Having student loan debt can seem overwhelming. The balances are large, the interest rates are not always low and the time frames feel endless. What may be most disheartening to student loan borrowers, is unlike other types of loans based on tangible assets like cars and houses, all graduates have for all the debt is a piece of paper that may or may not be helping earn more money. There may not be many clear answers, however here are some options to consider if you find yourself trying to map out your life while dealing with student loans.
Maintain Patience – A college degree is typically achieved to increase the trajectory of one’s income over an entire working career. That’s why people go to college, to earn more money than they otherwise would have earned. Another way of looking at this is a college degree is a prerequisite to getting the ideal job, which is the case in more and more industries. The increase in income that comes with having a degree may not be realized for 5, 10 or more years after your career really gets going. In the meantime, as long as the debt payments are being made on time and in full that may be the best you can do. Remember the long term goals when looking at the short term concerns. Also student loans are considered installment loans and they are considered good debt. That means the lender and the credit bureaus really want to see that loan paid off over the full length of the loan, not necessarily early. Here is a quote from a blog written by Equifax’s contributors on their own site written in 2014. “An open account paid regularly is more beneficial to your credit score than a closed account, which is what your installment loan becomes once it’s paid off.”(1) If the money is there to pay it off that’s a personal decision because you would be saving interest payments, but also surely there would be competing uses for that money as well.
Buy a House – Here is an unusual idea. Debt is only paid by two things, cash flow or a lump sum obtained somehow. A newfound lump sum of money could be the result of an inheritance, a gift, or a legal circumstance. These occur rather rarely though. Another example of finding a sum of money would be developing an asset that has value. Starting a business perhaps? Starting a business is difficult though, and developing equity in the business that can be extracted from it is even more difficult. Buying a house on the other hand is a natural step most people want to take any way.
There is a generation of home buyers in America now who represent a dramatic change from prior generations. This generation already has student loan debt on their record when qualifying for a home purchase. The data is mixed on whether this is holding back the housing market. According to a Student Loan Hero Survey (www.studentloanhero.com), 41% of college-educated Americans with student loans have postponed buying a home because of their debt. On the other hand, according to an article from the Washington Post in May of this year, home buying does not seem to be holding back those with debt, at least not graduates who have a student loan. As far as a planning strategy once you have the house, unless you do an interest only loan, every payment creates additional equity. As time goes by houses generally go up in value. Not always, as we have learned, but generally. By making the payments on time, good fortune with maintenance, and other factors, and it’s possible over time to develop equity in that home. If you find yourself in a position to have such an asset it gives you options. You can sell the property and use the proceeds to pay off student debt. Or you can take an equity line at perhaps a lower interest rate than the student loan and pay off the student loan with it.
Seek Forgiveness – The Department of Education lays out on their website the ways in which student loans can be forgiven, cancelled or discharged. Here is the website https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation#when. One of the scenarios on this list that might be a viable option as a career path is the public service loan forgiveness. The public sector represents a wide variety of industries and in many cases stable employment. In addition after 120 qualifying payments the borrower’s Perkins loans may be forgiven.
In a follow up article we will explore some other considerations for staying on track to pay down a student loan.
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Brian established PSG Clarity as a division within the firm Planning Solutions Group to focus on clients under a given net worth, instead of above it. Brian exclusively works with people who DON’T feel wealthy. In his 15th year in the financial planning field, Brian focuses his practice in the areas of retirement planning, investments, & insurance protection, with a special interest in assisting public sector employees. He is the author of “Total Compensation: A Practical Guide to Federal Employee Benefits” and “The Personal Finance Handbook”, a Guide to the Most Common Personal Finance Questions”. He is the host of the bi-weekly TV show “Your Future Your Finances” which airs on channel 16 MMC in Montgomery County MD and on YouTube. He has contributed articles to, or been quoted in, The Wall Street Journal, FedSmith.com, The Business Monthly, Nerdwallet.com, and Credit.com, among others. He is a CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Life Underwriter (CLU®), & Certified in Long Term Care (CLTC). He holds his FINRA Series 7, & 66 registrations. Brian graduated from Towson University with a B.S. in Business Administration & a minor in English. He lives with his wife Merin & their daughters Charlotte & Caroline in Odenton, MD.