I declare forbearance. You have to actually apply for it, so that is something that you need to know. You can't just call them up and let them know, you have to go through the process with your servicer of applying. But if you have something that comes up in your life and we all have those moments, it's great to have the option. Another big one, and it is a little bit morbid, but I wanna touch on this a couple different times throughout this. Federal student loans will discharge in the case of your death, which means that if you die, especially very prematurely and your parents are still alive, they're not going to be on the hook to pay off that debt. It just gets forgiven by the government. Private loans are a little bit different. Usually they have higher interest rates, especially if you took it out in college. I've even heard scenarios of people paying what would really be credit card level interest rates on student loans. I spoke to a woman once who was paying about 13% on her private student loan. Now that's obviously not necessarily the norm, but that's a huge interest rate to be paying on a debt for college. There are fewer options in the case of hardship. This is unique to different private lenders. Some of them are starting to offer some forbearance options, but it's pretty rare. Again, you have to reach out to them directly and talk to them if that's a situation. It also may require a cosigner for you to get a private student loan. And a cosigner is somebody who essentially guaranties that you're going to make these payments and that if you don't your lender can turn around and go to the cosigner in order to recuperate the payment. And they say like hey, this person owes us $300 a month, they haven't paid for six months, probably less amount of time before they come calling, so you, cosigner, owe us this amount of money, and you need to keep making these payments, because you vouched for the person that took out the loan. Now that's why I bring up this idea of debt not being discharged in the case of death. With some private lenders they do not discharge the debt in the case of your death, which means that your cosigner is now on the hook. And there have been some really horrible stories that have come out in the news over the past few years of a child dying young for whatever circumstances and the parents now being responsible for it could be 40, 50, $60,000 of debt. And because they were the cosigner, and of course, if parents are also phasing towards retirement that could have completely annihilated their ability to actually pay for retirement. Now one thing too that I want you to consider is if you currently do have a private student loan that is cosigned and if your lender does not discharge in the case of death, you could consider getting a term life insurance policy. This is a very easy, vanilla life insurance policy. You can get it for the amount of money that your cosigner has cosigned on your student for. Generally this is probably only gonna cost you about 15 to 20 bucks a month in order to have the policy, so if something did happen to you you'd list your cosigner as the beneficiary, so they inherit an amount of money that can then pay off the debt. Just something for you to consider if you have cosigned debt. Now what are the repayment options? You have found all of your student loans, you've written your list, and now it's time for you to evaluate your options. We're going to work through for federal and for private as well. But let's kick it off first by talking about the option of consolidating. Now this is looking more towards federal student loans. There's something called the direct consolidation loan where what you're going to be doing is bundling all of your federal student loans together into one easy payment. Generally what's going to be happening is that it's a weighted average of your interest rates. Now I wanna take a pause here to think about debt snowball and debt avalanche. Sometimes people choose not to consolidate their debt, because they want to use debt snowball or debt avalanche to attack their student loans, and so by consolidating if you had a student loan that's maybe at a 2.5 or a 3% interest rate, you've got some gloriously low interest rate, well if you consolidate it with something that goes up to 5% you kind of lose that edge of doing something like a debt avalanche. So if you're in a scenario where you don't really care to have one easy monthly payment, you wanna attack it with debt snowball or debt avalanche I recommend not consolidating, 'cause that's gonna do a weighted interest rate average. One thing though that you do need to know about consolidating is that if you want access to any of the income-driven repayment plans or forgiveness programs for federal student loans you're required to go through consolidation to get them onto one easy payment in order to be eligible for those programs. So if you're somebody who wasn't going to take advantage of those programs anyway maybe that's when we use debt snowball or debt avalanche, as we spoke about in the consumer debt segment, in order to pay them off. Now what is an income-driven repayment plan? There are a variety of options available to you. Four of the main ones being Revised Pay As You Earn, Pay As You Earn, Income Based Repayment, and Income Contingent Repayment. Each one is a little bit different in terms of how many years you have to pay on it and the amount of discretionary income you have to pay. But what they're doing is they're capping your monthly payments in relation to your income. So that if you owe a lot of money in federal student loans, but you're not making a whole lot of money it gives you a little bit of breathing room month to month, which ties back to the idea that we talked about yesterday of if you're looking to give yourself a little bit of breathing room in your monthly budget, because you're trying to achieve other financial goals, maybe saving in that emergency fund, going on an income-driven repayment plan could be a way