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Next Generation: Managing Student Loan Debt

M Caton 2014
Maria Caton, CFP®, ChSNC®, AAMS®
Senior Vice President, Manager of Financial Planning Services - Team Leader
[email protected]
(585) 419-0670 x50666

As spring approaches with anticipation of warmer weather, so too does a new crop of recent college graduates. Unfortunately, along with diplomas comes staggering student loan debt. Student loan debt is at an all-time high of over $1.5 trillion, having an exponential effect on people’s lives. Young adults are delaying marriage, having children, purchasing homes, and most importantly saving for retirement. How borrowers manage their student loans after college is critical to laying the foundation of their adult financial lives. 

The first step to managing student loan debt is to understand the loan(s). Who is the loan provider? What is the interest rate for each loan? And most importantly, are the loans government or private? Understanding these basic aspects can help set up a strategy for repayment. 

There are a few critical differences between private and government loans. The first is that the interest on government loans is tax deductible, while the interest on private loans isn’t always. Government loans allow students to make income-driven payments, as long as their income falls below a certain threshold. This is not typical for private loans. Some private loans offer variable interest rates, while government loan interest rates are set and guaranteed. Government loans tend to offer a variety of loan forgiveness programs, while private loans do not. Last but not least, government student loans are completely forgiven in the event that the student passes before the loan is paid off. The balance on private loans is typically charged to the student’s estate or is due by the surviving family members.

There are several government loan repayment plans. The most common are standard repayment or income-driven repayment. For individuals who find they have predictable income and are interested in paying the least amount in interest, standard repayment makes the most sense. If an individual has difficulty obtaining a job, or is in a job that pays a low wage, an income-driven repayment plan may be the best option. In some situations, it is possible to reduce payments to zero if the situation warrants it. There are four income-driven repayment plans: income-based repayment, income-contingent repayment, Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE).

Another option is the Public Service Loan Forgiveness program. This program forgives the remaining balance of government loans after 120 payments have been made under a qualifying repayment plan while working for the government or a nonprofit. Recent statistics indicate that a very small percentage of borrowers who have applied for PSLF have had their loans discharged due to not meeting the program’s strict requirements. It’s important to do due diligence in order to understand eligibility requirements.

Both government and private loans can have high interest rates and there are now many financial institutions that can refinance borrower’s loans, possibly at lower rates. If a borrower can get a lower interest rate by refinancing to a private loan, do consider: what if the borrower loses a job or becomes disabled? Will the origination fees offset some of the savings from the lower rate? 

It is critical to tailor a repayment program that can complement a retirement savings plan. For example, it is recommended to contribute at least the company match in a 401(k) plan so that you aren’t leaving money on the table. Interestingly, some employers are now adopting programs that pair 401(k) savings with student loan repayments. 

Understanding and organizing repayments for student loan debt can be overwhelming, especially when juggling other financial obligations. No matter what stage you or your family are at, CNB Wealth Management’s financial planning team can help you create a clearer financial path to your overall goals.

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