Uncover effective strategies to tackle your student debt through the SAVE student loan repayment plan. Learn about loan qualifications, repayment calculation, and financial tactics to regain control of your debt.Continue reading
According to the Federal Reserve Bank of New York, the fourth quarter of 2018 showed that outstanding student loan debt made it all the way up to $1.46 trillion! It’s no wonder then that many people my age, and older by the way, are still shouldering the weight of their educations. The impact of that is profound in that it is a serious source of anxiety for many, it pushes off other goals like children or property for many, and generally keeps a lot of great, hopeful, young professionals from engaging in financial planning because they want to clean that mess up first.
Well, that’s a lot easier said than done for most. Families and friends of mine, and yours truly too, are entering these awesome jobs with thousands of dollars looming over them and their incomes. Many are in positions to make great money, but if you asked them years after graduation, that debt will still be there. So, what are our options? How do we break free? How do I approach this systematically?
WHERE DO I LIKE TO START?
Where every good cash problem and solution starts, in my mind, is on our cash flow/budget and balance sheet. These don’t have to be crazy thorough, some of my spreadsheets get obscene when my inner nerd/engineer comes out. If you have no idea where your money is coming from and going to, we can find a time to talk about that. The point is, I like to know where I stand before I make any sort of changes and I need to know how much room I have to work with and develop strategies from. I also need to ensure that other needs aren’t going to sideline my goal of shedding these loans or other debts. The next two things you should compile are an inventory of your federal loans and your private loans. These will come from statements received or downloaded, or you can get your federal loans from the National Student Loan Data System (NSLDS), and you private loans from your credit report. You can actually pull your credit report up to three times per year for free without impacting your credit, once through each of the big three. The easy way to get there is AnnualCreditReport.com. Now, I take into account other things I have going on like if you have a 401(k) at work and what I might be contributing to that. Do I have any emergency savings on the balance sheet we just
made? So that part is crucial, it’s really hard to make any debt moves if one little bump will put you in more debt (there was an article I read that makes tons of sense that said “the first step in eliminating debt is to stop accumulating more of it”, poof, mind blown). Also, where do your values come into play? Is it more important to you to balance saving long-term with paying off debts today equally, or does your need to be history YESTERDAY; everybody has their own combination in this regard. So, my plug for those just starting out is to shoot for the balance. I like contributing enough to get the match (AKA “free” money) if available, it behooves you to have some emergency dollars starting to accumulate, and then, what’s an affordable monthly payment we can put to the student loans. The consideration for you here is to make it small enough to fit in your income but large enough so that less interest accrues. Then no matter what strategy we employ going forward, increase this savings number by a percent or two every year.
You’ll be hard pressed to even notice the difference you’re paying, but it will compound and pay serious dividends. A nice thing you’ll notice as we progress is the impact this will have on your credit score and your balance sheet.
OPTIONS AND TIPS BEFORE STRATEGIES
- If you’re absolutely not ready to pay try reaching out to your lenders and asking for deferment (like if you’re going back to school, it’s pretty easy to defer payments), forbearance will allow you to push off payments, too, but interest will likely accrue. If you’re military this is an option to defer payments while you’re in.
- If you’re military, take advantage of the Service Members Relief Act for any debt you accrued before service to reduce the interest rate to below 6%!
- Be super wary and skeptical of relief agencies. I don’t care what they promise you.
- Discuss with a professional the potential for forgiveness, i.e. public service or education.
- Take into account tax considerations of repaying student loans versus other debt you may have and the impact of your filing status if you happen to be married.
- Depending on your interest rates, balances, and current credit history, you may consider consolidating federal loans or refinancing into private loans.
- Work with a professional to determine if you qualify for any particular repayment options (PAYE, REPAYE, IBR, etc.)
- Can we refinance any of your private loans, too?
REPYAMENT OF DEBT
So obviously as just covered, there are a ton of things that will impact the amount and style of your repayment. But assuming we’ve combed through all of those options above and zeroed in on our minimum payment amounts, our interest rates, and remaining principals, we go back to our earlier decision on how much can I reasonably put towards my student loans per month.
Initially, you’ll start with paying the minimum amount on all loans not deferred, in forbearance, or forgiven (obviously on that one) within the confines of any plan you got into like the income-based repayment plan. From there, I like to use one of three techniques that I apply to all debt: the avalanche; the snow ball; and the hybrid. The way each of these works is that you will pay the minimum established payment on all liabilities and allocate additional budgeted dollars to one obligation at a time. In the avalanche, we are accelerating repayment and reducing interest
paid by paying off balances with the highest interest first. It’s a little slower, with less instant gratification, but you’ll end up paying less over time. The snow ball, is more ground-up in nature.
You’ll pay the smallest balance off first then work your way up. It’s awesome for people that need little victories to keep them engaged. The hybrid is a mix of the two. It’s nice because you’ll capture a couple small victories by knocking out a few small balances right out the gate, but then transition into the avalanche. Whichever direction you choose, your monthly outlay never changes; each time a balance is paid off, you reallocate that monthly payment to the next
debt in line.
$100/month going to loan #1 $100
$100/month going to loan #2 $100
$150/month going to loan #3 Gets paid.
Your new payment next month looks like this:
$100/month going to loan #1 $100
$250/month going to loan #2 Still paying $350 but more efficiently cutting debt.
