Much has been said in recent years about the growing student loan crisis, and for good reason. According to the Federal Reserve, Americans now carry more than $ 1.7 trillion in student loan debt, making it the largest source of household debt after mortgages. This figure is staggering, but when you consider that 34% of that debt – $ 574 billion – is carried by young adults in their twenties, the extent of the problem becomes clearer.
The rising generation plays a vital role in our financial ecosystem. We rely on them to educate themselves, to become productive in the workforce, to raise families, to raise children, to buy homes, to build communities and to do all the other things that fuel long-term economic growth. When struggling with high debt levels, young adults can lose their ability to perform these important tasks. A 2012 Federal Reserve study showed that 30-year-olds are more likely to own a house and a car if they don’t have student debt. It’s not rocket science: student loans seem to crowd out these other purchases and delay household formation.
If you’re carrying a heavy student loan burden, you don’t have to wait for the people of Washington to come up with a plan. There are several things you can do now to help ease the load. I’ll discuss a few ideas in this column, but if you want to know more, check out the website www.studentloanhero.com.
A word of advice: The world of student loans can be quite complex, so consult a knowledgeable advisor before committing to anything. Also note that today’s column deals with federal student loans. Private student loans are a whole different animal and won’t qualify for what I’m going to talk about here.
The CARES law enacted last March granted a temporary moratorium on federal student loan payments. President Biden recently extended the moratorium until at least September 30. It’s a great opportunity to move forward. Since no interest currently accumulates on these loans, every dollar you pay reduces your principal. So keep paying if you can and if you can pay more.
If you have a large student loan balance, it may be a good idea to use this moratorium period to enter into an income-based payment plan. There are four types of plans to choose from, but they all set your monthly payment between 10-20% of your disposable income.
Disposable income is calculated as the difference between your adjusted gross income and 150 percent of the federal poverty guideline for your family size and your state. For 2021, the poverty line for a single California resident is $ 12,880, so the threshold for an income-based payment plan would be $ 19,320. If your adjusted gross income is $ 35,000 per year, a 10% income-based payment would be around $ 130 per month, regardless of your loan balance. In comparison, a person with $ 45,000 in student loans would likely make monthly payments more than double that amount.
You can also consider working on one of the 13 existing loan cancellation programs that are available. Not all of these programs will be suitable for everyone. In fact, most target specific audiences very closely, but if you can find one that works for you, it can save you a lot of money.
One of these programs is known as the Civil Service Loan forgiveness. The PSLF can lead to a full forgiveness of your loan balance after 120 qualifying installments, but qualifying is tricky. To qualify, you must be working full-time in a federal, state, or local government agency or 501 (c) (3) nonprofit AND you must have an income-based payment plan like us mentioned earlier.
The Department of Education reports that the average loan balance canceled with PSLF is $ 75,090. However, they also report that only 3 percent of PSLF applicants were deemed eligible. What made the candidates fail? According to the DOE, 56% did not make the 120 eligible payments. Others failed because they did not work for a qualified organization. The bottom line: If you are going to take this program, make sure you understand how it works, make a plan, and then stick to it.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He accepts any questions you may have regarding investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to [email protected]