Paying Sallie Mae Back
Rapper Dee-1 sings (unflatteringly) about his experience with a student loan servicer in his song, “Sallie Mae Back.” When an issue reaches enough critical mass to be the sole subject of a rap song, that’s when you know you have to sit up and take notice. Not surprisingly, we’ve been getting more and more questions about how to manage student loan debt over the past year. The pause in loan payments and interest associated with the CARES Act of 2020, has led to many borrowers revisiting how to approach paying off what can be a significant liability. It is important to approach the analysis with some perspective, and a lot of data. Basic factors to consider include loan periods, interest rates, loan forgiveness, etc. For perspective, we go over some tips on how to balance debt while saving for other goals.
First, you need to be aware of your eligibility for loan forgiveness. There are two main types of loan forgiveness. The first is when the borrower enters into public service, allowing loan balances to be forgiven after ten years. The second type assumes employment in the private sector and forgives loan balances somewhere between 20 – 25 years. Loan forgiveness is an awesome feature, but it is essential to understand its (potential unintended) consequences. For example, any amount of loan that is forgiven as part of the private sector employment program represents a taxable event in the year that it is forgiven. Meaning, if you have a $250,000 balance that is forgiven this year, that amount will be taxed as ordinary income. It almost seems like a cruel joke, right? You pay on a loan for 25 years just to be hit with a huge tax bill. Thanks, Uncle Sam. However, in the public service program, the amount of loan forgiveness is not included as taxable income.
You might think that loan forgiveness is the goal, and then the simple solution is to make the minimum payment for the life of the loan. Sometimes this is the case, but often the interest rate is so high that it does not make sense to leverage this strategy. You will need to evaluate how much interest you are paying over the life of the loan. On top of that, you will need to understand the tax implications of any loan forgiveness amounts.
With interest rates near historic lows, now is a perfect time to consider refinancing. But, be aware that if you refinance a federal loan with a loan forgiveness feature, you will forgo the right to have the balance forgiven. Talking to a financial professional who can help you evaluate all of your options is a great place to start getting a handle on all kinds of debt, including student loans.
Having a large amount of student debt can seem like you are walking through life with a ball and chain tied to your leg. Chances are if you have student debt, you also have a college degree to go with it, and are hopefully in a profession you love. If that is the case, one could make the argument that it is a small price to pay for a long and fulfilling career. It may feel like you have to pay off your student debt ASAP, before you can ever buy a car, a home, or take extravagant vacations. The truth is you need to find a balance between living your life and paying down debt. Maybe you buy a used car, or rent for a few extra years, or hold off on that expensive all-inclusive vacation. These sacrifices are really only temporary though.
Making sure you have a financial plan in place will ensure you not only have a plan to pay down debt, but it will help you save for other life goals as well. If you have questions about loan amortization, debt pay down strategies, or just want to vent about student loans give us a call. I know a few financial planners who are more than willing to help.
The Student Loan Sherpa. Student Loan Forgiveness for Private Sector and For-Profit Employees.
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