From here, I like to grow each year by increasing my savings a little bit so that it becomes automatic and my balance sheet grows while my debt shrinks, without it hurting really at all. Any windfalls or additional income I have, I can allocate across the board according to my values automatically: I make a policy to myself that if I get, say $1000 more than expected; $500 will go to whichever debt I’m accelerating, $250 might go to my retirement savings or emergency fund,
and that last $250, could easily go towards a night out with my wife and daughters or into our “Disney Bucket.”
Whatever you choose, you have to make sure it works for you. Because like a diet, if you bite of too much too soon and it sucks, you’re not going to stick with it.
There is constant flak associated with the Millennial generation because, as should’ve been expected, they do things and think just a little different from their predecessors. I don’t actually care about all that. What I do care about is that we’re not yet the target market for most financial service professionals, and what’s worse, is that we impose our own limitations on ourselves. Often times we’ll turn to Google before we turn to a professional for help. This isn’t everyone, but it is common enough.
WHY GET A PROFESSIONAL
The things I hear the most from my peers are: “I have to concentrate on paying off my debt before I can focus on growing my wealth”; or “I don’t have any wealth to invest, yet;” and “oh, I’ll work with someone once I get everything figured out first.” To me, those statements seem counterintuitive (and not because I’ve started a new practice and want people to work with me!). The way my head works is that math is math and if I can optimize anything, I will probably reach my goal sooner. I believe that being emotional and empathetic are some of our most powerful qualities, but they also significantly work against us. They get in our way of seeking help, they inhibit our success in the market, and just imagine the momentum we could have if someone could help us direct our emotions to be in alignment with our goals. For example, I can easily do a quick web search on best ways to pay off my student loans: I can use the “avalanche” to pay off highest interest first; the “snow ball” to get a series of victories by attacking balances first; I can just as easily adopt PAYE and REPAYE plans and/or work for debt forgiveness on certain federal loans. It’s not as simple for everyone as just deferring to the math to define which is best for them, and that’s where a professional comes in. And I’ll let you in on a little secret, the most math efficient technique in any area of planning is NOT always the best. A fun example is in the design of submarines. An engineer can figure out mathematically the best way to decrease friction, reduce heat loss, maximize output, and how to cram as much stuff into a small space as possible, but if they aren’t careful, they’re going to put some critical valve or component upside down in some horrid location that a technician can’t get to let alone perform maintenance! It’s the same with dieting; I know I can lose ten pounds by axing carbs. At the same time, I’ll quit that diet if I can’t drink my beer when I want. The same goes for budgeting and every other concept, you have to take the person into consideration. It’s not an easy task, even for the most self-aware individuals.
Working with someone can help you fit the best strategy to you thus increasing the probability of success. Professionals should be able to address the behaviors and feelings that only an objective perspective can. I like to think that as I move through life transitions, even without “wealth” to invest, that my life would be more fulfilling if I had a sounding board, a coach, an advisor and advocate that could keep me on track, make me aware, or teach me the things that I know I don’t yet know. If can start the process earlier and make small tweaks here and there as I go, two things will happen; (1) I won’t have to make a huge correction later on because I started later, and (2) I’ll be on my desired path sooner, which will feel much better. Plus, the more time we have left to our own devices (regardless of how great a DIYer you are), the more time we have to make mistakes.
WHAT CAN YOU DO BEFORE PAYING SOMEONE
Especially for the younger generations, on a personal level cash flow always seems tight. So, before we rush to hand our money over to, what seems like, every professional we meet, let’s figure out what we can do first to make the most out of that time. I approach this the same way I approach planning, I ask a few questions. “What would I want if there weren’t any obstacles?” “What have I learned from the past decisions I’ve made?” And lastly, “what’s going right that I’d like to see more of?” These questions set the groundwork to answer personal value questions, they help you set goals and objectives if you don’t have any yet, not given it thought, or need to clarify existing ones. A little self-reflecting can help us identify our own habits, biases, passions, and strengths which facilitate making behavioral changes, adapting, and evolving our dreams to even bigger possibilities.
From here, take a snap shot of where you’re at and the ideas you’ve tried and are trying. Typically, in the finance world that may look like a balance sheet and a cash flow statement. Naturally, you can see the logic in that if cash flow is a concern. You simply can’t stop the bleeding if you don’t know where the money is going. And that’s a big part of getting to work, is getting organized and being aware of where you are. Once you know this you can take steps to optimize the course you’re heading or completely change directions. That power is up to you now. For money especially, the anxiety of not knowing and feeling overwhelmed by these burdens is very real. The more financial stress we have the more we tend to make missteps, too. So, take a little bit of time and figure out where you are and one small thing you can do again or do differently, and I’ll bet you see a dramatic change in the long run and in how you feel.
Now that you know roughly where you’re at and one thing you’d like to adjust or replicate, the next step is what kind of person can help me make this make sense and work better. Find professionals that specialize in your objectives and interview them. How they get paid, not necessarily just how much. What is their personality like and what’s their approach? This person is going to learn a lot about you, hopefully you like them, and at the same time we don’t want them to just be a “yes” man or woman. Share with them what you are good at and areas that lack your interest so they can best help you. If you’re super analytical ask them for the math or the statutes so you can understand and internalize the advice. If you’re more visual, explain that certain graphs make you more comfortable or to slow down with the math. The point is to find and articulate the style that works best for you so that the advice you receive is more actionable for you and takes less time to arrive at. Therefore, you have better value and bang-for-your-buck.