Brenden Leese, CFP®
Student Loan Considerations: Undergrad Is Just the Beginning
Updated: May 26, 2022
A Bachelor’s degree is only a fraction of what many successful families will pay for higher education these days.
Many do not have sufficient savings in 529 or Coverdell plans to cover graduate school and beyond.
The average student loan amount exceeds $200,000 for some advanced degrees.
Don’t overlook forgiveness options and income-based repayment options.
With the cost of attending college rising several times faster than inflation, one in eight Americans (43 million people) are carrying student loan debt. The average outstanding balance is $28,950 for bachelor’s degree holders, according to the Institute for College Access & Success (ICAS). But for many of you from high-striving families, that’s just the beginning. ICAS data shows the average student loan amount for graduate degrees is $71,000; ranging from MBA holders ($66,000) to $145,500 for law school attendees and $201,490 for medical school attendees.
If you think these jaw-dropping numbers look more like mortgages than education loans, you’re not alone. Even though these graduates tend to earn very high salaries, it can take years, if not decades to get your payback from these loans and that’s before factoring in the lost income from years spent in graduate school and not in the workforce.
President Biden extended student loan relief until January 31, 2022, but in many cases, that’s just delaying the inevitable.
Many of you saved diligently for your children’s or grandchildren’s college education through 529 plans or other savings vehicles. But since you were successful in your career and had high amounts of home equity built up after years of living in the Northeast, you were probably surprised to learn that you didn’t qualify for much financial aid unless your child was an elite athlete or had world-class musical talent. That’s especially true if your student attended one of the 400 or so private colleges that require the burdensome CSS form to determine your Expected Family Contribution, rather than the simple, income based FAFSA form.
So even though it wasn’t easy to write those 5-figure tuition checks for college every six months or so, you made it work in order to have the student(s) in your family attend the best possible school they could get into. But now they need to attend graduate school to pursue their dreams. This is where many of our clients fall short and start looking at loans in order to avoid depleting their retirement savings.
Smart Ways to Pay Off Student Debt
We have found the best ways to pay off debt—especially for high ticket law school, medical school or dental school— are to take advantage of any forgiveness options. Focus on paying down loans with high interest rates, generally greater than 5%. Get on a monthly plan that works best for you and stick to it. If you have the means, continue to pay down monthly during the moratorium period as your payments go toward principal. You can refinance to consolidate debt with higher rates if you qualify. Pay additional if you have the means or used “found money.”
Real World Example
We have had multiple clients come to us with inheritances and have made the recommendation that they use a chunk of that windfall to pay off their loans. Of course, this is circumstantial to the client’s interest rate, goals, and amount of inheritance relative to their student loan amount. Forgiveness Options There are a wide range of loan forgiveness options if you work at a government or educational institution*:
Forgiveness with Income-Based Repayment (IBR) – payments are capped at 10% or 15% of discretionary income; after 20 or 25 years, you may receive forgiveness (may be taxable after 2025).
Forgiveness with Pay as you Earn (PAYE) – payments capped at 10% and could be forgiven after 20 years (may be taxable).
Public Service Loan Forgiveness (PSLF) – after 120 payments, 100% can be forgiven for full-time employees at a federal, state, or local government agency, or at a 501(c)(3) organization.
Forgiveness with Revised Pay as you Earn (REPAYE) – payments capped at 10%; undergrad loans may be forgiven after 20 years, graduate loans may be forgiven after 25 years.
Forgiveness with Income-Contingent Repayment (ICR) – 20% of discretionary income or a fixed 12-year plan; forgiven after 25 years.
Federal Perkins Loan Cancellation – typically can cancel a portion after every year of service (typically for those in education field, but some other public service fields may qualify)
Teacher Loan Forgiveness – Must work in a qualifying school for at least 5 consecutive years
Forgiveness depends on grade level and what subject you teach.
Various other programs for nurses, doctors, military, lawyers
NURSE Corps Loan Repayment Program
National Health Service Corps (NHSC) Loan Repayment Assistance
Students to Service Program
Department of Justice Attorney Student Loan Repayment Program
Army’s College Loan Repayment Program
Student Loan Discharge for Special Circumstances – death, disability, closed school, etc.
Pros/Cons of the Most Common Federal Student Loans
Student loans are either subsidized or unsubsidized. Subsidized loans do not accrue interest while you are in school, as long as you are at least a half-time student. They are based on financial need and are determined by cost of attendance minus expected family contribution. They’re for undergraduate students only. Unsubsidized loans are for graduate and undergraduate school--same qualification and calculation as subsidized loans. Interest is charged during in-school, deferment, and grace-periods.
PLUS loans are unsubsidized. They are the responsibility of the parent, not the student. There is no max loan and you need to pass a credit check. They are not need-based.
Loans Based on your Future Earnings/Income
An increasingly popular option for paying for higher education is to pay a portion of your future income to a benefactor, rather than carrying a student loan.
Standard – fixed amount to payoff within 10 years.
Graduated repayment plans – payments are lower at first and then increase every 2 years to pay off in 10 years.
Extended Repayment Plans – payments may be fixed or graduated to ensure they are paid off within 25 years.
Revised Pay as you Earn (REPAYE) – monthly payment is 10% of discretionary income
Revised each year
Pay as you Earn (PAYE) – monthly payment is 10% of discretionary income but never more than you would have paid under 10-year standard plan.
Revised each year
Income-Based Repayment Plan (IBR) – monthly payments are 10% or 15% of discretionary income but never more than you would have paid under 10-year standard plan
Revised each year
Income-Contingent Repayment Plan (ICR) – lesser of 20% of discretionary income or fixed amount for 12-year repayment
Revised each year
Income-Sensitive Repayment Plan – based on annual income; paid within 15 years.
To make these income-based “loans” work, it is important to get on a schedule and stick to it. Set up automatic payments so you don’t even see the money leave. Work with an advisor on the best option for you. If you are a young professional starting out, make sure you have a firm understanding of your budget as you transition into this new chapter.
Conclusion Depending on your level of debt, it can feel like a large chunk of your monthly income is going toward paying down your education and impeding on your ability to save. Make sure to maintain good credit, as you wouldn’t want another impediment on your path to purchasing a home or a car. Do what you can while we wait to hear about potential forgiveness developments.
If you or someone close to you has concerns about college savings for your children or grandchildren, please don’t hesitate to reach out. We’re happy to help. BRENDEN LEESE is a Paraplanner at Novi Wealth