As of March 2019, U.S. student loan debt amounted to $1.6 trillion in federal and private student loan debt.
On July 11, 2019 the President of the American Federation of Teachers, AFL-CIO filed a lawsuit against the U.S. Department of Education (ED) for gross mismanagement of the Public Service Loan Forgiveness (PSLF) and Temporary Expanded Public Service Loan Forgiveness (EPSLF) programs.
The underpaid and unappreciated teachers these programs were designed to help fired a flaming cannonball across the bow of a rickety wooden ship that’s been rudderless for far too long. Hopefully change is in the air.
You aren’t facing overwhelming student loan debt alone. The issue goes hand in hand with the skyrocketing college tuition prices, and it’s affecting millions of Americans. It seems we are spiraling out of control as the debt balance tips the one trillion dollar mark.
It’s a widely publicized national concern and a major political platform going into 2020. Some believe outstanding student loan debt could be a causal factor for the next financial downturn, while others disagree. Regardless of the opinions, the public call for action recently received a response.
Time will tell as the ED is attacked with objectively valid accusations that hundreds of thousands of teachers were robbed of their due process and left holding bags of student loan debt they believed would be forgiven. I’m sure we’ll all watch intently as the battle rages, hoping for justice and personal relief.
What does this all mean for your immediate financial woes? Unfortunately, not a lot. But I encourage you to keep this lawsuit in the forefront of your mind while looking at options for loan consolidation, and forgiveness. If you are focused on the PSLF Program, some of your decisions may seem like a gamble.
Student loan debt consolidation programs
Focusing on student loan debt as a whole, let’s consider both long and short term strategies for relief. The decision to consolidate student debt is a balancing act. Many variables need to be weighed.
Let’s begin with the salary you intend to earn after graduation and what payment you can realistically afford… today. Now, compare that to what you anticipate you’ll make ten and twenty years after graduation.
Those considerations should inform your decision of which repayment option to choose. Overall, there are five for the Direct Loan Program. These plans provide a fair amount of flexibility for different career paths and income levels. The different payment options will also provide insight into whether or not consolidation is the right option for you.
Depending on which source you use, the average student loan debt for Americans is $31,000. We’ll use this number as a baseline.
PSLF program
Let’s assume you’re entering a career that qualifies for the PSLF Program. A sensible option in this scenario is the Income Based Repayment (IBR). This plan was created to provide easier payments for people in low salary careers in public service.
Keep in mind that to qualify for the PSLF program, you must consolidate under the Direct Loan Program. You may also extend this loan out to 30 years, keeping your payment very low. That isn’t bad considering the fact you will be eligible for balance forgiveness after making 120 payments and meeting the additional criteria.
Graduated loan repayment plan
Now take a look at the other side of the coin. Say you’re a new CPA intending to remain in private practice. You know without a doubt you’ll be paying your entire loan balance. You might consider the graduated loan repayment plan.
This program is designed for graduates starting at lower salaries, but realistically expecting to make much more as their careers progress. The payments start lower and increase every two years.
The typical loan life for this plan is ten years. If you consolidate however, you may extend certain loans under the graduated plan to 30 years. However, in this scenario there’s quite a bit to consider.
Think about the ultimate reason you want to consolidate. If it’s just to make one easy payment, consider this. Typically, the origination fee for a consolidation loan hovers around 1.066%. The fee for a $31,000 loan will be approximately $500.
That’s not a horrible figure, but take the time to understand the additional costs before making a decision. What are the interest rates on your current loan versus the rate you will be given in consolidation.
Consolidation loans may provide the advantage of flexibility. But there is also the increase in long term cost in some circumstances, which is a disadvantage. Also take a moment to consider the disadvantages of consolidating under the graduated plan versus taking a standard plan for thirty years.
Conclusion
For many, eliminating loan debt is high on the priority list and may seem achievable. Just consider the fact that life changes and things don’t always go as planned. Consider leaving yourself an out.
The graduated repayment plan is significantly more expensive than the standard plan. Consider consolidating under a standard 30 year plan. There is typically no penalty for making extra principal payments if you have the extra money, yet your payment remains low. This provides you with some breathing room.
Take a look at the above link for repayment options and play with a student loan calculator. Take into consideration your long and short term goals, and consider that whenever you incur debt, you incur risk. Don’t forget to leave yourself outs (like the lowest payments you can get).
Once we’ve sorted out how we plan to pay for our loan in the near and long term, let’s think about what happens if we have health problems, or the economy goes into another deep recession and you are left completely unable to make your payments.
What do you do now? Student loans aren’t subject to normal bankruptcy laws. This means that they are almost impossible to get rid of. Let’s look at student loan forgiveness as a whole. What is it exactly?
The ED refers to forgiveness as no longer being responsible for paying some or all of your loan and provide the following applications for forgiveness, cancellation and discharge of student loans for numerous situations. Successful approval of one of these applications would mean that you are no longer responsible for paying off your student loan debt.
The options and pitfalls surrounding student loans can be overwhelming. Hopefully this broad overview of loan consolidation and forgiveness options provide some insight for you to develop your own sound financial strategies.
The opportunity to receive a great education and follow your dreams is still there for the taking in America. It’s just a bit more expensive than it used to be. Take the time to educate yourself on ways to safely pursue them.