How to Approach Attacking Student Loans

Few young professionals escape the burden of student loans. It is understandable (and normal) to feel slightly overwhelmed by the balance of your loans. Still, with an understanding of how your student loans are structured, you can confidently craft a plan to pay off your student loans and begin creating wealth.

The Current Student Loan Landscape

First, the CARES Act, passed in March 2020, provided borrowers relief by suspending payments, pausing collections of defaulted loans, and lowering the interest rate to 0 percent for federal student loans. The Biden Administration extended this forbearance until the end of September 2021.

Second, the Biden Administration has discussed forgiving up to $10,000 in federal student loans. With the possibility of having student loans forgiven, borrowers may want to avoid taking actions such as consolidating, refinancing, or paying off student loans until there is a final decision.

Third, the latest stimulus bill Congress passed on March 10th, 2021, includes making any student loan forgiveness tax-free. Before this provision, federal student loans forgiven were considered taxable at the borrower’s income tax rate; there are a few forgiveness programs like the Public Service Loan Forgiveness program, which are already tax-exempt.

Considerations for Your Student Loan Repayment Plan

Your Cash Flow

When determining your repayment plan, understanding your budget is critical. A simple exercise will tell you all you need to know. On a piece of paper, write down your take-home pay and the total of your monthly expenses (separate these into needs and wants). A little basic math will tell you if you have a surplus or deficit and will allow you to begin building your repayment plan. While there are apps to help with your budget, there is something about actually writing it down that makes it more real—trust me.

Opportunity Costs

If you find yourself with discretionary income and decide to accelerate your student loan repayment plan, consider where you could allocate the extra payments. Do you have an emergency fund? Are you saving enough in your 401(k) to receive the company match if they offer one? Do you have higher interest debts? Do you have other goals you would like to plan for that would benefit from an early start?

Look to Refinance Higher Interest Rate Loans

By simply lowering the interest rate, you can reduce the amount of interest you pay and the number of years it will take to pay off your student loans. When refinancing, particularly undergraduate loans, it is crucial to understand the type of loan you are refinancing to and what benefits you might be giving up. If refinancing moves you from a federal to a private loan, you could be giving up some valuable benefits, like:

• Deferment and forbearance due to job loss
  
• Income-driven repayment plans
•  Loan forgiveness

Evaluate Student Loan Consolidation

Consolidating your student loans could simplify the management of multiple student loans into one payment, give you more flexibility over the repayment time, and possibly lower your interest rate, although that is not always true. In some cases, consolidating your loans could increase your interest rate by consolidating a lower interest rate loan with higher interest rate loans.

When evaluating student loan consolidation, it is critical to be aware of the cons. Consolidating your student loans could eliminate credit you have earned toward an income-driven repayment forgiveness plan, lead to paying more interest by extending the repayment time, and cause the loss of borrower benefits in your original loans.

How to Accelerate Repayment

Once you have your repayment plan in place, you can find additional ways to accelerate your plan. Many lawyers earn bonuses, and you could use part of your bonus to make additional lump-sum payments to your loans, knocking months, if not years, off your repayment. You can do the same with stock option grants, inheritances, and other unexpected windfalls.