Student loan repayment is a common challenge faced by many people.
While most of you might expect to be repaying your loan in your twenties or thirties, there are still a lot of people over 50 who are struggling to repay their own student debts or from putting their kids through college.
This can be a huge hindrance while planning for retirement. How can you focus on your savings, investments, and tax planning, and lay out an overall retirement plan if you are constantly burdened with monthly student loan payments?
Recognizing this problem, Erik Kroll, CFP® from Student Loans Over 50 has embarked on a journey to help people pay off their student loans as early as possible so that they can retire sooner and enjoy their golden years.
In one of the recent episodes of the Retirement Revealed podcast, Erik shared a simple yet highly effective five-step process to help those heading towards retirement navigate their student loans. We’ll go through that process in this blog.
Read on to learn the steps you need to take to ease the burden of your student loan!
1. List Out Your Student Loans
There are a number of factors that influence your loan repayment strategy. The first step you should take is to list out all of these factors. This will help you make more informed decisions that will suit your unique situation.
The most important variables to keep in mind are:
a) The type of loan:
There are a wide variety of loans available. It’s important to identify the category your particular loan falls into. Some of the common types of student loans include a Direct Stafford Loan, a Parent PLUS Loan, or a Federal Family Education Loan (FFEL).
The type of your student loan dictates the repayment plans that you’ll qualify for.
b) The time when the loan was taken out:
The issue date of your loan is also a significant factor as it determines whether you qualify for a specific plan.
The loans offered by the government and private institutions keep changing. So, if you took out a loan that is no longer available today, it can be difficult to keep a track of the applicable rules and regulations that apply to your situation. (For instance, the FFEL program was discontinued in 2010.)
c) Balance remaining on the loan:
Knowing what you still owe on your student loan is helpful. If you can break it down into separate principal and interest amounts, even better!
However, simply knowing the outstanding balance is also a good starting point.
d) Interest rate:
If your student loan is a type of federal loan, then the interest rate until September 30th, 2021 is 0%.
However, after this forbearance ends, you’ll need to factor in the interest rate on your loan as it significantly impacts the monthly amount you’ll need to pay.
2. Pursue Forgiveness
There are several forgiveness programs available to eligible borrowers that can help you become completely free from student loans.
One of the most popular ones is the Public Service Loan Forgiveness (PSLF) program. After making 120 qualifying monthly payments (which need not be consecutive), it essentially forgives the remaining balance on your student loan, tax-free!
Such a forgiveness program can be highly beneficial as those savings can be redirected towards your retirement planning.
To qualify for the PSLF program, you must work for a qualified employer. This includes government employers at any level, from federal to local. It can also be a nonprofit organization, such as an 501(c)(3) employer, a hospital, or even attorneys working for a public defender.
The second requirement is that you must work full-time, which is 30 hours or whatever your employer deems full-time — whichever is stricter.
You also need to make qualifying payments, a payment based on your income. In total, there are four repayment plans under the federal system that are based on your income.
Finally, your student loan should be a qualifying loan. Direct Loans qualify for the PSLF program. However, the FFEL loans and private loans don’t qualify.
3. Coordinate Your Tax Strategy
In financial planning, everything is intertwined. Therefore, tax planning also affects your student loans, especially if you’re on an income-driven repayment plan.
If you’ve decided to opt for a forgiveness program, you want to pay as little towards your loans as possible and maximize your savings through the program. This leads us to – how can you drive down your adjusted gross income (AGI)?
There are a lot of ways to do that. By contributing to your retirement plans, 401(k), or 403(b), you can increase your pre-tax savings. You can also file separate tax returns from your spouse, thus lowering your total income and ultimately reducing the monthly loan payment.
Remember, tax planning is one of the most critical parts of financial planning. Coordinating your tax strategy with your student loans is definitely worth considering as it can help you minimize your loan payments.
4. Coordinate Your Investments
The main reason for coordinating your investments with your loan repayment plan is that it helps you identify the areas where you can maximize your savings.
If you’re trying to lower your income as discussed in step 3, then prioritizing contributions towards 401(k), 403(b), and your Traditional IRA might be a better idea, instead of focusing on something like a Roth IRA.
Moreover, if you have an after-tax brokerage or investment account, you should minimize the tax burden on that particular account by paying a close eye on your dividends, interest and realized capital gains.
By coordinating all of your investment accounts effectively, it’s possible to lower your income, minimize your tax burden, and still earn decent returns.
5. Create Your Paydown Plan
This is the step where you take an overall integrated approach. After having focused on all of the steps above, you can finally focus on building an overall repayment plan that helps you pay off your student loan in the most effective way.
There is no one universal solution to this. For example, depending on your unique situation, you might want to apply for forgiveness, pay down your entire loan aggressively, or refinance at a lower rate.
Having a comprehensive process in place not only helps you develop a strong plan, but it also enables you to successfully implement that plan.
Who knows, you might be able to retire a lot sooner than you expected and live your dream retirement!
To learn more about how Erik Kroll helps people over 50 to tackle the complexities of student loans, visit Student Loans Over 50.
If you have any questions regarding your retirement planning, feel free to contact us!