10 Things You Must Know About Handling Student Loan Debt

1. There are two different types of federal student loan debt forgiveness. The first one is income driven. With the income-driven plans, your loans are forgiven after either 20 or 25 years depending on the type of loan. 

2. The second type of federal student loan debt forgiveness plan is Public Service Loan Forgiveness (PSLF). With this plan, while working in government and/or non-profits you have to make 120 "qualifying" payments with one payment qualifying per month. It doesn't matter where you're located, as long as you're working for the US government you can work anywhere in the world. International NGO’s (Non-Governmental Organizations) don't qualify. As long as the organization is a 501c3 or not for profit, there’s a good chance you can qualify. 

3. If you’re pursuing PSLF, no entity that qualifies for profit will count ever. They have to be non-profit. 

4. You can get public service loan forgiveness working for a church or religious organization. The borrower will have to establish that they are doing full-time work that does not qualify as proselytizing or preaching. The PSLF candidate has to be working at least 30 hours a week or whatever the organization has defined as “full-time” if it’s more. 

5. A lot of times, it does not make sense to refinance federal loans because the best you can do is the aggregate of the current interest rates. What this means is that if you were to refinance multiple federal loans with different interest rates, you won’t technically save any money on interest. If you have 10 different loans, with all different interest rates, and you refinanced them into one loan, the interest rate will be the average of all the interest rates put together. The benefit to doing this is simplicity by only having to make one payment. But, if you are working on a debt snowball type plan, you won’t experience the small behavioral wins by paying off the smaller loans if you’re trying to pay them off early. 

6. Private student loans are by far the most dangerous and should be paid off first or refinanced into a federal loan if possible. Private loans have nowhere near the same flexibility or benefits that federal loans have. If you have private student loans, especially ones with co-signers, it’s usually a good idea to get rid of them and possibly refinance them if you can get a lower interest rate. 

7. If long term forgiveness is likely, in 20 or 25 years, and you have private loans, the forgiveness will be taxable. Private student loan payoff/forgiveness strategy should be handled in parallel with federal. If you will have private student loans forgiven, you must have a plan to cover the tax bill when it comes. 

8. If you have large amounts of private loans, you may want to increase your disability or life insurance in case of job loss or death. Private student loans don't go away with death. The estate is responsible for private loans. 

9. It will be much harder to get a mortgage with large student loan debt. The question of whether or not you should be buying a house with large amounts of debt is debatable. But, if you are having house fever and your monthly student loan payments are large, getting a conventional mortgage could be difficult. FHA loans are more flexible but also have higher fees. 

10. For retirement planning considerations, you may actually get an incentive for contributing to a pre-tax account like a 401k because it lowers your AGI which will make your 120 payments in the PSLF program lower and will increase the amount that’s forgiven. All student loan repayment plans are based on your Adjusted Gross Income (AGI) and therefore by lowering your AGI, you will effectively lower your required monthly payment which could increase the amount forgiven. 

Final thoughts..

While the tips here may help you qualify for ten’s or even hundred’s of thousands of dollars of student loan forgiveness, the approach you take to getting student loans out of your life is unique to each client’s situation. 

Debt is not something to play around with and considering the fact that our college system in the US is debt-based, unfortunately, many students feel this is the only way they can attend college. 

There are many ways to go to college debt-free if you look for them. 

Here’s the other thing. What if you’re working for a non-profit now and you’re making $40,000 but you have the opportunity to go to a for-profit company and double your salary but you have 5 years left to qualify for PSLF? What would you do? 

Or what if you're a doctor making $65,000 now but expect to be making $265,000 in 7 years? Do you contribute to your 401k since once this valuable pre-tax space is not used, it's gone forever?

There are so many considerations when deciding to pursue income-based repayment student loan forgiveness plans. Not only with the long-term ramifications but also just navigating the details of the system. And even when you get in, once you are on an income-based repayment plan, you then have to re-certify every year. You can also re-certify if you had a substantial change in income like job loss or addition to your household. 

From all of my research, there are not many good resources out there to help people in the student loan arena. We currently have over $1.4 Trillion owed in student loan debt and it’s growing by over $2,700 per second! 

That’s why I’m offering to help people as either part of their financial planning or as a separate service. If you are overwhelmed with how to proceed or you just want a second opinion on your strategy, reach out to me personally at jason@kisplanning.com and we will schedule a free 20-minute consultation to help you. Or you can learn more here.