to do that. So here's an example of what one looks like. This is the most recently launched option called Revised Pay As You Earn. So generally your monthly payment is capped at 10% of what is known as your discretionary income, I'll explain what that is in a minute. You have to now make payments for 20 years on undergraduate loans, or 25 years if it's for graduate or professional studies. And it's available to any borrower with eligible federal student loans. And like I said, you do have to consolidate those loans through the direct consolidation in order to go on one of these plans. And I mentioned a little bit earlier that the standard repayment plan is 10 years, but going on income-driven repayment extends you out to 20 to 25 years. But first let's talk about discretionary income. It's basically a big word for this formula that still sounds very complicated, but it's annual income minus 150% of the poverty guideline for the family of your size in your state of residence is discretionary income. You don't have to do the formula, it's okay, the servicer is going to do it for you. But I just wanted to let you know what the formula is, so that you understand how they're going to be calculating what your discretionary income is and then capping at 10% of that for your monthly payment. So this breathing room that you're gonna get in your monthly payments does come at a cost, quite a literal one, because like I said, standard 10 year repayment plan, but if you're expanding it out to 20 to 25 years that means you're paying a lot more in interest over the life of the loan. Now a perk of income-driven repayment, especially if you have a lot in federal student loans, is that at the end of that 20 to 25 years the remainder gets forgiven. So anything that you're still paying gets discharged. But it could be that you're 23, recently graduated, and you're making payments until you're 43 years old and that's when you're going to have it discharged. Just something to think about. Another option is maybe it's just what works for you now, you need that breathing room right now, but in four or five years you're gonna be in a different financial situation and you can start to pay them down more aggressively and just get rid of that debt, you don't have to stay on it for the full 20 to 25 years. That's not some sort of requirement and they're not gonna be charging all those nasty interest, precomputed interest charges and prepayment penalties that I talked about in the consumer debt portion. Now income-driven repayment plans are tied to your income, so as you earn more in your career your monthly payments are going to be going up. You're going to be required every year to essentially reapply. You have to give the information that's going to get pulled off your tax return to see how much money you're now making, so you're going to see that you inch up each year as you earn more in what you're gonna owe. So that's something that you have to account for in your budget as well. You also should be filing paperwork along, all the way along for any of these plans, just to make sure that if you're gonna get debt forgiven at the end you wanna be on the right track. I'm gonna come back to that idea shortly. Another thing is if you get married and if you are tax, if you do your taxes filing jointly your spouse's income is now gonna count. So you can see that it's possible your monthly payment's gonna all of a sudden skyrocket, because you have a whole other person's salary being weighted into the calculation that they're doing. For a lot of these programs there is a rule where it's not supposed to exceed what you would be paying on the standard 10 year repayment plan, so also in that case you might just wanna default back to your standard 10 year repayment plan depending on your particular financial situation. But just know that in year one if you're not making a ton of money, you've got a lot of debt, and you've got great breathing room that's not exactly the payment you're gonna be paying for the duration for 20 to 25 years. Now student loan forgiveness programs are another option for you as well. So here you do have to have your loans on an income-driven repayment plan in order to even be eligible for forgiveness. So you have to go through everything I just spoke about, pick your income-driven repayment plan, and then you'll be eligible for forgiveness depending on your job. So public service loan forgiveness is typically the one we speak about the most when we refer to forgiveness programs, also known as PSLF. So here's what you need, first you have to maintain a qualifying job in public service for 10 years and you have to make 120 payments on your loan. And that's not biweekly payments, it's every month for 10 years you have to make a payment. You can't try to shorten the timeline to five years by doubling down on how many times you're making payments. The next thing you need is to make sure that your loans are on that income-driven repayment plan in order to be eligible. You need to submit at the end an employment certification form to prove that you have been in a qualifying job all the way through for the last decade. They don't actually require you to submit that until the very end. Do it every year, have this form updated every single year, because what happens if 10 years down the road you're trying to find the manager that you had in year two for a job that was eight years ago. That manager might not be there anymore, it could be hard to track it down. Maybe you even worked for a nonprofit that no longer exists. So that's just incredibly stressful, stay on top of your paperwork as you go. And at the 10 year mark, if it all goes well for you, any remainder on your loans are going to be forgiven and they are supposed to be forgiven in a way that doesn't trigger any sort of tax penalty. There is still conversation about income-driven repayment plans if the amount that gets forgiven is going to have taxes charged on it, we're not totally sure yet. Depends on the administration