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The Modern Millennial’s Battle With Student Loans

May 29, 2020

Everyone can agree that student debt is a problem in the United States. Now more than ever, student loans have come to the forefront of the cultural landscape. This February, Forbes reported that student loan debt in the U.S. had reached a record of $1.6 trillion, and the CARES Act provisions for student loans has brought them even further into the spotlight of public consciousness.

 

The everyday millennial’s battle with paying off student loans is a complex problem that is created by a variety of factors. Here are some of the issues and situations that typical millennials face when paying off student loans, along with some tips for actually tackling their debt once and for all.

 

That Moment When the Grace Period Ends

The grace period of student loans, typically lasting around six months after the completion of college, provides time for the new graduate to find a job. For those six months, they are free from the burden of making payments on their student loans. This period can seem to be a respite from the debt; however, the grace period can quickly turn into a period of stress. If the economy is in a dip, it can be difficult to find the job’s necessary to pay off student loans. Even when they do find a job, sometimes it can be difficult to make the monthly payments with an entry-level salary. The moment when the grace period ends is when reality starts to set in. Nonetheless, many still find the ability to begin making payments for a period of time. This then leads them toward the next hurdle – not getting discouraged by their loan balance.

 

The Difficult Task of Paying Off High Interest Rate Loans

Many millennials are trapped in high interest rate loans, where they attempt to pay their loans back, but the balance of the loans never really seems to go down, or at least not by much. The high interest rates simply counteract any effort to pay the loans off, leading many millennials to feel discouraged and stop making payments altogether. This causes their loan balance to increase, along with impacting their credit score with missed payments, which can hinder their ability to refinance for a lower interest rate later.

 

The Misleading Comfort of Student Loan Forgiveness

Loan forgiveness has often been discussed by both politicians and the media. After all, forgiving student loans would unburden hundreds of thousands from debt – however, there still stands no real basis for believing in total and complete student loan forgiveness. The closest to forgiveness that we’ve seen is the recent CARES Act, which waived payments on student loans through September 30, 2020, allowing those with federal student loans to stop paying for the period without having interest accrue. The constant talk of student loan forgiveness and even the CARES Act, while incredibly important and beneficial to those struggling with student debt, take away from some of the seriousness of paying back student debt on time. After all, why pay back loans when there seems to be student loan forgiveness on the horizon? This hope is the reason that many millennials decide to miss student loan payments, defer them, or even worse, go into default.

 

The Importance of Making Student Loan Payments

The talk of loan forgiveness should never trivialize the importance of paying off student loans promptly, as student loans can affect other things than simply your wallet. When many millennials graduate, they aren’t overly concerned with their credit score or history, and may not even know that missing student loan payments can affect them in this area. After all, they likely aren’t looking to buy a home or take out a personal loan immediately following graduation. They already may have to pay plenty of “new” expenses such as rent, utilities, groceries, etc., and unfortunately, student loans can fall by the wayside with these newfound expenses emerging.

 

However, missed payments, depending on how long you go without making them up, can have severe impacts on your credit score and credit history. Most prevalent is the presence of your missed payments on your credit report for up to seven years. In some cases, missed payments can lead to drops in your credit score as well. As such, it is important that you know how missed student loan payments can affect your credit score.

 

The Reality

The impact of missed payments on your finances cannot be understated. It leads to more interest to pay back, keeping the mountain of debt continuously growing, and it can drop your credit score substantially, especially if you have a good credit score to begin with. And, sadly, debt forgiveness isn’t guaranteed. The best way to avoid drops in your credit score and increasing debt is simply to take it seriously and pay it back timely. Worth noting is that if managed properly student loans can help your credit score in the long run.

 

How to Pay Back Student Loans Faster and More Effectively

Student loans can be seriously overwhelming, but there are several methods to pay them off faster and more effectively:

 

Set Up Automatic Payments

Automatic payments are an easy way to make sure that you are paying your student loans on time and never missing payments. They’re easy to set up and can take much of the burden away from keeping track of when you need to be making your payments.

 

Refinance Student Loans

Student loan refinancing is another way to pay student loans back quickly and more effectively. By refinancing, you choose which loans to consolidate and take out a new loan with a private lender, often with a lower interest rate and with a term length of your choosing. This allows you to either lower your monthly payments or pay your loans off faster by choosing a shorter term. ELFI customers have reported that they are saving an average of $272 every month and should see an average of $13,940 in total savings after refinancing their student loans.1. Check out ELFI’s student loan refinancing calculator to estimate your potential savings.

