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student loan debt

HCP Wealth Foundations: Student Loan Debt

Student loans are having a huge financial impact on millions of borrowers

  • As of 2019 the total number of student loan borrowers reached 44 million.
  • The total outstanding student loan debt has reached $1.6 trillion.
  • If you are a healthcare professional, odds are you are faced with this extraordinary challenge of figuring out how to unburden yourself of your student loans while trying not to completely ignore your other financial goals.
  • And yet, ignoring other goals is exactly what a large number of millenials are being forced to do...

how student loan debt impacts other goals

So yeah, student loans are a bummer, and it's only natural they create a lot of anxiety.

  • I can empathize.  My wife decided to go to an expensive private school for a few years before deciding she wanted to become a nurse.   This was all before I knew her.
  • When I married her, I married her student loan debt.   I'm not searching for sympathy as I definitely married up.  But I just want to make a point that I know first hand the challenges that student loans present and I know from experience that the best way to reduce the stress of that debt burden is to know that you have the best possible plan in place for getting rid of it.  
  • This module is not meant to be an encyclopedia on student loan debt.
  • Entire books could be and have been written about this subject alone.  The goal here is twofold The first is to outline a process for tackling your debt so that you become empowered enough to figure out a strategy either on your own or with a professional.  The second is to hopefully save you a lot of money and a lot of stress.

There are 4 basics steps to the process:

  1. Get organized
  2. If you already have private loans- figure out if it makes sense to refinance
  3. Determine income-driven plan options for your federal loans
  4. Determine Public Service Loan Forgiveness (PSLF) Eligibility

Step 1:  Get Organized

  • Not only is it important to stay organized so that you don't accidentally miss any payments, when trying to figure out the smartest student loan debt strategy, you have to begin by knowing all of the details of every single federal and private loan you have ever borrowed. 
  • This is especially true for your federal loans as the complex rules that dictate the options and strategies available to you depend on things such as loan type, when you first borrowed, and loan status.
  • Most healthcare professionals have a mix of federal undergraduate and graduate loans, as well as private loans.
  • It's extremely important to understand how the rules and options for federal and private loans defer.

So whats the best way to properly inventory all of your loans?

  • For your federal loans, visit studentaid.gov and click "Create Account".  Follow the instructions to set up your username and password.  It will have you provide your name, DOB, and SS# (don't worry, this is a highly secure, government-owned site).  It will also have you verify your phone number and email address.  Once you create your account you will be brought to your dashboard.  Here, you will want to click  "view details".national student loan data system file access
  • Next you want to click on "View Breakdown".

  • We will circle back to your federal loans in a bit.  But first we still need to inventory your private loans.  Unfortunately, there is no single database for your private loans like there is for your federal loans.  For your private loans we are going to use the process of elimination.  
  • First, you need to download a recent credit report.  (You can do this for free once per year at www.annualcreditreport.com which is a safe, federally authorized site).  

  • You will be required to verify your identity. Next it will ask if you want to download all three credit reports, or just one of them.  Just pick one.  It doesn't matter which one.  This way you can still check the other two for free later on if you want.  It will then display your report and list all of your credit accounts and loans in alphabetical order by lender name. 
  • You can then determine that all of the loans that show up on your credit report but not in your federal loan file are private loans.
  • You want to focus on determining the interest rates, whether they are fixed or variable, and if they have a co-signer.  Some private lenders make this info readily available when you log into their websites.  For others, you may need to request a copy of the promissory note.  This is the legal document you signed when the loan was originated and it contains all of the loan terms. 

Step 2: Analyze Private Loan Options

  • If you already have private loans, your options for those are more limited since they can't be converted to federal loans to have access to income driven plans or benefit from Public Service Loan Forgiveness.
  • Your best option is to see if you can get a lower rate on those loans by refinancing through a private lender.  
  • You will need to have a solid credit score unless you have a co-signer when you refinance. 
  • When refinancing, it's imperative that you shop around and get multiple rate quotes.  When choosing a lender you should also consider factors like flexible payment options, co-signer release options, and customer service.
  • Once you refinance, you want to pay off those loans as quickly as possible by making extra payments. 

Don't forget to factor in cash bonuses when shopping for private lendersstudent loan refinancing bonuses

  • Depending on how much you end up refinancing, you can currently find bonus offers for up to $750.
  • As we will discuss later, your private loans won't be eligible for PSLF.
  • BUT, it's important not to forget  that many healthcare professionals have private loans that qualify for state forgiveness programs.
  • For example, my wife currently participates in the Florida Nursing Student Loan Forgiveness Program which pays off up to $4,000/year of her private loans for up to 4 years.  And like PSLF, these reimbursements are tax free.  You can find a complete list of forgiveness programs HERE.

