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Should You Pay Off Student Loans Early? 5 Questions to Consider

Should I Pay Off Student Loans Early?

I’ve recently had a few clients and children of retired clients ask me questions about paying off their student loans early, so I thought a blog post was in order. Like most posts here, this is a snapshot of my thoughts on a pretty broad topic, so please contact me if you have any questions and I’ll do my best to answer them.

Like many financial planning issues, there are a number of sub-questions that can help you decide if paying off your loans early is a great idea.  Below are my top five questions to consider:

  1. What’s your interest rate? – The interest rate on your loans plays a critical role in deciding if paying them off early is a good investment. Student loans that were consolidated several years ago likely have a quite low interest rate (I’ve seen as low as 2.25%), where those who have recently completed programs normally have an interest rate of 6.8%. By repaying a loan early, in some sense you’re guaranteeing yourself that rate of return by saving yourself future interest. Therefore, the higher the interest rate, the more benefit you have from paying off this debt early.
  2. Do you qualify for loan forgiveness? – There are many employers, and a new Federal Government program, that can provide loan forgiveness for borrowers. Like many financial things the devil is in the details so you’ve got to really read the provided documents to make the choice that is right for you. A few other factors to consider:  – How long do I need to work here to qualify for forgiveness? I’ve seen some programs kick in with as little as 3 years of service, where the Federal program requires 10 years of service and 120 payments.  – Will your loans qualify? Many programs offer forgiveness for federally guaranteed student loans, fewer for private loans. Read the details of what you’re being offered and ask questions.  (There are a lot of other provisions that the federal program is subject to that will likely require its own blog post in the future, so be on the lookout for that one)
  3. How much are you earning? – In an ideal world, you’d be able to make additional loan payments, build an emergency fund, and begin saving for retirement in the early stages of your career. Chances are you can’t do all of these, so you’ve got to prioritize on which will give you the best long-term return for your hard-earned dollars.
  4. Do you have a retirement plan with a match? – If your employer offers a retirement plan with a match, it’s hard for me to recommend passing that up to repay student loans. In some sense, a match is a guaranteed return on your investment, because you can get additional dollars contributed to an account, on your behalf, without you having to take them out of your paycheck. Grab the match and then decide if you want to put additional dollars towards student loans over saving for retirement while considering #5.
  5. How do you feel about debt? – This shouldn’t be an afterthought as it’s as critical as the other pieces. While few people truly like having debt, I’ve seen a wide range of true feelings with clients about the debts they carry and manage. Some are perfectly comfortable with making the monthly payments over an extend periods of time, others have huge emotional responses when they think about the payments and amount of debt outstanding. If your student loans are causing you emotional distress, then make paying them off a high priority, and free up that energy for more positive things in your life. Even if that delay caused you to have to work another 6 months before retiring, wouldn’t that be better than carrying around the emotional agony for 10 years because putting money away for retirement was the ‘smart thing’?

Student Loan Consolidation Deadline 6/30!

If you’ve got Student Loans, you need to be aware of this deadline and the opportunity it presents.

The Department of Education is offering the opportunity to consolidate student loans from a private lender with student loans held directly by the Department of Education.  The opportunity to consolidate these Direct Student Loans as well as any Family Federal Education Loans (also know as FFEL Loans) is going to expire on 6/30 and I think that it’s an amazing opportunity to simplify your financial life, as well as potentially benefit from other federal student loan program benefits such as forgiveness programs that are not available to loans issued by private lenders

A few key benefits:

This program would allow you to have one servicer and one payment for all of your eligible student loans.  That’s a huge benefit.  I’m always recommending to clients that they simplify their financial lives and consolidate accounts when possible, and this is a great opportunity to do just that.

You can save on interest.  Loans consolidated in the program will receive a 0.25% interest rate deduction on any private loans that are consolidated. The interest rate is fixed for the life of the loan, so you’ll lock in your current terms.  (If you sign up for automatic debit from your bank account, you can save another 0.25%.  That’s easy savings.)

Eligible for Public Service Loan Forgiveness Program.  If you work for a public entity or certain 501(c)3 not for profits, you may qualify for the balance of your loans to be forgiven after making 120 contiuous payments.  This is a huge benefit for those of you that work in education but don’t qualify for the teacher student loan forgiveness programs, or for others who work for other not-for-profits.

To consolidate your Student Loans, go to www.studentloans.gov and log into your account.  If you’re eligible, you’ll have a message in the “Alerts” box on the top right of the page.  Here’s a link to the Department of Education’s Frequently Asked Questions about the program.

If you have any questions, please contact me and I’ll do my best to help you out!

5 Financial Tips for New Grads

Recent graduates,

Congratulations!  You’ve finished up 4 years of hard work and are excited to be out on your own.  Hopefully you’ve landed a great job to start yourself out, and your future is looking bright!

With freedom comes responsibility and now is the time to get your personal finances off to a good start as well.  There’s lots more to a successful financial life than these 5 tips, but this should get you off to a good start.

1.  Keep your regular expenses low.  Take out a notepad and pen, and write down what it costs to keep you afloat for 30 days.  Things like rent, utilities (electricity, phone, internet), and loan payments need to be planned for.  You should be able to calculate this amount pretty accurately, and it shouldn’t change much from month to month.  For those of you with student loans, don’t forget that most loans don’t require payments until 6 months after graduation so get used to setting that money aside now!

2. Track how much you’re spending on your lifestyle.  Now that you’ve got some cash in your pocket, it’s natural to want to go out to eat more often, and to enjoy some of your success.  That’s not inherently a bad thing.  You just need to look at this more regularly than once a month.  I recommend you visit the ATM once a week, and take out a set amount that you’ve agreed upon as your weekly limit for these kinds of expenses.  A lot of money can leak out of your budget by going out to lunch everyday, and spending cash is a great scorecard when the end of the week comes around.

3.  Start saving early.  If you develop a good savings habit now, it will serve you well for the rest of your life.  Sign up for your employer’s retirement plan as soon as you can.  Save 10% of your income if you can, less if you must.  At least save what your employer matches so you can claim that extra money and start it working for you.  Also, open a savings account and set money aside in it until you have at least 3 months of your monthly expenses set aside.  This account will become your emergency fund and will serve you well as your cash cushion for the rest of your life.

4. Be careful with credit cards.  I do think it’s a good idea for you to have your own credit card.   It starts building your credit history and can be a useful and safe tool for buying things online.  The downside comes if you don’t use it wisely.  Use your card for purchases you would have made without the card.  Pay the balance off in full each month.

5.  Track your spending.  You’ve got to come up with a system for keeping track of your spending.  I recommend Mint.com for tracking your personal spending.  It will pull your transactions in from your online banking sites automatically, and they now have apps for the different smart phone brands too.  It will take some effort to get a system set up, but once it is done all it takes is 15 minutes a week to maintain.

I hope these tips help you get off to a good start!  Please let me know if you have any questions, or other tips in the comments!