How to Eliminate your Student Loan Debt
Our Nation is $1.5 trillion in Student Loan Debt, only falling second in line to mortgage debt. Pretty much anyone reading this has fallen subject to becoming part of that number. We made the decision (most of us at too young of an age to understand) to sign that line. Most of us did not truly grasp, until years later once the payments start rolling in, how huge of an impact these federal loans would have on our lives. I am not here to debate any political side of this. I simply struggled through the first year of student loan repayment and will likely continue to do so until mine are paid off. So, I decided to try and help prevent others from making the same mistakes I, and others, have made. I gathered this information through experience, a lot of google searching, input from other professionals, and my financial advisors.
How do you know where to start when choosing a repayment plan?
There are seven repayment options for federal loan repayments. The most important things to pay attention to when deciding which plan is best for you are: do my loans qualify, what will my payments be, am I eligible, and what will my total payout be? It is critical to pay attention to these specifics of the plan that you choose.
I will condense the information in this next section with an example based on a starting total of $230,000; these numbers are rough estimates. I heavily encourage you to pay close attention to the difference in total paid under each plan:
Standard Repayment Plan essentially calculates your total plus interest in 10 years and makes your payments based off that number; your rate will be fixed under this plan. You will pay off your loans in 10 years exactly if you never miss a payment or pay any extra. This plan is not typically recommended if you are seeking Public Service Loan forgiveness (we will get to PSLF later). Under this plan, your monthly payments will be around $2,600 with your total amount paid over 10 years being around $310,000.
Graduated Repayment Plan is similar to Standard; however, your payments will gradually increase. This plan is not recommended for PSLF and is set up to have your loans paid off in 10 years, or up to 30 years for consolidation loans. Under this plan, your payments will start off around $1,500 and end up around $4,500 with your total paid around $330,000. It is important with this plan to be realistic with the amount your income will increase over those 10 years in comparison to the rate of inflation.
Extended Repayment Plan offers fixed or graduated payments based on a 25 year pay off. FFEL and Direct Loan borrowers must have >$30,000 to qualify. This plan is not recommended for PSLF. Extended Fixed payments will be around $1,400 and will total at around $450,000 paid. Extended Graduated payments will start around $1,200 and end around $2,500 totaling around $490,000.
*Revised Pay As You Earn (REPAYE) determines payments based on 10% of your discretionary income. If you are married, your household income and household debt are considered regardless of tax filing status. After 20 years (25 years for graduate studies) of on time and no missed payments, your loans will be forgiven; the amount forgiven will be taxed. It is critical to know that your minimum payments will not cover your interest accrued each month, which means your total debt will be increasing for those 20 years and then taxed once forgiven. Payments will start around $600 and end around $2,200 with total paid in 20 years at $370,000; total amount forgiven around $190,000 taxed at 25% will equal around $47,500 so your true total is $417,500. This is a good option for PSLF.
*Pay As You Earn (PAYE) determines payment based on 10% of discretionary income. This plan is similar to REPAYE, but you must be a new borrower. If you are married, your spouse’s income and debt will be considered only if you file a joint tax return. First monthly payment around $600 and last monthly payment around $1,800 with total paid in 20 years around $250,000; total amount forgiven around $270,000 taxed at 25% will equal around $67,500 with a true total of $317,500. This is a good option for PSLF.
*Income Based Repayment (IBR) determines payments based on 10-15% of your discretionary income. Your spouse’s income and debt will be considered only if you file a joint tax return. Outstanding balance will be forgive after 20 or 25 years depending on when you received your first loans. For standard IBR, starting payments around $900 and last payments around $2,600 with a total paid around $505,000. Under IBR for new borrowers, first payment around $600 and last payment around $1750 with total paid around $255,000; total forgiven around $265,000 taxed at 25% for around $66,250 with a true total of $321,250. This is a good option for PSLF.
*Income Contingent Repayment determines payments based on 20% of discretionary income OR the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to income. If you are married, your spouse’s income and debt will be considered only if you file a joint tax return or if you choose to repay your direct loans jointly with your spouse. Any outstanding balance will be forgiven after 25 years. Parent borrowers can access this plan by consolidating their Parent PLUS Loans into a Direct Consolidation. First monthly payment will be around $1,300 and last payment around $3,000 with a total amount paid around $400,000.
*Payments are re-calculated each year and must be applied for EVERY YEAR; if you fail to re-apply on time, you will be forced out of this plan and into the standard repayment plan. This will also allow interest capitalization.
General Tips and Tricks
Get a financial advisor – We have all gone to school for multiple things that are not finances. These advisors are trained to help us figure out our finances. Dave Ramsey endorses local professionals that do not charge for meeting with you- yes, it’s true; I meet with mine monthly! You can find an advisor near you at https://www.daveramsey.com/elp that is able to help with a plan for getting out of debt and planning for your future.
