Many people are in the process of completing their FAFSA forms for next year for college. When financial aid does not cover enough of the cost, students often turn to student loans to bridge the gap. It is overwhelming to determine if a loan makes sense, and which loan to choose. Federal student loans usually offer lower interest rates, and some are also subsidized. The benefits of using a federal loan versus private loan financing are the ability to obtain student loan forgiveness and to enter income based repayment plans down the road. In addition, if you are considering working for a non profit corporation or hospital and are seeking public student loan forgiveness in ten years, you must be in an income driven repayment plan and that means you must choose a federal student loan, as private student loans are not eligible for these programs.
There are a variety of repayment plans that can be considered once you graduate and need to begin making payments. Choosing the best strategy can save substantial money down the road. Some of these programs require both incomes to be included regardless of tax filing status. Other programs allow you to be married and file separately to consider only one income, and this strategy works well when there is a disparity in incomes between the two spouses. If you are working towards public service loan forgiveness in ten years, you need to work for the appropriate employer and also make 120 payments in an income driven repayment plan or the loan will not be forgiven. This is crucial since many people believe their loan will be forgiven tax free after ten years but have not met the appropriate criteria. Some of the other income driven repayment plans allow loan forgiveness after 20 or 25 years, but the amount forgiven is included in taxable income at that point.
Repayment strategies can get quite complex as you need to consider your tax situation, the income levels of each spouse, and the appropriate repayment plan to achieve your goals of either lower payments or loan forgiveness. I offer Financial Strategy sessions to assist clients with these issues. Addressing your student loans is usually the first step in preparing your financial plan, and making the right decisions is difficult with all of the different programs out there. I am a Certified Student Loan Professional, and can provide you with the advice that you need to prepare for your financial future.