 

Choosing a Different Term

Another method to pay back student loans quickly or more effectively is to change the term of the loan. Shorter loan terms typically have higher monthly payments but allow you to pay them off faster, while longer terms often lower the monthly payment amount. Adjusting the length of your loan term can help you better manage your student loans by adapting them to your goals and lifestyle.

 

Make Extra Payments

Making extra payments on your student loans allows you to make contributions that directly impact your loan principal balance, helping you save on interest long-term and pay off your loans faster. Keep in mind that if you have late fees or interest has accrued, your payments will first go towards late fees, then interest, then at last your principal balance.

 

Look into Student Loan Forgiveness

If you work in a public service position or for a non-profit, you may want to consider the Public Service Loan Forgiveness (PSLF) program or another loan forgiveness program offered by the federal government. Keep in mind that only about 1% of PSLF applicants actually qualify for forgiveness. Other options exist for volunteers, military recruits, medical personnel, etc. Some state, school, and private programs also offer loan forgiveness. Check with your school or loan servicer to see if you may qualify for student loan forgiveness.

 

Federal Loan Repayment Plans

By default, upon completing your federal student loan grace period, you are entered into the Standard Repayment Plan. However, there are a wide variety of other repayment plans that the federal government offers, such as the Income-Based Repayment plan, which determines payments based on your income and is forgiven after 10 years of on-time payments. Check out the Federal Student Aid website to learn more about the options available to you.

 

Paying back student loans can undoubtedly be difficult and stressful, but by taking advantage of the many resources at your disposal, they can be managed. If you have questions about your student loans or methods of repayment, the best way to have them answered is to contact your loan servicer.

 


 

*Subject to credit approval. Terms and conditions apply.

 

1Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 2/7/2020 and 2/21/2020. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

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2020-07-13
How to Save for Retirement While Making Student Loan Payments

If you have student loans, you know how your debt can affect your ability to pursue your other financial goals, especially saving for retirement.    According to a recent survey by TIAA, 84% of responding adults said that their student loans negatively impacted the amount they were able to save for retirement. For those who aren’t saving for retirement at all, 26% said their student loan balances were why they couldn’t afford to do so.    However, putting off saving for your retirement is a costly mistake. It’s important to balance saving for your future with paying down student loan debt now. If you’re struggling to manage both priorities, here’s how to save for retirement while keeping up with your loan payments.  

Why you need to save for retirement now

When it comes to saving for retirement, the earlier you begin saving, the better. Compound interest and the power of annual returns can help your money grow over time. The longer you wait to start saving for retirement, the more you’ll have to invest your own money to have enough saved to retire comfortably.   For example, let’s say Jen begins saving for retirement at the age of 25. She contributes $250 per month into her retirement account, and her average annual return is 9%. By the time Jen reaches the age of 67, she’s contributed just $126,000 into the account, but her retirement account is worth $1,406,746.   By contrast, Jen’s friend Stephanie puts off saving for retirement until she pays off her student loans and doesn’t start contributing to her retirement until she’s 35. She starts putting $500 per month toward her retirement fund — double what Jen contributes each month. Like Jen, Stephanie earns an average annual return of 9%, but by the age of 67, her retirement fund is worth only $1,108,257. Stephanie contributed $192,000 of her own money — nearly $70,000 more than Jen — but her retirement account is worth approximately $300,000 less than Jen’s because Stephanie got a later start.   Chart showing the impact of saving for retirement earlier  

Retirement savings options

If you’re not sure how to save for retirement, here are some popular retirement plans.   

401(k) 

A 401(k) plan is an employer-sponsored retirement plan, meaning it’s a benefit offered through your job. With a 401(k), you invest a portion of your pre-tax salary in the investments you choose. Your contributions and the earnings are not taxed until you withdraw from the account.  

401(3)b 

401(3)b plans are very similar to 401(k) plans, but they’re offered to employees of non-profit organizations, churches, public schools, and universities. You make contributions to your retirement plan on a pre-tax basis, and your contributions and earnings aren’t taxed until you make withdrawals.  

IRAs

Another great option is to open an Individual Retirement Account (IRA) on your own. There are two options: a Traditional IRA and a Roth IRA.  

Traditional IRA

Anyone can contribute to a Traditional IRA, regardless of income. With an IRA, your earnings can grow tax-deferred, meaning you only pay taxes on your gains when you make withdrawals in retirement. Your contributions may be tax-deductible depending on your income level and if you have access to an employer-sponsored plan.  