Step 3: Determine Income Driven Plan Options

  • The goal here is to determine which of your federal loans qualify for which income driven payment plans (ICR, Old IBR, New IBR, PAYE, REPAYE).
  • These 5 income-based options use different calculations to determine what your loan payments will be.  Generally, they are calculated as 10% or 15% of discretionary income (except ICR which is 20%).   Discretionary income for all options except ICR is your income minus 150% of the poverty level for your family size and state.  With ICR, you only get to subtract 100%.
  • There are also different eligibility rules based on the types of loans you have and when they were originated.  
  • This is where the analysis can get a bit tricky as the results of those calculations change based on not only your income and loan amounts, but also your family size, marital status, and tax filing status.
  • Understanding which of your loans qualifies for which income-driven plan, and what the resulting payment would be, is the most important step in the process.   It's not exactly difficult, it just takes a bit of time.  One great resource for helping you with this is the Federal Student Aid Loan Simulator Tool.
  • Once you know what the monthly loan payments would be under eligible income driven plans, you need to determine if under those plans, your loans would be paid off in full before you make 120 payments.  This is to determine if you should go for public service loan forgiveness (PSLF). 
  • Warning: Don't just figure out which of the income driven plans gives you the lowest payment based on your current circumstances.  Make sure you know what your payments would end up being if you have expected future changes to your income and family size.  For example if you are single and have no kids, one income driven plan may give you the lowest payment, but if in the next two years you plan to get married and have a kid, a different income driven plan may then provide a lower payment.  

Step 4: Determine PSLF Eligibility

  • PSLF forgives federal loan balances after 120 qualifying payments.
  •  If your income driven payments are high enough that your loans would be paid off before you have been able to make 120 payments, then you get no benefit from PSLF because there won't be any remaining loan balance to forgive.  If you fall into this category, or if you don't have employment that qualifies for PSLF, you most likely will want to try to lower your monthly loan payments by consolidating your federal loans to a private loan.  
  • Before you do this, you need to be absolutely sure this makes the most sense because once you consolidate federal loans to private loans, you can't change them back to federal. 
  • Even if you won't qualify for PSLF, it is still possible to have your federal loans forgiven after 20 to 25 years but I won't get into any more detail on this because if you are a healthcare professional, your income most likely will cause your monthly payments to pay off your loans well before then.

So how exactly do you qualify for PSLF?

  • Given the reported rejection rates of PSLF applicants, there appears to be a general lack of understanding of the rules.  You can blame this on the government making all things student loan related as confusing as possible. how to qualify for public service loan forgiveness
  • I know this seems relatively straightforward, but trust me when I say the devil is in the details.  If you want more details,   I wrote a separate article about qualifying for PSLF that provides all the information you need to make sure you don't make a mistake that could cost you dearly.

Stay with me here.  We are almost at the finish line.

  • At this stage in the process you already know to refinance your existing private loans if you can get a lower rate. 
  • And if you won't qualify for PSLF, you know to consider refinancing your federal loans into private loans.  
  • If PSLF is likely, you need to consolidate non-eligible federal loans into federal direct consolidation loans.  
  • You then need to enroll in the income driven repayment plan that makes the most sense based on your income, debt, marital status, employment, and tax filing status of both yourself and your spouse if you are married.
  • Once you have enrolled in an income driven plan, the last step is to submit your first employment certification form for PSLF to FedLoan servicing.  If they determine your employment qualifies and you have some or all of your federal loans being serviced by a different provider, they will then be transferred to FedLoan so that all of your federal loans will be serviced by a single provider. 
  • You can begin this process online at the Federal Student Aid website

Tip #1: You may be able to reduce your income driven payments even further by reducing your AGI (adjusted gross income)

  • This is the amount used in the income-driven payment calculations and you can reduce it by increasing tax deductions such as 401(k) and 403(b) contributions, HSA's, and FSA's.  
  • Think about the benefits of this:  You save more for retirement, you pay less each month on your student loans, and in some cases even with increased retirement contributions coming out of your paychecks, you still end up with extra cash flow to spend on other goals like saving for a house.

Tip #2: If you planning on PSLF,  get your loans out of deferment and forbearance as soon as possible.

  •  Payments only count when they are required.  This means that any payments made while you are still in school, or your  loans are under the grace period, are in deferment or forbearance, or bankruptcy, WILL NOT COUNT. 
  • This is especially true if you have just started your residency as your your salary could allow you to make 3 to 5 years worth of payments that are at or close to $0/month.

Key Takeaways

  • There are a lot of nuances when it comes to choosing an income driven plan. You can absolutely be successful in going through this process on your own as long as you put in the time and attention to detail it takes to make the right choice.  
  • Please remember that tackling your student loan debt is an ongoing process.  
  • If you are on an income driven plan, each year you will have to fill out income certification forms.  If you are going for PSLF, you should fill out the PSLF employment verification forms at least once a year if not twice.
  • If you experience changes in income, employment, family size, etc. it is extremely important that you once again review your current strategy to be sure it is still the best option for you. 
  • Lastly, if you do end up saving money by changing your student loan debt strategy, don't go spend it all on purchases that don't align with your real priorities. 
  • Take that extra monthly cash flow and put it towards the other goals that are most important to you as we discussed in the first module.
  • Ideally, you are considering student loan strategies as part of a holistic view of your financial life and not just in a silo.  

Next Up: Use of Credit

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