Today I spoke to the Professional Women's Club of Chicago Financial Advisers Special Interest Group on Effective Student Loan Repayment Strategies. I covered many topics, including when it makes sense to consolidate your loans, types of income driven repayment plans, public service loan forgiveness, and how to determine which repayment plans you are eligible for.
Student loan repayment options are confusing and complex. There are many factors that have to be explored to determine the best strategy for a client to use in repaying their loans. If the client is married, they need to look at each spouse's income to see if it makes sense to use one of the plans that allows them to file separately, and base the payment solely on the borrower's income. In these cases, it is important to also run a tax projection to see how their taxes will be impacted by choosing this approach.
It is also important to estimate future earnings. Some of these options have payment caps, which means that the payment can never exceed the standard repayment amount. For a client whose income is expected to increase drastically in the future, if they do not choose a plan with a payment cap, they could end up paying more than the standard repayment amount, and that defeats the purpose of choosing an income driven repayment plan!
Some repayment plans require a partial financial hardship, and some of these also would cause interest to be capitalized once the partial financial hardship no longer exists. Some plans provide great interest subsidies, but they may also require that both spouse's income be used in the payment calculation.
Another option is private refinancing. This can be a good choice for clients with substantial income potential, and great credit scores. Some clients that do not have these end up getting an interest rate that is not much better than their current loans, and they lose many benefits that come with federal loans, such as discharge at death or disability, and forbearance and deferral.
As you can see, this can get quite complex, and making the right decision now can mean saving a great deal over the course of the loan. Sometimes making a bad decision in the beginning results in limiting your options later. If you need help with student loans, I work with clients and advisers to help them make the best decisions. I offer this as part of a Financial Strategy Session. Please visit my website to listen to the podcast interview that I did with the Certified Student Loan Professional group. I have also done speaking engagements for other professional groups and firms that have needed clarity on this issue. Please contact me if you would like to have a conversation to discuss your student loan repayment strategy.
About the Author
Patti Hughes is a Chicago Fee-Only Financial Planner. Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions. She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.