The State of Student Loans [WEBINAR SNIPPET]

[00:00:00] Hello, this is Brenton Harrison of New Money, New Problems and your host for the New Money New Problems podcast. If you have been tuning in for the last several months, you know, uh, that a good portion of our audience has federal student loan debt. And one of the most pressing, at least from a financial perspective, the thing. Um, hello, this is Brenton Harrison of New Money, New Problems and your host for the New Money New Problems podcast. If you've been keeping up over the last several months, you will know that a big portion of our audience has federal student loans. Of course, and one of, at least from a financial perspective, the biggest things that people are wondering about for this incoming presidential administration is, uh, the impact on federal student loans, is the Public Service Loan Forgiveness Program safe, uh, is income Driven Repayment safe? And the like. So as a result, over the past couple months, we have done some crossover episodes with Escape Student Loan Debt. Escape Student Loan Debt is not connected with our advisory work at New Money New Problems. It is a separate podcast and a separate business. Uh, but because the subjects and the interest align, we've been posting some crossover episodes. And last week we, we did a webinar over at Escape Student Loan Debt called the State of Student Loans, where we talked about all of the things that I just mentioned and more touching on private student loans, what you should do based on whether you should stay with the save plan or switching to another plan, the eligibility and the like. So what we're going to do this week is we're going to post a snippet of the replay from that podcast. If this is something where you want to access the full replay, we'll put the link in the show notes for you to be able to do so. But this is one of the snippets that we talked about at the end of the webinar where we go through three different scenarios in terms of the amount of student loan debt that you have relative to your income and talk about what your strategy should be depending on the camp in which you fall. So I hope this is beneficial to you. Next week we're going to have some of our favorite moments from the podcast throughout the year that we share. But this week wanted to give you some, uh, information that's quick hitting, that is relevant for a big portion of our audience. And hopefully if you are in this camp, it is relevant to you. So tune in. [00:02:10] Hello, this is Brenton Harrison of Escape Student Loan Debt and your host for the Escape Student Loan Debt podcast. If, uh, you've been paying attention the last couple of weeks, we've been talking about the impact of the incoming presidential administration on federal student loans and private student loans. And last week we hosted our State of Student Loans webinar, where every once in a while, when we start to get a collection of questions, we just throw it all into a webinar and answer everything that we can to, uh, let you know what's going on in the student loan space. So after the quick intro, you're going to hear a snippet of, uh, the replay of the State of Student Loans webinar. We are leaving this open for purchase. If you wanted to access the full replay, you can do so by clicking the link in the show notes and you will have that access via the video that we recorded on last Tuesday. I will tell you that, uh, um, let me see. Looking at the calendar, I do not think that we have another episode for this year. I may be wrong. Maybe it's like December 31st. But I will tell you that in the year ahead, we are planning some really cool things with the podcast. We are, um, tooling around and fiddling around with having some live guests and, um, doing some analyses of people's loan situations where we would, of course, de. Identify the individual, but be able to go through in real time some specific scenarios that people are dealing with with federal or private student loan debt. So we will keep you inform, um, when we are getting closer to bringing those ideas to fruition. So we can open up the portal so that if you want to be a part, then that's something that you would be able to do. But we're starting to get a lot of requests for individual consultations. We, uh, do charge for individual consultations, but this would be a way, if you are willing, uh, to provide some information to a broader audience while not having to pay the fee, uh, for an individual consultation. So there's more on that to come. But after the brief intro, you will hear a snippet of the State of Student Loans webinar. If you want to listen to the full replay again, you can do so by clicking the link in the show notes. And I will see you guys in a couple weeks, whether that's the very end of 2024 or the first week in 2025. Oh, and before I forget, when I recorded this webinar, I was fighting a losing battle with laryngitis. So I'm actually just coming out of it if my voice sounds a little raspier than usual. It was definitely raspier than usual on this recording. So my apologies. Bear with me all Right, let's get to it. So now, based on all that information, so let's talk about some strategies for where you stand. If you have private student loans, this is where you come into play. Uh, if you are considering refinancing to a private lender, this is also where this information will be valuable. And as we discuss it, we're going to break you up into three camps and you definitively, if you have federal student loans, you're a part of one of these three camps. You either have a federal or private student loan balance that is equal to or less than one times your household income, you have a student loan balance that is between one to one and a half times your household income, or you have a student loan balance that is greater than one and a half times your household income. Let's talk about some strategies for each of those three camps, starting with those who have a loan balance of less than one times your household income. And for this camp, the strategy, unless you have other pressing financial priorities, is to optimize the repayment of your federal or private student loans. Uh, I say that caveat, but because let's say that you know the goal would be long term to pay off your loans in full for the least amount of money over the smallest period of time, but you do have significant credit card debt or you are trying to take care of building up your emergency savings. Well, in that strategy, it may still make sense to take advantage of an income driven repayment plan, even though it's not the best optimized M strategy for your student loans long term so that you can focus on those other priorities. But once student loans have gotten on equal footing of your other priorities, it is highly likely that you're not going to have your student