Roth IRA

If you meet the income restrictions, a Roth IRA may be a useful option. With a Roth IRA, you make contributions with after-tax dollars. Why is that a good thing? While your contributions aren’t tax-deductible, your earnings and withdrawals are tax-free. And, you can take out the money you contribute to your Roth IRA — but not your earnings — before you reach retirement age without paying any penalties, so your Roth IRA can double as an emergency fund in a pinch.  

How to save for retirement while paying student loans

Finding a balance between saving for retirement and paying down student loan debt can be tricky, but it can be done if you follow these three steps:  

1. Make the minimum payments on all of your student loans

It’s important to stay current on all of your debt to maintain and protect your credit score and prevent racking up costly late fees. Keep making all of the required minimum payments on your federal and private student loans to avoid falling behind and entering student loan default.*  

2. If your employer offers matching contributions, contribute enough to earn the full match

If you have access to an employer-sponsored retirement plan like a 401(k) or 403(b) and your employer offers matching contributions, contribute enough to your account to qualify for the full match. Otherwise, you’ll lose out on free money that is a key part of your compensation package. Over time, skipping the match could cost you thousands of dollars.   For example, let’s say you make $40,000 per year, and your employer will match 100% of your contributions, up to 5% of your salary. That means if you contribute $2,000 per year to your retirement plan — 5% of your salary — your employer will match your contribution, giving you an additional $2,000 per year toward your retirement fund.   If you didn’t take advantage of the match while you were with that employer for five years, you’d miss out on $10,000. But the long-term consequences are even worse. If that money earned an average 9% annual return, in 30 years, that $10,000 would be worth over $147,000. That’s why it’s so important to take advantage of employer matching contributions if they’re available to you.   If your employer doesn’t offer a match, or if you don’t have access to an employer-sponsored plan, contribute to a Traditional IRA or Roth IRA  instead.  

3. Tackle your high-interest student loan debt

If you have extra money left over each month, put it toward high-interest student loan debt, meaning loans with an interest rate of over 5%. You can also consider student loan refinancing to lower your interest rate and reduce your monthly payment.   By refinancing your student loans, you can save money and free up more money in your monthly budget to save for retirement. Use the student loan refinance calculator to see how much you can save.*  

The bottom line 

When it comes to saving for retirement while paying student loans, you should develop a balanced strategy. Aim to both save for retirement and pay down your student loans at the same time. By taking advantage of employer contributions and tackling high-interest debt, you can improve your finances and build a secure future.  
  *Subject to credit approval. Terms and conditions apply.    Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Millennial reading news about student loans in coffee shop.
2020-07-10
This Week in Student Loans: July 10, 2020

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:
US Capitol

GOP Concerns Over Costs Could Limit Student Loan Relief In Next Stimulus

GOP Senate leaders are showing increasing concern about the costs of additional economic relief, particularly when it comes to student loan relief, as they weigh a second stimulus bill.

Source: Forbes

 

State Senate Chambers

Democrats Fail to Override Trump Veto on Student Loan Policy

This Friday, House Democrats were unable to override the Trump Administration's veto on a proposal to reverse the Education Department's strict policy on loan forgiveness for students misled by for-profit colleges. The House voted 238-173 in support of the override measure, coming up short of the two-thirds majority needed to send it to the Senate.

Source: ABC News

 

question mark

Study Finds Gen Z Borrowers Are Unaware of COVID-19 Student Loan Relief Programs

While the CARES Act allowed those with federal student loans to pause payments until September, a recent survey from Student Debt Crisis shows that Gen Z borrowers, in particular, were the least aware of the relief program.  

Source: CNBC

 

note saying pay off debt

Author Shares Her Big 'Wake Up Call' That Led Her to Pay Off $81,00 in Student Debt

35-year-old Melanie Lockert, the author of "Dear Debt," shared with CNBS the story of how she was able to pay off $81,000 in student loan debt over 9 years, with her big wake up call coming five years into repayment.  

Source: CNBC

    That wraps things up for this week! Follow us on FacebookInstagramTwitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.  
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

picture of different loan term lengths
2020-07-08
Dash Through the Debt: How a Shorter Student Loan Term Adds Up

If you’re like most college graduates, you’re sick of your student loans. If you want to get rid of your debt once and for all, refinancing your loans and opting for a shorter student loan term is a smart strategy. You can secure a lower rate and pay off your loans years ahead of schedule while saving thousands.    Here’s what you need to know about shortening your loan term, as well as how much shortening your student loan term could save you.   

