This is a complicated question, and the more accurate the answer, the longer it will be. We have clients with relatively simple student loan situations, but what does that mean? It could look simple, but still they are not taking advantage of maximizing their savings. We also introduce timing into the equation. There’s a major difference between having a favorable loan payment, say $0 per month, and having a favorable repayment strategy. We often see two borrowers with the exact same student loan amount, interest rate and payment amount, but one accruing interest at twice the rate as the other.
If you’ve been managing your student loan for a while, you know the complexities are endless. It’s easier to describe when it is not complicated. If you are a W2 employee, single, earning double the poverty line index, your school is still open, you have a 3% interest rate and under $8,000 in student loans, are in active repayment and have no debts that are greater than the 3% interest rate, and are in a 10 year standard based repayment with a direct loan, then your situation may be relatively simple. However, the larger the debt, higher the interest rate, more complex your financial picture (both business and personal), the more complicated a proper student loan strategy becomes. This applies to your savings, too.
Some variables to consider, not familiar to virtually any borrowers, financial professionals and/or student loan servicers, are:
– What are your loan types; are they the most advantageous for your overall strategy – saving you money both short term and over the life of the loan?
– Should you consolidate any, all or portions of your loans?
– What is the best repayment plan, now and long term?
– If you’re not in the best repayment plan, what is the cost to switch repayment plans? (Includes the direct cost, as well as capitalizing interest, which occurs when switching repayment plans, loan types or consolidation for any one or all of your student loans, even if done with the same servicer and even if they were all direct loans to begin with.)
– Should you switch loan types, and is there a cost – do you lose any of the qualified payments towards loan forgiveness?
– Do you need to consolidate at all, and if so, should you consolidate all of your loans?
– Is there a way to extend student loan payments past death, to avoid the tax implication associated with the forgiven balance?
– Are you taxed on the forgiven principal, or the principal and interest?
– If so, when and how does interest capitalize within the plan you’re in, and if there is a better plan, will it always be the best long term? (Looking toward the future is extremely important. For example, you may be single now, but engaged to be married and plan on having children. Your spouse may or may not have student loans. Your plan may be to go from being an employee to being self-employed, or vice versa. If this is the case, it is important to choose the right strategy now; not that you can’t switch strategies later, but because there is a cost in capitalizing interest when making certain changes).
The mistakes regarding student loan repayment generally begin immediately, at the origination of the loan, and begin to compound at the time of graduation. One element that will highlight this is the fact that without exception, we have not encountered a client that has waived the six month grace period that takes place after graduation.
Why would one want to do that, you may ask?
Well, that’s just the beginning. Call us, and we’ll happily explain.