Do you have massive student loans?
Do your loans make you anxious?
We interview Travis Hornsby at Student Loan Planner about some of his alternative student loan planning strategies and even some research that surprised him on how to quickly pay down student loan debt. Travis had extremely complex repayment decisions for him and his wife who is a physician. If you are burdened by student loans, you will not want to miss this episode.
Student Loan Planning: Why Most People Don’t Go After Loan Forgiveness
Maybe you’ve seen the reports on the news about the number of people who’ve been rejected for Public Service Loan Forgiveness (PSLF). At first glance, it’s alarming. Especially if you’ve been thinking about, or in the middle of, pursuing loan forgiveness.
But loan forgiveness has the potential to be a huge financial win for millions of people. As of March 2019, over one million borrowers have been certified for PSLF, with an average loan balance of almost $89K. Can you imagine wiping out that much student loan debt, tax-free?
Why aren’t more people taking advantage of PSLF and other forgiveness options? Is this a mistake and if so, what’s the alternative? Let’s take a closer look at loan forgiveness to see why it might make sense for you.
Why aren’t more people pursuing student loan forgiveness?
As mentioned, tons of people are being rejected for PSLF. The Department of Education released its first PSLF report in September 2018. Of the 28,000 applicants, only 96 had been approved. This has many borrowers skeptical of the program.
Can they trust the government to pay off their loans? What if they invest 10 years working for less money in a public sector job only to get rejected for loan forgiveness? For many, it’s a risk they aren’t willing to take. That says a lot considering there’s no cap on the amount you can have forgiven.
The other issue with PSLF is the complexity of the program. As someone who deals with student loans daily, I can say the program is not easy to navigate. PSLF has specific regulations you need to follow. Plus, it requires 120 qualifying payments, which amounts to 10 years of your life.
Even though the program has been around for a while, most people aren’t familiar with how it works or even what it does. This is partly because the first cohort of borrowers just hit the 120 payment mark. That’s why you’ve been hearing more about PSLF. Before this milestone, people have been making qualifying payments and turning in their Employment Certification Forms (ECF), but that’s it. Now that borrowers are being rejected or finally receiving forgiveness, people have become more interested.
If you look beyond the headlines, the majority who were rejected for loan forgiveness were denied because they didn’t meet program requirements, which include:
- Eligible loans
- 120 qualifying payments
- Eligible employment
Often, it’s a missing signature or another small mistake that kept someone from qualifying. That shouldn’t be enough to keep someone from pursuing loan forgiveness, though.
Why more people should pursue student loan forgiveness
The reality is that you should go after student loan forgiveness if it’s an option for you. First, it offers huge savings. One of the requirements for PSLF is being on an income-driven repayment (IDR) plan. This lowers your monthly student loan payments and leaves more debt to be forgiven later and more money in your pocket now.
Want to lower your monthly IDR payments even more? The monthly payment you make is based on your Adjusted Gross Income (AGI). You can lower your AGI by contributing more to pre-tax retirement accounts, like a 401(k).
The other reason to pursue student loan forgiveness is that it frees up funds for your other financial goals. This could include a retirement fund or saving for a home, or maybe you want to start a family. Student loans shouldn’t get in the way of life. Scoring lower monthly payments and getting your debt forgiven years down the road could allow you the freedom to pursue such life goals.
What if you took the money you saved by being on an IDR plan and invested it? Imagine being able to contribute more and build up retirement or investment accounts. Even throwing that money in a high-yield deposit account would earn you some extra money.
The importance of your saving rate when you have debt
While debt repayment is important, so is making sure you’re prepared for retirement. The U.S. Department of Labor recommends that people save at least 20% of their income, annually, to fully prepare for retirement.
At Student Loan Planner, we surveyed our readers about their investment strategies. Only 10% of those surveyed had a savings rate above 20%. Most of them don’t know how to use a brokerage account. These are important topics to think about and, more importantly, learn about and implement.
Do you know where your saving rate is at right now? If you aren’t sure you’re putting enough away for retirement, now is a good time to analyze your finances.
What good is killing yourself to pay back student loans if it’s going to put you being with your retirement goals? You could slowly pay your loans through an IDR plan and use the extra money to bump up your savings rate to where it should be.
What student loan forgiveness options are available?
PSLF isn’t the only federal loan forgiveness program. Borrowers with federal loan debt have a couple of options when it comes to student loan forgiveness. Each has its own rules and regulations.
Public Service Loan Forgiveness
PSLF is the loan forgiven option most talked about these days. It can be complicated, but here’s what you need to know:
- Only Federal Direct Loans are eligible for PSLF
- You must work for a qualifying employer. This includes government organizations and 503(c)(3) tax-exempt nonprofits
- You must be enrolled in an IDR plan. There are four of them to choose from.
- Make 120 qualifying on-time monthly payments. These don’t have to be consecutive.
To ensure your employer is eligible, take the time to fill out and submit the Employer Certification Form. Your specific job within the organization doesn’t matter, just the employer.
You must be employed for a qualifying organization while making all 120 payments. Any payments made while working for a non-qualifying employer don’t count toward the total payments required.
If you meet all the requirements and are approved, your loan debt will be forgiven tax-free.
Income-Driven Replacement (IDR) Loan Forgiveness
This forgiveness plan isn’t well known but is still a viable option for borrowers with federal student loans. It’s especially helpful if you aren’t working in the public sector and don’t qualify for PSLF. How does it work?
To qualify, you’ll need to get your student loans on one of the four available IDR plans. Depending on the specific plan, borrowers who make monthly payments on their IDR plan for 20 to 25 years will have the remaining loan debt forgiven after that time.
IDR loan forgiveness, however, is not tax-free, unlike PSLF. There are tax implications for any amount that’s forgiven through this program, which could be huge. The nice thing is you have years to plan if you go this route.
Whether IDR loan forgiveness is right for you depends on your career. If you are going to be in a high-paying career, like a doctor or lawyer, being on a repayment plan based on your income might not make sense.
It’s important to design a student loan repayment plan that fits your needs. Determine important to you going forward. Is it paying off your loans to get out from under your debt? Is it planning for retirement or setting up the life you’ve dreamed about living? Student loan forgiveness could be the path that leads to some freedom in those areas.
Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $650 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He’s helped over 2,500 clients save over $120 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.
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Today’s Guest, Travis Hornsby:
Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
Travis’ online presence:
Kirk Chisholm | Innovative Wealth
Miranda Marquit | Planting Money Seed
Michelle Waymire | Liberty Advisor