Not Having a Plan For Your Student Loans – March Madness of Top Personal Finance Mistakes

Finance Mistakes

It’s official, for the first time in tournament history, Not Having a Plan for Your Student Loans has won won the 2016 Top Personal Finance Mistakes made by young professionals tournament! In what proved to be the match-up of the decade, Student Loans overtook the heavily favored and all too common personal finance mistake made by many young professionals, Living with No Budget.

If you missed the first three rounds of the Top Personal Finance Mistakes tournament be sure to check out the Quarterfinals, Final Four and Championship to learn what top mistakes ultimately lost out on being crowned the top mistake made by young professionals in 2016.

Here at Lifewise we are big believers in the importance of having a budget. In fact, it’s probably the number one topic that we’ve blogged about in recent months—look no further than here, here and here for our latest posts on budgeting—due to the positive impact it can have on every aspect of young professional’s lives.

So then how does one of the most fundamental keys to financial success and the mistakes surrounding it get overtaken by pesky student loans? Good question.

In short, nearly 70% of college graduates now leave school with student loan debt. To put that into prospective, the iPhone accounts for about 40% of the U.S. cell phone market according to a recent reports. How many people do you know that currently use an iPhone? I know for myself it seems like virtually everyone—for better or worse. Now multiply that by two and that’s roughly how many college graduates and young professionals are riddled with student loan debt. Scary, we know!

In celebration of the #5 seed’s big victory and given the giant burden that student loans place on young professionals just starting out in the workforce and those returning from grad school, let’s take a look at a few keys to tackling your student loans.

Have a Plan Before You Get to School

You don’t need to know exactly what you want to be when you grow up before you start your undergrad degree. However, when the cost of college has increased over 1,120 percent since 1978—yes that number has a comma in it—going to college is no longer just a time to “figure things out” either. This is precisely why it helps to have at least an idea of what careers you might want to pursue upon graduation.

Have interest in becoming a teacher or firefighter? That’s awesome and both jobs are incredibly value to society—and largely underpaid relative to the value they provide—but jobs that probably shouldn’t come with a hundred thousand dollar price tag in student loans. This holds true for those young professionals looking to go back to grad school too. An advanced degree can open up a lot of doors, but at what cost?

Before signing up to take on a ton of student loan debt be sure to check do your homework on what realistic starting salaries are out of school, as well as those coming out of grad school. PayScale or GlassDoor are two great sites that can help give you an idea of what a fair salary expectation can be.

Get Clear on the Type of Loans You Have

The first thing to be clear about when it comes to student loans is whether or not they are federal or private. This distinction is critical, as there is considerably more flexibility when it comes to federal loans than private loans. However, with flexibility comes complexity and when it comes to federal loans, while private loans tend to be more straightforward despite being fairly rigid in the options available.

Here’s a quick list of the common federal loans:

  1. Perkins Loans: low interest rate loans available to both undergrad and graduate students; loans are administered through the school—essentially your school is the lender or their chosen service provider; funds are awarded based on student need.
  2. Direct Loans Subsidized: for undergraduate students with financial need; government pays the interest while in school (“subsidized”); rates are currently set at 4.29% until June 30, 2016.
  3. Direct Loans Unsubsidized: for undergraduate and graduate students; no financial need required; interest begins to accrue right away; rates are currently 5.84% until June 30, 2016.

Fully Understand Your Repayment Options

When it comes to Federal loans there are no shortage of repayment options, which is both a good and a bad thing. It’s a good thing because there is a lot of flexibility in repaying your loans and a bad thing, because there’s so many moving pieces. Here’s a quick overview of the four primary income-based repayment plan options that can be helpful if you’re looking to create more cash flow on a monthly basis by lowering your payments (keep in mind that by lowering your payments you may be extending the period of your loans and the amount you pay in interest over the long-term).

  1. Revised Pay As You Earn (REPAYE): The newest repayment option eliminates two key barriers that prevented borrowers from previously accessing PAYE. This program caps monthly loan payments at 10% of the borrower’s discretionary income and forgives loans after 20-years of on-time payments or 25-years of on-time payments for those with graduate loans.
  2. Pay As You Earn (PAYE): Launched in 2012, this plan also caps payments at 10% of discretionary income and forgives loans after 20-years of payments. Only federal loans taken out after September 2007 qualify for the program.
  3. Income Based Repayment: This program caps loans taken out prior to 2014 at 15% of discretionary income, but the payment is capped at what you’d pay with a standard 10-year plan. For loans taken out after 2014, the cap on monthly payments is 10% of discretionary income.
  4. Income Contingent Repayment (ICR): This plan is largely for older loans and for those who don’t qualify for one of the above programs. It caps monthly payments at 20% of discretionary income and forgives debt after 25-years, assuming all requirements have been met.

Ultimately the biggest mistake many young professionals make surrounding their loans is simply not having a plan in place to tackle them in the most efficient and appropriate manner. Given the complexity, it can seem like a daunting task to begin to build a plan to tackle your loans in the best manner possible, but by being proactive and doing a little homework you can ensure that you’re maximizing how you pay off your loans.

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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