Time is Running Out for Student Loan Borrowers + Tips for YOU
By Sage Casaga
Undoubtedly the global pandemic has negatively impacted our lives over the past year, but it came with one economic silver lining for over 42 million Americans. As of March 13, 2020, all federal student loans were placed in automatic forbearance to provide essential financial relief throughout COVID-19. This means that borrowers did not have to make monthly payments on their existing loans, and interest rates dropped to 0%. While this well-needed policy allowed many individuals to overcome the furloughs, layoffs, and other monetary consequences of the pandemic, I think the long-term aftermath goes overlooked.
Student loan debt is arguably the largest issue that the US economy, Millennials, and indebted young adults face today. Did this impulsive decision by the federal government truly benefit borrowers? Or did it simply hinder impoverished communities and individuals from financial advancement and add to our ever-growing ~ $1.5 Trillion national student loan debt? There is no question that the forbearance provided some financial relief to borrowers in the short term, but it is important to keep a long-term perspective when setting yourself up for financial success. Student loans did not magically go away, and it is still a financial obligation for roughly one in eight people in the US. At the federal level, debt is very complex;substantial fundamental improvements are necessary for our financial systems to continue providing educational opportunities for future generations.
As a society, we have created this financial burden, and it is our responsibility to diminish the educational barrier for higher education. We are about one month away from the end of the forbearance (January 31, 2022) – With that in mind, here are 8 important educational points for student loan borrowers:
1. You can still make payments if you choose. The nice thing about the relief is it didn’t force people to stop making payments. If you did continue to make payments, you stayed ahead of the game. However, those that took advantage of the forbearance were likely able to save more money each month - since payments were not made. The latter makes sense in many cases.
2. You can still be an investor and carry debt. Contrary to what many believe, it CAN make sense to invest while still paying student loans. For example, if the interest rate of your loan is at 6% and you earn 11% in the stock market, mathematically, you are better off investing the excess cash. Past performance is not indicative of future results – please consult a financial advisor.
3. Don’t let the psychological effects of carrying debt dismantle your financial plan. If you have consistent income and are disciplined enough to stick to a long-term strategy, you can become debt-free. It’s important to make sure your payments fit within your monthly budget so that you don’t become overwhelmed.
4. If you don’t have a steady income, here is great news for you – Income-Driven Repayment Plan: If approved, your monthly student loan payments become set at an affordable amount based on your income and family size. There are four different repayment plans (REPAYE Plan, PAYE Plan, IBR Plan, and ICR Plan).
5. If you are an employee of a federal, local, or state government (or non-profit organization), you might be eligible for the Public Service Loan Forgiveness Program (PLSF). The PSLF Program essentially forgives the remaining balance on your loans after 120 qualifying payments during qualified full-time employment.
6. It is ideal to keep your interest rates as low as possible. When January 31st, 2022 does approach and payments must be made on multiple loans, focus on paying down the higher interest rates first. This is very important because over time interest compounds.
7. Loan Consolidation may make sense for certain situations. One of the most common strategies is called refinancing, which is a weighted average of multiple interest rates. It may be a good option if you have high-interest rates on different types of loans or if you are looking to aggressively pay down your debt, without prepayment penalties. While there are pros and cons to loan consolidation, always make sure to check how it could affect your credit or potential for future forgiveness. First Republic Bank and SoFi offer many resources for loan financing.
8. You may be eligible to receive a tax credit. The student loan interest deduction is a federal income tax deduction that allows you to subtract up to $2,500 of the interest you paid on qualified student loans from your taxable income. It is one of several tax breaks available to students and their parents to help pay for higher education. Please consult a tax & accounting professional to see if you can take advantage of this credit.
While the Biden administration did extend payment forbearance to January 31, 2022, it is unlikely that there will be further support. That means borrowers may not receive the extensions, forgiveness, or cancellations that many hoped for. Although free college has also recently been proposed, it should be viewed as a “longshot” for America as we search for the best way to navigate the current educational debt crisis. A structural adjustment will need to be made, and that will take time.
When making financial decisions, please consult a GK advisor for advice on your specific situation. Our team is happy to help plan for your financial goals.
I have no interest in SoFi or First Republic Bank.
Sage Casaga is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $2 billion in assets under management as of 06/29/21. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."