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Repaying Your Student Loans

The time has come to pay back your student loans, now what? Dealing with student loan debt can be stressful and even frustrating for borrowers, however, now is the time to take control and alleviate that stress. First, create an inventory of your loans including loan type (private vs federal), balance, interest rate, payment amount, and repayment term. This can be done using your credit report through for private loans or for federal loans.

Once you have collected this information, you are able to develop a debt management strategy. First, determine how these payments fit into your budget. For those with extra funds, prioritize paying down the principal of the loan with the highest interest rate or pay extra on the loan with the lowest balance to increase future cashflow. Some may find it financially difficult to repay their student loans. In this case, federal loans offer options for repayment and possible forgiveness. Private loans have fewer options and protections, therefore, refinancing may be the only option to lower payments in these instances.

Types of federal loans include Direct Subsidized, Direct Unsubsidized, FFEL, Direct Plus, or Direct Consolidated. Federal loans have several repayment options. For those that can’t afford standard repayment terms, choosing the right repayment plan is critical. Under some Income-Driven Repayment Plans (IDR), remaining balances are forgiven, usually after 20 to 25 years or repayment. This forgiveness may be taxable and require additional planning. Public Service Loan Forgiveness (PSLF) is typically available for those in an IDR plan after 10 years or successful repayment and 10 years of service with a government or non-for- profit organization. PSLF requires the borrower to recertify their income annually. Direct Loans should only be refinanced if there is no opportunity for forgiveness.

The Coronavirus Aid, Relief, and Economic Security Act, (CARES Act) suspended payment, interest, and involuntary collection on Direct Loans. This provision, which is set to expire on January 31, 2022, increased cashflow for borrowers and allowed borrowers to receive credit towards their repayment plans. The paused payments count toward IDR forgiveness and PSLF as well as on time payments for those in Rehabilitation Plans. The CARES Act also suspended the income tax due on loan forgiveness amounts to 2025.

Resuming student loan payments may come with challenges. After 21 months, some loan servicers have exited the business. The remaining servicing companies are preparing for payments to resume and taking on new loans from exited servicers. An estimated 10 million borrowers will need to transition to a new servicer or are entering repayment status for the first time. With this in mind, borrowers should be proactive as January approaches. Your servicer will be in touch regarding your payment due date, but ensuring that your servicer has your correct contact information is paramount, as your first payment needs to be made on time. Another wrinkle will be the annual income recertification for IDR plans. Typically, this is done annually, however the system may be taxed recertifying so many borrowers at once.

Debt management is an important part of any financial plan. While student loans come with their own challenges, understanding what debt you have and the options available will help you develop a plan that works for you. Our team at CNB Wealth Management can help incorporate a successful strategy into your financial plan.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.