Graduating college is one of life’s most exciting achievements; but with the burden of a student loan repayment issue, it can also be one of the most stressful. Many of our clients count themselves among the seventy percent of graduates who borrow money to finance their education.
Facing your student loan repayment.
As soon as your diploma is in hand, the repayment process must begin. Starting your professional life under a mountain of debt may feel overwhelming, but with a clear understanding of the repayment process, smart budgeting decisions, and early financial coaching, it’s possible to pay off your student loans with minimal stress.
Student loan forgiveness is an option.
If you work for the government, a nonprofit, or in education, you may qualify for student loan forgiveness. Public Service Loan Forgiveness requires that the graduate make the first one hundred and twenty loan payments and work for either a government agency or a non-profit at least thirty hours a week. Teacher Loan Forgiveness requires that the graduate work at a low-income school for five years. Once qualifications are met, the remaining balance of your student loan is forgiven.
A caution about student loan forgiveness and taxes.
Many clients who receive student loan forgiveness have the same question: “What does this mean for my taxes?” While many canceled debts are taxed as income, student loan forgiveness is not. The exception is if the loan is forgiven in exchange for services provided to the institution that issued the loan. Before you make a decision on any type student loan forgiveness offer, talk with us about tax planning and financial coaching. Sound financial advice is critical to your long-term financial planning and success. We’ll help you.
A single monthly payment helps relieve student loan stress.
Many students accumulate multiple loans over the course of their education. When it’s time to start paying, there are multiple options. These could include:
- Consolidating those smaller loans into one large one.
- Refinancing through private lenders who may offer a much lower interest rate than the original loans. While federal loans can’t be refinanced, they can be combined into a Direct Consolidated Loan.
Having a single loan with one monthly payment ultimately saves money and cuts back on the stress and confusion of student loan repayment. Remember, refinancing or changing your loan from its original federal student loan status to another type of loan could change the loan from a student loan to a conventional-type loan. This is another issue to talk with us about.
Choose the student loan repayment plan that works for you.
You’ve decided you need a student loan repayment plan; now what? Currently, there are four federal student loan repayment plans available to choose from:
- The Standard Repayment Plan is the fastest repayment option available. The payments are fixed and may be spread out over ten years. While this option costs the least over the lifetime of the loan, it isn’t a feasible plan for all graduates.
- The Graduated Repayment Plan could be the right choice for graduates who can’t afford high monthly loan payments as they begin their careers. This plan offers monthly payments that begin low and increase every two years, providing a more stable income to debt ratio throughout the graduate’s career.
- The Income-Based Repayment Plan is another option. The Graduated Repayment Plan assumes that the graduate’s income will increase as years of career experience are gained, but we all know life doesn’t always work out the way we plan. If you find yourself in unexpected financial trouble, the Income-Based Repayment Plan may be an option. Under this plan, your monthly payments are recalculated every year and do not exceed fifteen percent of your income. While an Income-Based Repayment Plan won’t help you pay off your loan quickly, it could help ease the financial burden of your student loan if the unexpected happens.
- The Extended Repayment Plan might be an option if you owe more than thirty thousand dollars in student loan debt. This plan allows for lower payments over a longer period of time, up to twenty-five years. Like income-based plans, extended plans won’t hasten your loan payoff, but will ease some of the stress of loan repayment.
What about loan deferments and forbearance plans?
Loan deferments are available for graduates who are continuing their education or serving in the military after graduation. A deferment pushes the start date of your student loan repayment plan. During deferment, the loan does not accumulate interest.
Forbearance may be issued to graduates who are unemployed or unable to make their loan payments for other reasons. This plan also pushes back or suspends loan payments, but it does not halt the accumulation of interest. Forbearance is a tempting but, ultimately, costly solution for managing student loan repayments during times of financial distress.
Pay off your loans early, regardless of which student loan repayment plan you chose.
There’s no overnight, “quick-fix” solution to repaying your student loans, but there are other things you can do to speed up the repayment process, regardless of the payment plan you choose.
- Make a budget and stick to it. Until your student loan is repaid or you qualify for student loan forgiveness, the monthly payment is going to be a fact of life. Plan for it and base other financial decisions around making the payment.
- Live within or below your means. Keeping to your budget, especially as you start out in your career, will require you to live within or below your means. Don’t rent an expensive condo when you can live comfortably in a studio for a fraction of the cost. Cutting back on major expenses like rent will help ease the burden and stress of your student loan payment.
- Pay more than the minimum monthly payment. If your monthly student loan payment is $275, round it up to $300. Extra payments toward the principle of the loan, even small ones, decrease the total cost of the loan and allow you to pay it off faster. Remember, whenever you pay more than the stated payment each month make a notation that the additional dollar amount is to be applied to the principal. Most payment forms will specify “additional principal” but if that’s not the case, it could be applied the total amount of the next payment.
- Put all “unexpected” money toward your loan. It may be tempting to spend bonuses and other unexpected money on something special, like a hard-earned vacation or an extravagant gift for someone you love. But if you put the money toward your student loans, you’ll be free of the debt much faster.
Not all student loans can be consolidated. For instance, if you have both private and federal student loan debt, you will have at least two monthly loan payments. If this is the case, apply the above tips to the loan with the highest interest rate.
Now is the time for you to consider long-term life and financial goals, and paying off student loans is just one part of the strategies you’ll begin putting in place.
As your CPA team, we’re much more than number crunchers and tax preparers. We establish and maintain a personal and business relationship with each of our clients. We know that Your LIFE Is Your Business, and we take your life seriously.
What’s the bottom line?
Financial coaching can be the transformational platform to change your life. Contact us. Let’s open the discussion with student loan repayment options or anything else you want to discuss. That’s what we do.
Contact Melanie Radcliff CPA, Inc.
Call 479.478.6831 or send us an email.
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