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Student Loan Repayment Plans and Loan Forgiveness

Student Loan Repayment Plans and Loan Forgiveness

July 12, 2018

Many financial planners don't like to get "dirty" with complicated issues such as student loans.  They like to focus on managing large sums of money.  OK, that's where the big $ are, so who can blame them.  But we get excited about helping people improve their financial situation - especially young people.  

Student loans are one of the biggest impediments to financial freedom facing our younger generation.  Many have borrowed heavily in pursuit of their dreams, and find the payments difficult to manage, as they strive to start a family, buy a home, etc. 

Making matters worse, the government has made student loan repayment extremely complex.  All loans start out with a 10 year standard repayment.  If your loan balance is small, you can probably handle that.  But those with large amounts of debt face a myriad of options.    

  • Extended payment terms of 20 or 30 years
  • Income based repayment programs (with loan forgiveness after 20 or 25 years) 
  • Public service loan forgiveness
  • Refinancing with private finance company 

There are advantages and disadvantages of each option.  But none of these are easy choices.  Consider just a few of the complexities facing a borrower as they decide how to proceed: 

  • Forgiven loans (except under PSLF) are considered taxable income.  That can result in a huge tax bill - just when you thought you were free of that debt forever, you may wind up owing the IRS.  And tax debts don't have loan forgiveness!  
  • If you get married your combined income may (or may not) force you to make a higher income based payment.  Choose option A and you get lower tax bills, but higher loan payments.  Choose option B and you get lower monthly payments, but higher tax bills. Some plans require you to report both spouses income, others do not.   
  • Hoping to buy a home?  Your chosen loan repayment strategy can impact mortgage eligibility.  Mortgage qualification formulae consider the ratio of debt payments to overall income.  The total amount owed on non-mortgage debt may not be as important as the monthly payment.  
  • If you make a smaller payment under an IBR plan - what happens to the interest you don't pay?  Under certain schemes, your balance and your loan liability can actually keep growing - meaning far bigger payments down the road if your income goes up.  Other plans cap your liability.  

How is a student loan borrower supposed to figure all of this out?  The loan servicers are notorious for giving out poor advice, and oftentimes completely inaccurate information.  Figuring it out on your own is like solving a Rubix Cube puzzle.  

Well, Financial Pathways has good news.  We KNOW student loans.  We now have obtained state of the art software which not only computes the best repayment option for any borrower, but shows how various options impact your overall financial plan years down the road.  With our new tools and the experience we have gained from helping so many young people figure manage their student loans, we can help put you on the fast track to getting rid of your debt and achieving your financial goals - whatever they may be.