How long does the average graduate take to repay their student loans? 

When you graduate from college, you likely expect to pay off your student loans quickly. However, life often gets in the way of your plans, even if you make a good salary.    While the
Standard Repayment Plan for federal student loans is ten years, many students extend their repayment terms with income-driven repayment plans, forbearance or deferment periods, or by missing payments altogether. According to the One Wisconsin Institute, the average length of repayment for graduates with bachelor’s degrees is 19.7 years. If you have graduate student loans, the average repayment period is even longer.    With such a longer repayment term, you’ll pay thousands of dollars in interest charges on top of what you initially borrowed, adding to your loan's total cost. And, carrying such a heavy financial burden for decades can force you to put off other goals, like buying a house, starting a business, or even getting married.   

How to get a shorter student loan term

When you take out a student loan, you sign a loan agreement or promissory note where you promise to pay the loan back according to set repayment terms. The agreement will outline the loan’s interest rate, payments, and loan term.    Many borrowers don’t realize that you’re not stuck with those terms forever. If you’re unhappy with your current loan’s repayment terms or your finances improve, there is a way to change them: student loan refinancing.*    When you refinance your debt, you apply for a loan from a lender like Education Loan Finance for the amount of your total existing student loan debt. If you have both federal and private student loans, you can combine them so you’ll have just one loan to manage and one monthly payment to remember.*    The new loan will have different terms than your old ones, including the interest rate and monthly payment. When you apply for the loan, you can choose your own loan term that works for your goals and budget. For example, if you currently have a ten-year loan term, you can select a five or seven-year loan if you'd prefer a shorter term.   

Benefits of a shorter student loan term

Instead of making payments for 20 years or more, it’s a good idea to select a shorter loan term, if you can afford it. Opting for a shorter student loan term has many advantages:   

1. You can get a lower interest rate

When you have a long loan term, lenders consider you to be a riskier borrower and they charge you a higher interest rate. You’ll have a lower monthly payment, but the longer loan term will cost you more money in interest charges over time.    By contrast, lenders reserve their lowest interest rates for credit-worthy borrowers who choose the shortest loan terms. If you want the best possible rate, opting for a shorter loan term will allow you to save money.    You’re probably wondering, “How much can I save by shortening my loan term?” Let’s look at an example.    Pretend you had $30,000 in student loans with a ten-year loan term at 5% interest. By the end of your repayment term, you would repay a total of $38,184; interest charges would cost you $8,184.    If you refinanced your loans and chose a five-year loan and qualified for a 3.19% interest rate, you’d repay just $32,496 over the life of your loan. By refinancing your debt and selecting a shorter loan term, you’d save $5,688.   

Original Loan

Balance: $30,000 Interest Rate: 5% Loan Term: 10 Years Minimum Payment: $318 Total Interest: $8,184 Total Repaid: $38,184  

Refinanced Loan

Balance: $30,000 Interest Rate: 3.19% Minimum Payment: $542 Total Interest: $2,496 Total Repaid: $32,496

2. You’ll pay off your debt earlier 

When you choose a shorter loan term, you’ll be able to pay off your debt years ahead of schedule. Not only will you save a significant amount of money in interest charges, but you’ll also have the psychological benefit of not having to worry about debt any longer. If your student loan balance was causing you stress, that’s a significant advantage, and a huge weight off your shoulders.   

3. You’ll free up cash flow

Once you’ve paid off your student loans, you’ll free up extra cash flow. You’ll no longer have to make your monthly loan payment, so you can instead direct that money toward other goals, such as saving for retirement, boosting your emergency fund, or buying a home. If you use the above example, you’d have $542 per month you could use to fund your financial goals.    To put that in perspective, let’s say you paid off your loans by the time you turned 27. After that, you invested the $542 you were paying toward your student loans into your retirement nest egg. If you contributed $542 every month into your retirement fund and earned an 8% annual return, on average, your account would be worth over $1.8 million by the time you reached the age of 67.   

The bottom line

While extending your loan term may seem like a good idea to get a lower monthly payment, that can be a costly mistake. You’ll have to pay a higher interest rate and, over time, the longer loan term will cause you to pay back far more in interest charges.    Instead, consider refinancing your loans and selecting a shorter student loan term. You’ll be debt-free sooner, and you may save a substantial amount of money.    To find out how much you can save, use the student loan refinance calculator.*  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.