There are two primary paths to debt elimination. Option one is to pursue student loan forgiveness programs. Option two is to pay off the loan in full. Many attorneys, especially recent graduates, may not know the ideal approach for many years. Because of this uncertainty, student loan planning requires an understanding of various strategies and considerations.
Student Loan Forgiveness
Know all the rules to public service loan forgiveness (PSLF).
Simply working for a public service employer isn’t enough. Eligibility confusion has resulted in approximately 99 percent of the PSLF applications being rejected. Borrowers must have an eligible loan, repayment plan, and employer.
Submit an employer certification form (ECF) on a yearly basis.
Completing this form does more than just documenting employment. It also triggers a review of the borrower’s repayment plan and loan eligibility. The result of an ECF is a tally of the eligible payments toward Public Service Loan Forgiveness or an explanation of a potential eligibility issue. Though not explicitly required, this step is essential.
Look beyond PSLF.
PSLF is probably the best-known forgiveness program, but there are multiple avenues of student loan forgiveness. Loan Repayment Assistance programs are available through schools, government entities, and bar associations. Borrowers working outside the public service arena are also eligible for forgiveness through income-driven repayment plans.
Use the student loan repayment estimator.
The Department of Education has a helpful tool for borrowers to estimate their payments and forgiveness options. It isn’t perfect, and makes assumptions, like an annual 5 percent pay increase, but it is helpful for evaluating options.
Understand the impact of marriage.
Getting married can cause some borrowers to have substantially higher payments on income-driven plan payments if they file their taxes jointly. However, filing separately will mean a higher tax bill. Work with tax preparers and use the repayment estimator, to evaluate options. Student loan planning for couples will depend upon if one or both have student loans.
Save for retirement and get lower payments.
Monthly payments on income-driven repayment plans are based on a borrower’s Adjusted Gross Income (AGI) from their most recent tax return. Contributions to retirement accounts, such as a 401(k) or an IRA, lower a taxpayer’s AGI. This means that putting money in a retirement account lowers the tax bill, lowers monthly student loan forgiveness, increases the amount forgiven, and grows a borrower’s retirement savings.
Study the federal repayment plan options.
There are five different income-driven repayment plans. Borrower eligibility and payment amounts vary from plan to plan. Take time to understand the pros and cons of each plan before making a selection.
Don’t miss income-certification deadlines.
Missing the certification deadline results in the borrower being put back on the standard repayment plan. Worse yet, accrued interest is capitalized, meaning the interest is added to the principal balance and the borrowers may start paying interest on the interest.
Know when federal consolidation is necessary.
Federal student loan consolidation can turn an existing federal loan that is not eligible for programs such as PSLF into a Federal Direct Consolidation Loan that is eligible for PSLF. However, it can also reset the forgiveness clock. In some cases, federal direct consolidation is essential, in others it is a mistake. It is critical to understand the process and when it should be used.
Repayment in Full
Don’t just make minimum payments.
Many loan repayment plans are spread across decades, which results in substantial spending on interest. Even paying a little bit extra each month can make a huge difference in the long run.
Lock in lower payments if possible.
This tip may seem at odds with the previous one, but the idea is to get lower minimum payments on all loans to maximize the available cash to attack the loan with the highest interest. Eliminating high-interest loans first is the most effective way to pay off student loans.
Refinance loans strategically.
Student loan refinancing is a great way to leverage a steady income and good credit into a lower interest rate. Borrowers do not need to refinance all their loans. Instead, loans should only be refinanced if terms are improved. Existing low-interest loans do not have to be included in the process.
Be careful about refinancing federal loans.
The advantage of refinancing is that it eliminates old loans with higher interest rates and creates a new loan with a new lender and a lower rate. With federal loans, this can be a disadvantage. The federal government is the only lender that offers income-driven repayment plans and loan forgiveness programs. Any borrower who might need these borrower protections should keep his federal loans with the government, even if it means a higher interest rate.
Shop for the best interest rate.
There are about 20 different companies offering student loan refinancing services, so marketplace competition keeps rates low for qualified borrowers. Each lender uses a different formula for evaluating applications, so it is important to check rates with several different lenders. The lenders advertising the best rates may not be the lender that offers the best rate.
Use tax season to evaluate your student loan plan.
Each year the government tweaks the student loan rules and tax codes. Borrower circumstances can also change. Tax season is a great time to take a close look at personal finances and to evaluate new options and strategies for loan repayment. Plus, student loans should be a consideration in tax planning.
The best student loan strategy will be one that can adapt as circumstances change. Attorneys should consider how changes in living situation, employer, and salary might impact their plans.
Successful planning and adaptation will be dependent upon an understanding of the many variables at play.