I recently read an article from the National Association of Realtors® that only 20% of millennials (aged 22-35) with student debt own a home. Of the 80% who don't own homes, a whopping 83% believe that their student debt has affected their ability to buy. Further, these millennials stated that they expected their student debt to delay purchasing a home for a median of 7 years, with 84% expecting to delay home ownership by at least 3 years. I found this information dismaying, as both a real estate professional who often works with first-time buyers, and as a mom whose son is about to enter his senior year of high school. We are currently exploring college options and among the many factors we are evaluating is cost. While I want my son to get the best education to give him the best opportunities, do I really want him (or me) graduating with a soul-crushing amount of student debt? Student debt represents $1.4 Trillion in U.S. debt, and can impact purchasing a home, starting a family, and saving for retirement.
So I was glad to find an episode on the Bigger Pockets Money podcast dedicated to how to pay off your student debt. The podcasters interview Travis Hornsby, whose company Student Loan Planner helps people find solutions to their student debt. As it turns out, there are various options to pay down your debt depending on the type of loan you have, how much you owe, and your career path after college/ post-graduate school. Here are a few scenarios I learned:
Repaying the loan: If you have low debt, say under $50,000, then you're probably better just paying it off. Being frugal will be helpful, if not necessary, particularly in areas like the Bay Area where the cost of living is high. This means getting roommates or avoiding car loans or limiting restaurant outings or all of the above. Pay off the loan debt and save as much as possible if home ownership is on your goal list.
Refinancing: If you have a steady job and a decent credit score (high 600's or better), refinancing may be an option. You may be paying a higher rate because you were young and seen as "high risk" due to limited credit history when you first applied for your loans. Now that you're working, you may very well qualify for a lower rate. Interest rates are still low, so refinancing could reduce your payments such that you could pay less and/ or pay the loan off more quickly. A quick Google search came up with several financial institutions that will refinance student loans. There can be tax and other implications, though, depending on the type of loan you have, so be sure to do your research on both the financial institution and the type of loan you're considering. The Consumer Financial Protection Bureau has helpful information and tips on their website.
Pay As You Earn (PAYE) or Income-Based Repayment Plan (IBR): Both of these programs are similar loan forgiveness plans for those whose student loans are too onerous. As their names indicate, you pay only a percentage (between 10-15%) of your discretionary income over a 20-25 year period depending on the plan. At the end of the repayment period, any remainder of your loan is forgiven. However, any forgiven (unpaid) amount is taxable, so be sure to calculate what you think you might owe to determine what that final tax bill will be at the end of the loan term.
Public Service Loan Forgiveness Plan (PSL): If you're in a field that qualifies, for example working for a non-profit or government employer, you can work for 10 years and pay on an income-driven plan. At the end of the 10 years, the remainder of your debt is forgiven with NO tax consequences. This plan could work for fields like government attorneys, physicians working in non-profit hospitals, teachers, and others in public service.
A few tips and general rules:
Some general guidelines I also picked up include:
- Thoroughly investigate each option to determine which would suit your particular situation best before acting. If you refinance your loans, for example, you may no longer be eligible for loan forgiveness programs down the road. So think about your current earnings situation, as well as your potential future earnings before making a move.
- Generally speaking, if your loan is 1 1/2 times or less your income and you're working a private sector job, paying off your loans probably makes the most sense. If it's more than that but less than 2 times your income, refinancing could be the best option for you. If your loans equal more than 2 times your earnings, then a loan forgiveness program could make the most sense.
- If refinancing, purchase your home before if possible. Moving to a private loan could effect what a lender is willing to give you to purchase a home.
- If you're considering loan forgiveness, try to minimize your taxable income as much as possible. Take full advantage of pre-tax retirement funds and HSAs to reduce your taxable income and/or consider filing taxes separately from your spouse if filing jointly increases your overall taxable income.
- Ensure your loans are always kept in eligible status. While I haven't yet experienced this first-hand, there seems to be a lot of "i's" to dot and "t's" to cross to ensure you maintain eligibility status.
- Always, always, always consult a financial professional to ensure you're making the best decision for you and your future goals.
I learned a ton just listening to this one podcast, which compelled me to do a whole lot more reasearch. If you have student debt, I hope that it inspires you to do the same.
Disclaimer: I am not a financial expert and am not qualified to give expert financial advice. As with all financial decision making, it is important that you consult a qualified financial professional to find the best solution for your situation. Further, this article is not intended to endorse any company, product or service mentioned.