Cracking the Code on Student Loan Repayment

Federal and private student loan debt have hit a crisis point in recent years. Over 42 million people in the U.S. carry student debt, and the total amount owed — almost $2 trillion — has tripled in less than 20 years.

And while progressing financially may seem impossible when you have a mountain of student loans, there are opportunities to lessen the impact this debt has on the rest of your finances.

The common thread of both federal and private student loans is their complexity when compared to other forms of debt, such as mortgages and car loans.

While federal student loans offer conventional repayment plans that pay off loans in full during a given period, some repayment options can have varying terms. For example, the monthly payments increase every two years under plans like the Graduated plan, and even for options like the Standard plan, whose payments never change, the repayment period for borrowers can vary based on the amount owed.

Differing Payment Plans for Federal Loans

For federal loan borrowers with low incomes, high loan balances or both, Income Driven Repayment plans offer loan forgiveness for any remaining balances after a certain period of time (20, 25 or 30 years depending on the payment plan). Public Service Loan Forgiveness, a program available to employees of eligible nonprofits and government entities, offers loan forgiveness after 10 years for borrowers who meet certain requirements, such as using an IDR plan to pay their loans.

With IDR plans, there is no limit to the amount that can be forgiven. Your adjusted gross income is a large factor in calculating payments under each IDR plan. You may want to keep your AGI low while in repayment, but that could mean altering other financial plans, such as making Roth retirement contributions, which could be beneficial in retirement but won’t decrease AGI during loan repayment.

Different Rules for Private Loans

For those with private student loans, their journey is just as unique. The goal with private student loans is to find the best repayment terms regarding interest rates and repayment periods, and there are tools to secure them that are unique to private student loans.

Private student loan lenders will show you tentative interest rates and loan terms with a soft pull of credit. That allows borrowers to evaluate different offers without damaging their credit score. Generally, there are also no origination costs to establishing a private loan, meaning it can be refinanced multiple times without increasing the loan balance. These features encourage private loan borrowers to be proactive in checking interest rates to see if they might benefit from a potential refinance.

Make a Plan for Student Loans

To integrate a student loan strategy into a financial plan, borrowers should take time to:

1. Review the terms and repayment options for their federal or private loans.
2. Consider what other areas of their finances (taxes, retirement investments, employee benefits, etc.). may be impacted by certain student loan actions.
3. Determine a repayment path that complements your financial goals (i.e., paying off a loan in full or planning for loan forgiveness).
4. Take advantage of opportunities that benefit your strategy (decreasing adjusted gross income, falling interest rates).

Student loans can be a significant burden on the finances of borrowers, and it takes knowledge and a comprehensive strategy to keep them from damaging the rest of your finances. Working with a CERTIFIED FINANCIAL PLANNER® professional can help ensure your student loan decisions are coordinated with the rest of your financial plan — such as taxes, retirement savings and long-term goals — rather than made in isolation. But when managed correctly, these loans can be a bump, instead of a boulder, on a borrower’s journey to wealth.