As decent human beings, we assume that these terms outlined are honest and guaranteed. Example: If I make those minimum payments for 20/25 years, the government will forgive the rest. HOWEVER, the government hasn’t had even a decent track record to date of keeping their word. During the first group of Public Service Loan Forgiveness (work for a nonprofit for 10 years and the debt is forgiven), 1% of applicants were approved for forgiveness. As of October 2019, 110,729 applications were submitted with only 1,216 approved. Let’s not rely on these statistics.
In each of the “forgiveness” plans, it is important to note that the amount forgiven will be considered income for you that year (with the exception of the PSLF). You will be taxed on the forgiven amount plus your income. It is expected to be paid back just as your yearly taxes are. If you choose to complete this repayment plan, you should save throughout the 20-25 years to prepare for the tax hit on the year you pay them off. It is also important to note that you are allowed to pay more than your minimum payment method; however, pay attention to which plan you choose. Some plans can charge a fee for paying over a certain amount. I have found it effective to pay all of my extra to the principal loan balance, which lowers the interest accrued each month following. Self awareness will be huge when deciding which repayment plan to use. If you know that you will remain disciplined, pick a lower monthly payment and knock out that principal. If you know you won’t pay that extra, pick a standard plan and set it up for autopay.
ALL income-based plans (PAYE, REPAYE, IBR, ICR) must be renewed each year; if you fail to renew, your interest will capitalize and you will be switched to the 10 year standard repayment plan immediately. Interest capitalization will also occur when you switch repayment plans, coming out of your “grace period, and coming out of deferment/forbearance. Interest capitalization is when they take the entirety of your unpaid interest and add it to your principal balance. From that point forward, all of your interest is accrued based on the new total principal. If at all possible, pay off as much interest as possible during your grace period to avoid the capitalization. I waited on the phone for over an hour to speak with a “supervisor” with FedLoans to get a full list of when interest can be capitalized. It has been over two weeks with no answers.
I don’t know much about Perkin’s Loans, but if your loans are Perkins, there is a Loan Cancellation forgiveness program for health care workers. You will fall under “nursing/medical technicians”. A therapist who is currently going through this program has had good results so far. It takes ~5 years to complete.
Two of the most common repayment strategies are Snowball and Avalanche methods. If you haven’t heard of Dave Ramsey, look him up. He is an incredible advisor with his books, podcasts, etc. and really takes a behavioral approach to paying off debt and building wealth. In his approach, you pay minimum payments on all loans and attack the smallest loan first. Once the smallest loan is paid off, whatever you were paying on that loan is now applied plus the minimum payment on your new smallest loan. This method provides the “YAY” each time you see a loan balance hit $0.00 (https://www.daveramsey.com/blog/how-the-debt-snowball- method-works). The Avalanche method attacks the loan that is accruing the most interest each month, or the loan with the highest interest rate, and then work your way down. This method typically shows the quickest payoff mathematically, but it requires a much higher level of discipline (https://www.nerdwallet.com/blog/finance/what-is-a-debt- avalanche/). Again, I would recommend getting a financial advisor to help you figure out which method will work best for you.
Another large debate many people find themselves in is whether to refinance or not. This is a risk/reward weight out. If you are going to refinance, only do so if the overall interest rate is lower AND the length of time that you will be paying is the same or shorter. Dropping the interest rate for a longer payout period could, and most likely will, overall increase the amount that you pay. When looking into refinancing, look into whether or not the company offers: autopay discounts, professional membership discounts (Laurel Road offers discounts for APTA members), and do they charge a fee for extra payments/paying off early?
The best thing that you can do for yourself with student loans is determine what is most important to you, how long you want to owe the government, make a budget, do some research, and get an advisor. You can never have too much knowledge of how this system works, so keep pushing to learn more!
Through trying to pay off my student loans, I have learned a lot about what to do and a whole lot about what not to do. My financial advisors have saved me from making huge mistakes. I recently changed repayment plans so that I could pay more per month; however, my interest capitalized. This sparked the creation of compiling all of this information. I would love for us to all come together and beat the system that is not created to help us.
*Please understand however that I am by no means a financial or student loan expert; I am just a somewhat new PT that is trying to put together information gathered from other health care providers and what I have learned in order to help answer some questions that I didn’t even know to ask. Feel free to like and share this and/or follow my IG @faithfitnessandfood where I’m planning to start throwing some physical therapy and financial tips in too. Everyone’s input and feedback is so appreciated. Keep it coming!
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daveramsey.com. (2019). A Proven Plan for Financial Success | DaveRamsey.com. [online] Available at: https://www.daveramsey.com/ [Accessed 7 Dec. 2019].
Myfedloan.org. (2019). MyFedLoan. [online] Available at: https://myfedloan.org/ [Accessed 7 Dec. 2019].
The White Coat Investor – Investing & Personal Finance for Doctors. (2019). Easy Refinance Student Loans Guides and Tools. [online] Available at: https://www.whitecoatinvestor.com/student-loan-refinancing [Accessed 7 Dec. 2019].