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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.

 

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Woman thinking about using credit card to pay down student loans
2020-11-30
Should I Pay Student Loans with a Credit Card?

Paying off student loans can be a challenging process, so it’s natural to look for creative ways to accomplish your goal. One question some student loan borrowers have asked is whether they can use a credit card to pay student loans.    Technically, it is possible, but it’s generally not a good idea. Here’s what you should know before you try it.  

Can You Use a Credit Card to Pay Student Loans?

Unfortunately, making monthly student loan payments with your credit card isn't an option. The U.S. Department of the Treasury does not allow federal student loan servicers to accept credit cards as a payment method for monthly loan payments.   While that restriction doesn’t extend to private student loan companies, you’ll be hard-pressed to find one that will offer it.   That said, paying off student loans with a credit card is technically possible through a balance transfer. Many
credit cards offer this feature primarily as a way to transfer one credit card balance to another, and if you’re submitting a request directly to your card issuer, that’s typically the only option.   However, some card issuers will send customers blank balance transfer checks, which gives you some more flexibility. For example, you can simply write a check to your student loan servicer or lender and send it as payment. Alternatively, you can write a check to yourself, deposit it into your checking account, and make a payment from there.   Balance transfer checks often come with introductory 0% APR promotions, which give you some time to pay off the debt interest-free. That said, here are some reasons why you should generally avoid this option:  
  • Once the promotional period ends, your interest rate will jump to your card’s regular APR. The full APR will likely be higher than what your student loans charge.
  • Balance transfers come with a fee, typically up to 5% of the transfer amount, which eats into your savings.
  • Credit cards don’t have a set repayment schedule, so it’s easy to get complacent. You may end up paying back that balance at a higher interest rate for years to come.
  • Credit cards have low minimum payments to encourage customers to carry a balance, which could cause more problems. 
  • You won’t earn credit card rewards on a balance transfer, so you can’t count on that feature to help mitigate the costs.
  So if you’re wondering how to pay student loans with a credit card, it is possible. But you’re better off considering other options to pay down your debt faster.  

Can You Use a Student Loan to Pay Credit Cards?

If you’re still in school, you may be wondering if it’s possible to use your student loans to pay your credit card bill. Again, technically, yes, it is possible. But there are some things to keep in mind.    The Office of Federal Student Aid lists acceptable uses for federal student loans, and private student lenders typically follow the same guidelines. Your loans must be used for the following:  
  • Tuition and fees
  • Room and board
  • Textbooks
  • Supplies and equipment necessary for study
  • Transportation to and from school
  • Child care expenses
  If you incur any of these expenses with your credit card, you can use student loan money to pay your bill. However, if you’re also using your credit card for expenses that aren’t eligible for student loan use, it’s important to separate those so you aren’t using your loans inappropriately.   Also, the Office of Federal Student Aid doesn’t list credit card interest as an eligible expense. So if you’re not paying your bill on time every month and incurring interest, be careful to avoid using your student loan money for those expenses.  

How to Pay Down Your Student Loans More Effectively

If you’re looking for a way to potentially save money while paying down your student loans, consider student loan refinancing   This process involves replacing one or more existing student loans with a new one through a private lender like ELFI. Depending on your credit score, income, and other factors, you may be able to qualify for a lower interest rate than what you’re paying on your loans right now.    If that happens, you’d not only save money on interest charges, but you could also get a lower monthly payment.    Refinancing also gives you some flexibility with your monthly payments and repayment goal. For example, if you can afford to pay more and want to eliminate your debt faster, you can opt for a shorter repayment schedule than the standard 10-year repayment plan.    Alternatively, if you’re struggling to keep up with your payments or want to reduce your debt-to-income ratio, you could extend your repayment term to up to 20 or even 25 years, depending on the lender.    Keep in mind, though, that different refinance lenders have varying eligibility requirements. Also, just because you qualify, it doesn’t necessarily mean you can get more favorable terms than what you have now.   However, if you’re having a hard time getting approved for qualifying for better terms, most lenders will allow you to apply with a creditworthy cosigner to improve your odds of getting what you’re looking for.   Before you start the process, however, note that if you have federal loans, refinancing will cause you to lose access to certain programs, including student loan forgiveness and income-driven repayment plans. But if you don’t anticipate needing either of those benefits, it won’t be an issue.  

The Bottom Line

If you’re looking for ways to pay off your student loans more effectively, you may have wondered whether you can use your credit cards. While it’s possible, it’s generally not a good idea. Also, if you’re still in school, it’s important to be mindful of how you’re allowed to use your student loan funds, especially when it comes to making credit card payments.   A better approach to paying down your student loan debt is through refinancing. Take some time to consider whether refinancing your student loans is right for you, and consider getting prequalified to see whether you can get better terms than what you have on your current loans.
Woman learning how to start investing with student loans
2020-11-27
Should You Save, Invest or Pay Off Student Loans?