loans forgiven if you owe less than what you make on a yearly basis. Because going back to that partial financial hardship, as you saw on the previous screen, it's highly likely that you wouldn't have a payment under an IDR plan that would leave any remaining balance after 20 or 25 years. As a matter of fact, you may not even make it to 10 or 11 years. So if that's the scenario, instead of leaning on idr, you would instead want to optimize your repayment strategy by, uh, finding the best combination of low interest rate and flexible repayment period and payment. Notice that I didn't say to find the lowest interest rate and the fastest repayment period. I said to find the best combination of those factors. The difference is the lowest interest rate and lowest repayment period may lead to a high payment that does not fit with your other financial priorities. You can definitively find a low interest rate if you're going to sign up for some five year repayment period. But if you're paying $1,500 a month towards your student loans and you're not able to save, you're not able to address your retirement needs, you're not able to pay down other debts, that's not the best strategy for you. It may be a better strategy to find a higher interest rate over a longer repayment period with a lower payment because that allows you to both pay it off while, uh, also addressing other areas. I uh, will say then when it comes to federal student lo and most times they have lower rates than what you would find with private lenders. And they also have more options and more flexible payment strategies when it comes to the ability to defer or forbear or income driven repayment plans, standard plans and the like. However, interest rates on federal student loans are actually pretty high right now. And there are scenarios in windows like this where you could potentially find a lower interest rate with a private lender. And if the goal is to optimize repayment, there could be a scenario where it makes more sense, sense to refinance that federal loan with a private lender. Or you may just say, and some people are saying this even if it doesn't make the most financial sense. I am tired of trying to keep up with all this information going on with federal student loans. I just want to have this stuff paid off with a lender that doesn't change the terms and doesn't change the rules. And as a result I'm going to refinance. That's not a bad strategy if that's something that gives you more peace of mind. If you are pursuing private student loans, there are some things that you want to be aware of as compared to federal student loans, loans that work in your favor. Private student loans, they base your interest rate and terms off of a number of factors. Things like the um, SOFR index, which is something that they use to determine interest rates on a quarterly basis, monthly basis. In some cases they look at the credit score that you bring to the table and also the dependability of your income m and they also look at things like your co signer's finances. If you have a co signer and if you had a co signer in the past and you're trying to get them off of your loan, and I uh, highly encourage you to do so because if you were the person who took out the loan for your schooling, the cosigner has an equal responsibility to pay off that debt, which is something that if you have the ability to release them of that obligation, I would definitely consider doing. So if you co sign for someone else and you need to get off that loan as fast as possible, when they have improved finances, uh, they can actually refinance with a private lender that will release you from the co signing responsibility. Or the current loan that they have may have a cosigner release option which you can investigate. It would require the primary borrower to submit information about their current income and credit, but if it is a strong enough profile, they could consider removing you from that loan even without a refinance. Now, when it comes to the unique features of private student loans, there are a couple. The first, and I tell people who are either trying to refinance an existing private student loan or they have federal student loans and they're considering refinancing the private lender, I tell them to check rates for private student loans at least three or four times a year. And the reason that that is so easy to do is because, um, unlike most forms of debt where in order to get your interest rate, you have to have a hard pull of your credit, which negatively impacts your credit score, with private student loans, you can get a pretty good idea of what the rate would be if you formally applied to a soft pull of your credit. So that means that not only can you check interest rates frequently, but you can check with as many different lenders as you see fit, as frequently as you see fit. Which why I tell people whenever it comes to a form of debt that you're considering taking on, you want to apply with at least three different lenders. That is doubly true when it comes to private student loans because there is no negative credit impact when you apply with three lenders versus seven lenders to see which could give you the best terms and the best interest rate. Another consideration when it comes to private student loans, as compared to other forms of debt, is that if you do decide to pull the trigger and submit a formal application, which would lead to a full hard credit pull, but you're getting a better fee, you're getting a better interest rate, you're getting a better repayment period, and maybe two or three years down the line, there's another scenario that pops up that is even better than your current student loan. Unlike other forms of debt like a mortgage, where there's closing costs, when you refinance a loan with Private student loans, there are no origination fees or closing costs, which means that you could conceptually refinance a private student loan 10 or 15 times. There's not going to be a negative financial consequence based on the amount that you owe because of those lack of origination fee. So if you're in the camp where this makes sense to you, that camp being you owe less than one times your household income in student loan balances, then these are the types of things that you need to consider next. Let's go to camp number two. These are people who owe between one and one and a half times the household income. This is a camp that really has to make a decision based on what makes sense given the balance of their finances. Because the good thing that this camp has going for them is at least when it comes to income driven repayment plans, they are likely going to have a partial financial hardship. Hardship. Now the downside however, is that if you have between one and one and a half times your household income, there's also the distinct possibility