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
annualcreditreport.com for private loans or
studentaid.gov 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.
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