The rules and repayment options available to graduates with student debt changed in 2015, as a result of a Memorandum issued by President Obama.
I wish financial experts would educate themselves about the new rules and stop scaring graduates about their student loan debt. One expert went all the way to say one should put off retirement planning completely until student loans are paid off. This type of information is misleading and can hurt the financial future of an unknowing student, who may take it literally.
So, why am I concerned?
On a daily basis, colleagues share with me the anxiety they experience surrounding their student loans. I often shake my head in disbelief, because their rent payment (or mortgage), car payment, phone bill and utility bills, due every month, should elicit more anxiety than that of federal student loans. The reason being, for periods of unemployment, federal student loan payments can be waived. You can’t say the same for other payments or bills.
About 71% of college students graduated with federal student loan debt, so you are not alone. Year after year, more students rely on student loans to finance their academic careers. Thus, the government made the decision to support graduates by making repaying these loans easier. In June 2014, President Obama issued a Presidential Memorandum, directing the Department of Education to propose regulations to ease the burden of student loan debt. On Oct. 27, 2015, the Department of Education issued a final regulation, establishing a new income-driven repayment plan.
Many students are unaware of this repayment plan. As a result, what do you think happens after graduation?
Many graduates live with anxiety about their student loan debt. There’s a preconceived notion that the best way to handle this anxiety is to find a GREAT job, and PAY it off as quickly as possible with ALL of your hard earned money, thereby putting off investing for your retirement. That’s the ONLY way to handle it… right?
The BEST way to handle your student loan debt is to educate yourself about repayment options. This is something many young professionals fail to do. As a result, they end up not putting away enough money for retirement.
Flexible Repayment Options with Loan Forgiveness:
With the new Revised Pay As You Earn program, young professionals can limit their student loan payments to 10% of their income. Let me repeat this: students can pay only 10% of their income towards their student loans — 20 years for undergrads and 25 years for graduate students (then *POOF* — the loan is gone). The remaining amount is forgiven (the government will provide a subsidy to minimize your tax bill on the remaining balance that is forgiven.) Students that work for Government Organizations, or with a Not-For-Profit, can apply for Public Service Loan forgiveness and have their entire loan balance completely forgiven in 10 years. Many hospitals, schools and health systems are registered as non-profits. Be sure to check with your employer to confirm its status as a non-profit — they should have a 501©(3) tax designation. Monthly payments on the Public Service Loan Forgiveness plan are also capped at 10% of income and are forgiven after 10 years.
No Credit History Necessary:
You don’t need credit history to get a student loan. This allows students whose parents cannot afford to pay for their college education to pursue professional degrees anyway. Federal student loans level the playing field by allowing everyone access to higher education.
Increased Earning Potential:
Higher education leads to increased earning potential. On average, a college graduate will earn twice as much as an individual with a high school diploma. The professional degree often increases that level to three times that of a person with a high school diploma, and these are CONSERVATIVE estimates. Some professionals can earn up to 10 times that of a person with a high school diploma. College graduates are also more likely to be employed full time and less likely to be unemployed, versus their less-educated counterparts.
Student loans are tax deductible. This means the government will allow you to reduce your taxable income and, in turn, reduce your tax liability to the federal government. Be aware of income and interest deduction limits.
Extended Grace Period:
If you miss a payment on a private student loan, it immediately becomes delinquent and could be reported to the credit bureaus. Federal student loans give you more time and many repayment options. It takes about 9 months of missed payments to go into default.
Points to Take Away From the Blog Post
Someone who starts investing money earlier, towards retirement, because they take advantage of flexible payment options will be better off than someone who invests late because they were focused on paying off their student loans.
Most financial blogs recommend loan refinancing. However, when a federal loan is refinanced, an institution (typically a private bank) pays off your loan, and then takes over the loan. You are then required to pay them back. These private banks may provide lower interest rates, but you immediately lose all the benefits you had with a federal loan. Benefits, such as flexible payment options, loan forgiveness, tax deductions, extended grace period during unemployment etc. are lost when a federal loan is refinanced.
As someone in his 30s, who has been studying personal finance for the past 10 years, I understand what it is like to plan for the future and have others (mostly grown- ups) continuously provide scary information about finances. What these individuals don’t realize is that we are a completely different generation. The rules of finance that applied to our parents do not apply to us. I want to help teach my generation about these new rules. I truly hope this message gives many people hope about their finances. Pass this message along to any friend who is stressed out about their federal student loan. This information can make a big difference in their life.
***This post refers specifically to federal student loans, not private. If you have a private student loan, these benefits do not apply to you.***
This blog post is not intended to be, and should not be considered to be, individual financial advice. The information shared by The Investing Tutor is for educational purposes only.