Student loan debt has become an enormous issue for many people over the past couple of decades. It affects the student’s finances for years and can affect how soon the student starts saving for retirement, buys a home, and generally contributes to the overall community.
The standard repayment plan for federal loans pays off the debt over 10 years, but the payment may be too high for many borrowers, especially if they are just starting out in their career. As a result, many borrowers sign up for one of the income based repayment plans available to federal loan borrowers or they consolidate their loans which usually means a lower monthly payment.
Does your financial advisor understand your student loans? Here are the three questions you can ask to find out.
Question 1: Am I in the right repayment plan based on my personal circumstances?
Did you know that there are currently five different federal repayment plans available? How do you choose among them? Did you also know that unless you choose otherwise, it is the servicer who selects the repayment program for you? Each of these five programs has their benefits and drawbacks. These programs can behave differently depending on whether or not you are married, your tax filing status, and the amount of time you will be paying back the loan. These calculations can be extremely complicated and are highly individualized.
Question 2: Should I be filing married jointly or separately? Is there a cost benefit to doing that with my student loans?
Married borrowers have extra complications to think through, especially if both of you have loans. Some of the income driven repayment plans allow you to file married separately in order to avoid having your spouse’s income considered when determining your payment. Is the reduction in payment worth the extra income tax you will pay by filing separately? Understanding how payments are determined and applied is crucial to determining the correct answer for you.
Question 3: Should I be refinancing to a private loan to reduce my interest payments?
A lower interest rate can be enticing. But, you may be giving up loan forgiveness and other benefits associated with staying in the federal loan repayment program. Your financial advisor should be able to help you look at the total cost of federal vs private loans.
Hiring a financial planner can make a big difference in helping you think through this debt, which other than a mortgage, will probably be the biggest amount of debt you will ever acquire. Currently, we believe very few financial planners really understand student loan debt and cannot give their clients sound advice. As you interview advisors be sure to ask them if they think you are in the best repayment program for you. If they ask you for details on the loans, including when the loans were dispersed, the exact type of loan, and ask you for data from the federal loan database, you know you are on the right track. Otherwise, you may be working with someone who does not have the knowledge to help you figure it out.
Our team has the knowledge to help you sort through this complicated issue and how it relates to the rest of your financial life. We can help you understand your options when it comes to consolidation, repayment plans, loan forgiveness, and give you the confidence that you understand your loans.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. 10/19