One of the questions many students grapple with as they begin life post-college is whether to invest or aggressively pay off their student loans. Figuring out when to start investing can be a complicated issue, especially if you’re worried about how much student loan debt you ended up with after college.   The good news is that it’s possible to start investing while paying student loans. However, everyone needs to make a decision based on their own situation and preferences. As you consider your own choices, here’s what to consider when deciding whether to start investing with student loans.  

Should I Invest When I Have Student Loan Debt?

When you have student loan debt, it’s tempting to focus on paying that down—just so it isn’t hanging over your head. However, there are some good reasons to invest, even if you’re paying off student loans.    The benefits of investing include:  

Compounding Returns

The earlier you invest, the longer your portfolio has time to grow. When you invest, you receive compounding returns over time. Even small amounts invested consistently can add up down the road. If you decide to wait until your student loans are paid off before you invest, you could miss out on several years of potential returns.  

Tax-Deductible Interest

If you meet the requirements, a portion of your student loan interest might be tax-deductible. If you can get a tax deduction for a portion of your interest to reduce its cost to you, that could be a long-term benefit. It’s not the same as not paying interest at all, but you reduce the negative impact of the interest. For more information about this option, speak with your financial advisor.  

Returns on Investment May Exceed What You Pay in Interest

The long-term average return of the S&P 500 is 9.24%. If you qualify for a tax deduction on your student loan interest, you can figure out your effective interest rate using the following formula:   Student loan interest rate x [1 - your marginal tax rate]   If you fall into the 22% marginal tax bracket and your average student loan interest rate is 6%, you could figure out your rate as follows:   6 x [1 - 0.22] = 4.68%   Long-term, the potential return you receive on your investments are likely to offset the interest you pay on your student loans.   Don’t forget, too, that if you decide to refinance your student loans, you might be able to get an even lower rate, making the math work out even more in your favor if you decide to invest.  

Student Loan Forgiveness

Another reason for investing with student loans is if you plan to apply for forgiveness. If you know that you’re going to have your loans forgiven, rushing to pay them off might not make sense. Whether you’re getting partial student loan forgiveness through a state program for teachers or healthcare workers, or whether you plan to apply for Public Service Loan Forgiveness, you might be better off getting a jump on investing, rather than aggressively tackling your student debt.  

A Word of Caution About Investing

While investing can be a great way to build wealth over time, it does come with risk. When paying off student loan debt, you have a guaranteed return—you get rid of that interest. With investing, you aren’t guaranteed that return. However, over time, the stock market has yet to lose. As a result, even though there are some down years, the overall market trends upward.    If you don’t have the risk tolerance for investing while you have student loans, or if you want the peace of mind that comes with paying off your debt, you might decide to tackle the student loans first and then invest later.  

How to Start Investing

If you decide to start investing while paying student loans, there are some tips to keep in mind as you move forward.  

Make at Least Your Minimum Payment

No matter your situation, you need to at least make your minimum payment. You don’t want your student loans to go into default. Depending on your income and situation, you might be able to use income-driven repayment to have a lower payment and then free up more money to invest. Carefully weigh the options to make sure that makes sense for your situation since income-driven repayment can result in paying interest on student loans for a longer period of time.  

Decide How Much You Can Invest

Next, figure out how much you can invest. Maybe you would like to pay down your student loan debt while investing. One way to do that is to determine how much extra money you have (on top of your minimum student loan payment) each month to put toward goals like investing and paying down debt. Maybe you decide to put 70% of that toward investing and the other 30% toward paying down your student loans a little faster. There are different ways to divide it up if you still want to make progress on your student loans while investing.  

Consider Retirement Accounts

If your job offers a retirement account, that can be a good place to start investing. Your investment comes with tax benefits, so it grows more efficiently over time. Plus, you can have your contributions made automatically from your paycheck, so you don’t have to think about investing each month.  

Use Indexing to Start

Many beginning investors worry about how to choose the “right” stocks. One way to get around this is to focus on using index funds and index exchange-traded funds (ETFs). With an index fund or ETF, you can get exposure to a wide swath of the stock market without worrying about picking stocks. This can be one way to get started and take advantage of market growth over time. As you become more comfortable with investing, you can use other strategies to manage your portfolio.  

Bottom Line

It’s possible to start investing while paying student loans. In fact, by starting early, you might be able to grow your portfolio for the future even while you work on reducing your student loan debt. Carefully consider your situation and research your options, and then proceed in a way that makes sense for you.
Recently married couple with student loan payments
2020-11-25
How Marriage Can Impact Your Student Loan Repayment Plan

For better and for worse, marriage can really change your financial situation. The tax bracket you fall into, the investment rules you need to follow, even your financial priorities can, and likely will, change after you tie the knot.

