In the Money: Student Loans
It is 2019 and Americans are more burdened by student loan debt than ever. You have probably heard every scary statistic that there is about it but that pile of student debt has the potential to be a terrific investment. The Census Bureau calculated that a college education doubles the earning potential of a high-school diploma. For instance, over the course of your working life a bachelors degree is estimated to translate into $2.1 million in lifetime earnings, compared to $1.2 million for those with just a high-school degree. If you earn a master’s degree you will be at approximately $2.5 million and with a professional degree (MD or JD) you will have a lifetime earnings potential of $4.4 million.
I know student loan debt can feel more like a ball and chain than your ticket to riches but you are not as locked down as you may feel. You do have to pay back your student loans but lenders provide several payment options to give you flexibility.
YAY you graduated, what comes next?
Throughout your college education you took out student loans. The most common student loan is the Federal Stafford Loan. You may also have Perkins loans and if your parents took out loans, you will also have Plus loans. Since this is personal finance, I am going to focus mostly on Stafford Loans.
If you qualified for subsidized loans, the federal government paid the interest payments while you were in school. However, if took out unsubsidized loans, you had to pay the interest payments. Now if you did not pay any interest on the money you borrowed while you were in school and chose to have it capitalize (added to the original loan amount) then you will have to pay interest on top of interest once your 6-month grace period is over. If you do not know how much in student loans you have you can head over to National Student Clearinghouse or track down your loans through the National Student Loan Data System.
Pumping the brakes:
You may be able to get $5,000 of your Stafford loans forgiven if you agree to teach in a low-income public school (teacher forgiveness program). There are even cancellation options with a Perkins loan. In addition to the teacher forgiveness program, there is volunteer work in the peace corps, certain military service or law-enforcement as well as public servant, doctor and lawyer student loan forgiveness programs.
If loan forgiveness is not an option for you, you may be able to get a loan deferment. Deferring your loan will allow you to delay payment until a later date. If you have a federal subsidized Stafford loan, your loan will not accrue interest in deferment. However, with a unsubsidized loan while you don’t have to pay interest in deferment, all the unpaid interest will be added to the loan total.
Another option is to ask for a forbearance. With a loan forbearance you can get your payments delayed but during the time you are not making payments, the loan will accrue interest, whether its subsidized or unsubsidized.
Consolidation:
Loan consolidation can be a great solution for borrowers looking to make managing their loans easier and more convenient. Consolidation gives you the following:
one loan
one fixed rate
one monthly payment
one student loan servicer (of your choice)
no consolidation fee
You may also be able to maintain certain federal student loan benefits, including:
Flexible repayment options
Your grace period
Pay past due loans
Public Service Loan Forgiveness (PSLF) eligibility
You can shop around at banks, credit unions and other loan sources. If your loans are from a private lender that does not offer consolidation, you can ask them about different repayment options. Do your own research and determine which options are best for your particular situation.
Give yourself a break:
You may be eligible to deduct up to $2,500 in paid student loan interest from your taxes. Your loan payments are made up of principal (what you originally borrowed) and the interest rate your lender is charging you on the principal. The interest portion of your payments is what is eligible for the tax deduction.
Some lenders will reduce your interest rate by 0.25% if you agree to have your loan payment automatically deducted from your bank account each month. Paying on time can also help improve your credit score!
You can use Undebit.it to visualize and keep track of all your debts. Undebt.it is a free website that makes it easy to see when each one of your debts will be paid off by providing you with an amortization schedule. It also allows you to choose different payoff plans (snowball vs. avalanche) and as you record your payments, your debt balances and payoff dates will automatically be adjusted. This website is a great money-management tool!
You can pay off your student loans faster if you make more than the minimum payment every month. Paying off your student loan faster will save you money because you will not be paying extra in student loan interest. The Undebit.it calculators can help you see just how quickly these payments will pay off that student loan debt. For example, on a 10-year loan with a 4.5% interest rate, you would be debt-free six years ahead of schedule if you just paid an extra $100 every month!
There are a few ways that your day job might help you pay off your loans. Some employers have started to offer student loan assistance as part of their benefits package, it could be worth negotiating something into your compensation package.
I hope that you can now begin to see the light at the end of the student loan debt tunnel. By being strategic about how you pay off your debt, you can pay off your student loans much faster so you will not have them weighing on your finances.
Disclaimer: this is intended for informational purposes only and should not be construed as personalized investment, legal or financial advice. Please consult your investment, legal and financial professional(s) regarding your unique situation.