at the time perhaps. But do keep that in the back of your mind as you near that. It could be 15 years, 20 years from now, you might wanna be saving some money for perhaps a much heftier tax bill that year. So here are some of the qualifying jobs for public service loan forgiveness. Eligible jobs include government organizations and this is at any level. So it could be federal, state, local, or even tribal as well. Non-for-profit organizations that have a 501(c)(3) tax exempt status. And there are actually some non-501(C)(3) companies that still have a primary purpose of providing a qualifying public service, but if that's the kind of company you work for you really wanna triple-check that you are actually eligible before you bank on that. Again, if you're not sure, be sure to ask. It's much better to ask than assume. Another thing that I wanna talk about briefly, if you research this program you might see that a lot people have been rejected. This program didn't start until 2007, so the first wave of eligible applicants just came up last year in 2017, but it had an incredibly high rejection rate of people who had relied on this program to forgive their student loans and then the government said, eh, no, you're not eligible. There's a variety of reasons this happened for people. One of them was they didn't actually work in a qualifying job, either all the way through or at all. Another big one was they thought that their loans were eligible and they weren't. Or they were not enrolled on an income-driven repayment plan. They were on some other form of a repayment plan that wasn't actually eligible for PSLF. So if you are going to do this one, make sure you do a deep dive on your particular loan situation and make sure that everything is eligible. And keep on top of that paperwork, because I think that's another thing that's easy to go wrong, you're missing one signature from one person at one point in your career and that could be a reason for getting rejected. You might not be able to track somebody down, you might realize the job no longer qualifies. So please make sure that you stay on top of it in order to actually get forgiven. And again, be sure you're enrolled in an income-driven repayment plan. And like I said, those 120 payments are 10 years worth. You can't double down and try to pay more in a month in order to get out of that faster. One of the other eligible options is teacher forgiveness programs. This varies on the type of teacher that you are. It's $5,000 to $17,500 in forgiveness. You do have to teach full-time for five complete, consecutive years in a low-income school or educational agency. There are resources online where you can research and see if your school is eligible and find out if your particular school is eligible for you to get forgiveness. And the reason there's such a range is that higher number, that $17,500, is only for what they consider highly qualified full-time teachers who generally are math, science, or special ed. Teachers in any other academic field would typically only get $5,000 of forgiveness or if you think about it, $1,000 a year, 'cause it's only at the end of five years that you would qualify. There are certainly other forgiveness programs, doctors, nurses, even lawyers, depending on the kind that you practice, where you practice, the kind of community that you serve. And a lot of these can be unique to your state. So I do encourage you to look up the resources that could be available depending on where you live. There are also a lot of scams when it comes to student loans. I know I have gotten robo calls telling me that I'm eligible for a debt relief program from the President at least five times in the last couple of years. I'm sure you all have experienced something very similar. So just know that you never, ever need a third-party service in order to sign up for these programs. These programs are available to you through the federal government. Just go up through your servicer, sign up that way, sign up on the website. Never, ever pay someone in order to sign you up, because what's happening is they are taking money out of your pocket that could easily be going to getting you out of debt faster. So somebody calls you and tells you, hey, I've got this new program, you're eligible for it, I can sign you up, make it nice and easy for you. Be like, no thank you, I can turn to my servicer directly, I can sign up myself and take that extra money and put it towards my student loans. Before I get into talking about refinancing, do we have any questions specifically on forgiveness or income-driven repayment plans? If anybody tuning in has questions feel free to pop them into the chat room as well.
All right, we have one question from Johari, who is on an IDR plan and says, can I still make payment towards my student loan, even though I don't have to pay anything a month?
I'm curious why you don't have to pay anything a month if you're on an income-driven plan. Maybe you're in deferment, so perhaps you're back in school and you went into a deferment or something like that. You can always be making payments. If you're in college you're still in deferment most likely, you can be making payments. It's not gonna trigger anything. And that's actually going to be a great strategy for you to get out of debt faster and reduce the amount of interest that you're going to be paying. So if for some reason it's telling you you don't owe any money and you still have an outstanding balance and you have the money to be making payments, I say, go for it. It's gonna get you out of debt faster.
Yeah, and Johari had said, I'm not required to make a monthly payment, but they are still charging me interest. So don't know--
It sounds like you're likely in deferment then, so they are charging you interest, because it's an unsubsidized loan. And while you're not required to, if you have the financial wiggle room to do so, heck yeah, start paying those down now. It's gonna be something you are so grateful that you did in the future for sure.