 

That principle also holds true when it comes to student loans. Getting married can help, hurt or simply alter your student loan repayment trajectory.

 

Read below for a breakdown of the most important things to consider when it comes to marriage and student loans.

 

Marriage Will Affect Income-Driven Repayments

Borrowers with federal loans on an income-driven repayment plan may end up paying more every month when they get married.

 

These plans include:

  • Revised Pay As You Earn Repayment Plan (REPAYE)
  • Income-Based Repayment Plan (IBR)
  • Income-Contingent Repayment Plan (ICR)
  • Income-Sensitive Repayment Plan
 

The federal government will include your spouse's income when calculating your monthly payment. You may see a huge increase in the amount due if your spouse earns significantly more than you.

 

Let’s say you earn $50,000 a year and owe $80,000 in student loans with a 5.3% interest rate. If you choose an income-driven plan, your monthly payment will range between $257 and $621, depending on the specific plan you choose.

 

If you marry someone whose Adjusted Gross Income (AGI) is $100,000, your monthly payment under an income-driven plan would increase to between $1,024 to $1,035 a month. You could end up paying tens of thousands more over the life of the loan.

 

Only the REPAYE plan won’t factor in your spouse’s income, assuming you file taxes separately. However, filing taxes separately can hurt your overall bottom line because you may miss out on significant tax deductions and credits. Talk to an accountant to see which filing status is best for your financial situation.

 

If you earn much more than your spouse, you may see your payments decrease or only slightly increase when you get married. You can use the official federal loan simulator to see how your payments will change.

 

May Lose Student Loan Interest Deduction

Borrowers may be able to deduct up to $2,500 in student loan interest on their taxes, whether they itemize or take the standard deduction. But only those who earn below a certain amount are eligible for this deduction. For more information about this option, speak with your financial advisor.

 

In 2020, single borrowers whose Modified Adjusted Gross Income (MAGI) was $70,000 or less may be able to deduct the full $2,500. Those with a MAGI between $70,000 and $85,000 may be able to take a partial deduction. Individuals who earn more than $85,000 do not qualify for the deduction.

 

Married couples may be eligible for the deduction if their MAGI is less than $140,000. The deduction is reduced for couples whose MAGI is between $140,000 and $170,000, and is eliminated for those whose MAGI is more than $170,000.[1]

 

If you currently qualify for this deduction, you may lose that eligibility if you marry someone who pushes your income past the threshold. Also, you cannot claim this deduction at all if you file taxes separately. This is another instance where filing taxes separately may not be worth it.

 

Legal Responsibility

Federal student loans remain the borrower’s responsibility, even if they die or default on the loan. The government won’t request payment from a spouse for their husband or wife’s student loan balance.

 

Private loans are different based on state laws as far as protocols for handling the original borrower’s death. Contact a local attorney if you have questions or concerns. Borrowers who are worried about leaving their student loans behind can increase their life insurance payout to compensate.

 

Divorce Impacts Student Loans

In most states, you're only responsible for the loans incurred in your name, unless you’re a cosigner. But if you or your spouse take out private student loans while married, the other person may still be liable for them even if you get divorced.

 

A prenuptial or postnuptial agreement can sometimes work around this. Make sure to have a qualified lawyer draft one of these agreements if this is a concern.

 

Make Payments Easier

Most couples find that their overall living expenses decrease when they get married because there's someone to split the rent, utilities and groceries with. This can free up more money for student loans.

 

Married borrowers may also be less likely to miss payments or default on their loans if they lose their job, because their spouse can pick up the slack. Obviously, this only holds true if both spouses have sources of income.

 

Can Cause Disagreements

Statistically, money is one of the most common reasons for divorce. Conflict can easily arise if one person is bringing in $100,000 of student loan debt and the other person is debt-free. The debt-free spouse may feel burdened, while the indebted spouse may feel shame and judgment.

 

Before you get married, discuss how you want to handle the student loan situation. Should you keep finances separate until the borrower repays the balance, or should you combine your incomes and knock out the debt together?

 

Marital counseling can help both parties work through these issues before they become a major problem, and a financial planner can help couples formulate a strategy that works best for everyone.

 

Your Spouse Can Cosign

If you were denied a student loan refinance because of your income or credit score, you may be a better candidate with a cosigner. Most lenders consider a spouse an eligible cosigner if they have a good credit score and stable income. Refinancing your student loans to a lower interest rate can save you hundreds and thousands in interest.

 

Having your spouse co-sign on your refinance means they'll be legally liable if you default. This will also impact their credit score and show up on their credit report, so make sure your partner understands what they're agreeing to before cosigning on your refinance.

 

Refinancing your student loans involves a simple application process. Explore the ELFI website today to learn more about student loan refinancing.