As we briefly covered last week, the student loan landscape is a vast and unfriendly place. You’ve probably heard the phrase “never accept a first offer.” When it comes to taking on a repayment plan as assigned by your loan servicer, this can be a sound approach to considering your options. As you already know, there are a variety of different repayment options and they all have their own nuanced stipulations.
There are plans that require the full loan balance to be repaid. There are plans that require only a certain number of payments be made. There are plans that forgive the balance after a certain point at which time, depending on your plan, it may or may not be taxable. Many plans have limits on the monthly payment amount – but not all of them. In fact, there are circumstances in which you could select an income driven repayment plan and end up paying more than you would have in the standard repayment program. Each repayment option has its own provisions for interest capitalization, changing into or out of the plan, and how it may look at your income in determining the payment. The point is – there is a LOT to consider.
Let’s try focusing on three frequently asked questions about student loans and why the complicated answers to them make the need for a trusted financial planner even more crucial to borrowers.
- Q: Do I pay off my loans early or do I plan to let them be forgiven?
A: Like most answers to student loan related questions, it depends. As a general rule, if you have a high income to debt ratio then it could be in your best interest to pay the loan off early and save yourself the extra interest you’d have paid. If there is a low probability of you ever paying off your loans given your lifetime earning potential and total debt balance, then you may need to plan for when that balance is forgiven instead. That means don’t waste time throwing extra money at a loan you’ll never pay off anyway when you can be strategically planning for the tax bill instead. If you’re in the Public Service Loan Forgiveness plan you may not owe taxes on your forgiven balance but, as always, there are strict stipulations that must be adhered to along the way in order for that strategy to work properly. An advisor with training in student loan planning can best advise you on your own situation and how to proceed in your best interest.
- Q: Should my spouse and I file our taxes separately or jointly to get a better monthly payment?
A: As always, it depends. There are certainly available strategies in which your financial planner can help lower your monthly payment by implementing a plan that benefits one or both of you by filing separately. However, there are trade-offs. You can lose benefits on the deduction and income phase out side of the equation that many borrowers count on annually to reduce their taxes. Having the right financial planner and CPA on your team can make all the difference in evaluating your family’s options.
- Q: Should I consider consolidating my loans?
A: If your loans are federal, this is a path that should be carefully considered before proceeding. There are instances when the federal consolidation option can be in someone’s best interest, such as under certain Public Service Loan Forgiveness strategies. However, it’s not always advisable and should be evaluated closely before proceeding. By reallocating from federal to private loans you lose access to the loan forgiveness provisions, income driven repayment options, and open yourself up to a host of potentially catastrophic loan call provisions that many people fail to understand upon this type of consolidation. Your best bet is to talk to your financial planner BEFORE you make any decisions so that she or he can best advise you on this.
So what can we conclude from this borrower’s nightmare? Get help! There’s so much to consider and every decision you make has potentially far reaching, long term consequences to the rest of your financial plan. If you’re convinced you want help but don’t know how to work the cost into an already strapped budget, check back next week for Part III which will cover best spending practices that can help you work this relationship into your plan.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Fish and Associates is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.