that even though you have a lower payment under idr, it's still going to pay off your loans before they're forgiven in 20 or 25 years. So by lowering the payment, you are giving yourself more flexibility in terms of your finances, but you're really just extending and paying more towards the student loans over time because of the way the interest accrues than you would by just paying it off in full under a more aggressive option. So if this is you, you really have to look at the payments through things like the calculators that we have or other ones online to figure out just exactly what is that gap between your IDR plan and a 10 year standard plan or a plan that you would have available through a private lender versus just leaning on that lower payment to address other areas of your finances. For example, let's say that there's not much of a gap, but let's say that you do some calculations and your payment under an IDR plan is $150 a month less than it would be under the your standard plan. But because that's still not that much lower, you do some calculations and find out that you're going to pay off your loans in 16 years if you continue making that payment. Well, in that scenario, I would consider it worthwhile to look at interest rates for maybe 15 year repayment plans with a private lender that might offer a lower interest rate than what you have on your federal student loans. And you may find that you can keep at that lower interest rate, a payment that's very similar to what it would be under an IDR plan, and shave an entire year off of your repayment schedule while making the same payment because of the lower interest rate. Now, uh, obviously there's additional things to consider when it comes to leaving federal student loan umbrellas, like the flexibility that we've discussed when it comes to this debt as compared to private. But if you're within this window, this is what I'm talking about, where it is not as straightforward as just signing up for the income driven repayment plan and forgoing all other options to the point of not even researching them. Uh, and then lastly, people who owe greater than 1 1/2 times their household income, because people in this camp are likely going to find that going the IDR route and aiming for forgiveness is going to save them a significant amount of money as compared to trying to pay it off in full, even with a private lender or the federal government. So if you can save three or $400 a month and you're going to have your loans forgiven in 20 years under pay, as an example, then it wouldn't make sense to pay that additional money to pay it in full over 20 years with the federal government or even refinancing at a slightly lower interest rate with a private lender because of that huge gap between the payment savings under idr. So if this is you, the strategy is to optimize the income driven repayment plan payment that you are making. That optimization includes you choosing the right plan, making sure that you have direct loans only, because typically the most forgiving payment plans require direct loans only and consider public service loan forgiveness. We talked about it last night on the actual live version of this webinar. But I can tell you that when it comes to people with significant student loan debt, I think that the availability of, uh, public service loan forgiveness is often discounted. The one area where I don't see it discounted is in the healthcare space, where you see residents and fellows who really can just say, oh, well, all I have to do is do my residency, my fellowship, and then work for a nonprofit hospital or the VA for a couple more years and I'm done. And then I can go, quote, unquote, make the big bucks. But outside of medicine, I typically see people who are discounting the benefit of having student loans that you would have had to pay for 20 or 25 years forgiven after just 10 by working for a nonprofit or government entity. So, yes, you may make a decent amount more working in private industry. But if you're telling me that that additional amount requires me to pay 500, 1000, $1500 a month towards my student loans for 10 or 15 years longer than if I just work for a nonprofit or a government entity for 10 years, I'll take working for the nonpro or the government entity. And I do see this thought process where it's like, oh, I'll only be making half. That's not always the case in some industries. That difference between nonprofit, um, and private is not as pronounced as it is in others. So if you told me that I could make 150 for 20 years, but I have to pay for my student loans, or I can make 100 for 10, have the student loans forgiven and then go make 150 for the next 10, I'll take option B 10 times out of 10. So that's something to consider. If you find yourself drowning in student loan debt and you're looking for a way out. A career change within the same industry but with a different sector, Public versus private could be something that's in the cards. Optimization also includes making sure you use all the information we just shared to find the right income driven repayment plan for you. And then also once you have chosen your plan, understanding what helps lower your payment while also benefiting the other areas of your finances. If you're looking on screen, you're looking at a formula that shows discretionary income. Given your different payment plans, you're going to pay either 10% or 15% of discretionary income towards your uh, loans each month. But that formula for discretionary income is adjusted gross income minus a certain percentage of your federal poverty level. Federal poverty level is a little too deep to get into on this call. So we're going to focus on reducing adjusted gross income which reduces your discretionary income. Conversely reduces your student loan payment. And there are some key ways that you can reduce your adjusted gross income that are available to any taxpayer. And those ways are what's called above the line deductions. Those are things like your pre tax retirement contributions, be they 401k contributions, IRA 403, 457. If you're an entrepreneur, half of the self employment taxes that you pay each year go to reduce your adjusted gross income. If you earn below a certain amount, the interest that you pay on student loans reduce reduces your adjusted gross income. And if you have access to an HSA FSA or dependent care FSA, all of these things reduce your adjusted gross income dollar for dollar. Meaning that if you have $5,000 worth of above the line deductions. It reduces your AGI by $5,000, as it does your discretionary income. And that has and can have an outsized impact on a reduced student loan payment. So if you're going to have it forgiven, you want to have it forgiven after paying the least amount possible towards the student loans, and this is one way that you can do that.