“Listen, I get it, getting student loans repaid through Public Service Loan Forgiveness (PSLF) is a great option. But, the nonprofit route isn’t for me. What are my options, smart guy?”
I imagine some of you thinking this after reading my string of loan forgiveness posts last fall. So read on if you plan to work in private practice or you don’t have a high enough balance to pursue forgiveness. Whatever the situation, you still need a strategy for tackling student loans.
Let’s go over the two main approaches you can take when repaying federal student loans without forgiveness.
Minimizing total cost of loans
The concept here is to pay off the loans with the least amount of money possible. Since we already established that forgiveness doesn’t work for you, the only other way to lower overall loan repayment cost involves reducing interest charges.
You can do this without altering the loan by paying down the principal (amount due) faster. When you begin repayment, the government expects you to repay your loans in 10 years, so monthly payments get automatically calculated to pay off the loan in exactly this amount of time. One big exception is consolidated loans. Their standard repayment time can be anywhere from 10 to 30 years, depending on the balance.
Here’s the twist—you can pay more than the minimum monthly amount due!
Yes, the government will accept more money from you. Luckily, in this situation, it benefits you as well. Consider the example of a professional deciding to pay loans off in seven years instead of 10.
By paying roughly $162 more a month, this person saves $3,838.82 in total interest.
The other way to lower interest charges involves refinancing to lower your interest rate. This is a high-risk option, however. In recent years, there’s been a proliferation of companies offering to refinance student loans. However, in my experience going through the process with a few speech-language pathologists, clients rarely get offered a rate better than the rate on recently issued federal loans.
If you really find a lower rate through one of these companies, you then risk losing all options afforded you under the federal loan program. No more income-driven repayment plans, forbearance or forgiveness.
Plus, even in the worst-case scenario, you still get credit toward the 20- to 25-year forgiveness, no public service required.
Minimizing monthly payments
The other approach is to limit your loan’s effect on cash flow by keeping the monthly payment as low as possible. You can do this by enrolling in one of the many repayment plans offered by the federal loan program.
The plans fall into one of two categories:
- Income-driven repayment (IDR) plans
There are four different options, each with its own nuances. These plans are not designed to pay off the loan in a set amount of time. The monthly payments are based solely on your income and the corresponding formula.
These programs also offer built-in forgiveness at 20 to 25 years that does not require any workplace stipulations. They also could count toward public-service loan forgiveness in the event your situation changes.
- Extended payment plans
These plans simply stretch out your repayment period from 10 years to up to 25 years. A longer payoff period means smaller monthly payments. Except in unique situations, I’d favor an IDR plan over one of these.
If you’re considering the overall approach of minimizing the monthly payment, my question for you is: What’s your endgame? What does a lower monthly payment mean for you? Will you be applying the resulting increase in cash flow toward another need or desire?
Or, are you just trying to buy time? If so, what would trigger a change?
Be careful, because it’s very easy to go from “biding my time” to “I’m still paying off my student loans 17 years later.”
Jacob W. Parish, a certified financial planner™ professional, focuses on helping audiologists, SLPs and other young health care professionals navigate financial planning issues. Visit his website, Schooner NextGen, or follow him @SLP_Finance. Securities and Advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC