One late evening, we received a call from Mr. Booker who owes more than $200k in student loans for a degree that has a beginning pay of $55k. He recently got married and has a child who is 6 months old. He is struggling to keep up with all the payments, and listened to an “expert” suggestion to wait for 10 years and then apply for loan forgiveness. It sounded too good to be true, and so he wanted to know our perspective. This situation should sound strange, but unfortunately this is the current norm with young families. Student loan debt in this country has crossed over a trillion dollars, and is affecting the younger generation in more ways than they think. On top of that, many parents have co-signed on their children’s student loans and are in danger of losing their hard-earned retirement.
A lack of understanding of debt forgiveness and repayment options are affecting many youngsters in making the right decision.
However, here are the guidelines that you can follow:
Step 1: Identify Student Loan Details
The first step is to identify whether the loan is issued by the Federal government or through private sources such as a bank or financial institution. If it is from a bank, the interest rates are generally lower. If it’s from private sources, you’re likely have high interest rates.
When your interest rates are high, we recommend you to shop around for a better rate, and refinance. There are several agents like LendEDU or Nerd Wallet. However, you need to know the terms and conditions (remaining amount, interest rates, payment options etc) before you start the process.
Step 2: Identify whether you qualify for Federal Student Loan Forgiveness Program
As a result, Federal Student Loan Forgiveness, Cancellation and Discharge Program is an initiative that President Obama approved while he was in office. In order to qualify for forgiveness, cancellation or discharge program, there are strict guidelines that mandate the forgiveness. Some of them are:
a) Closed School Discharge
b) Public Service Loan Forgiveness
c) Teacher Loan Forgiveness
d) Perkins Loan Cancellation and Discharge
e) Discharge Due to Death
f) Borrower Defense Discharge
There are pros and cons for each category and we recommend that you contact Mayanah Coaches ASAP for your next steps.
Step 3: Identify Repayment Options
There are several ways student loans can be repaid. Common options are:
a) Standard Repayment Plan – Best Option
b) Graduated Repayment Plan
c) Extended Repayment Plan
d) Pay As You Earn (PAYE) Repayment Plan
e) Income Based Repayment (IBR) Plan
f) The Income Contingent Repayment (ICR) Plan
g) For Income Sensitive Repayment Plan
As a result, Mayanah Financial Coaching we recommend our clients to pay off the student loan by budgeting a set amount every month. We do not recommend aiming for Student Loan Forgiveness or Cancellation as the prime path for following reasons:
1) Government can change its rules at any time and relying on them for personal finance is never a good idea.
2) 10 years is a long time and it forces you to work for government with a lower salary, thereby taking away your choice and potential to earn and save for retirement.
3) Student Loans in most cases cannot be removed via bankruptcy and so any major incident in fe will keep you a debtor forever.