Charles Cox, CFP®
Vice President, Planning Advisor, Canandaigua National Bank & Trust
[email protected]
The time has come to pay back your
student loans, now what? Dealing with
student loan debt can be stressful and
even frustrating for borrowers, however,
now is the time to take control and alleviate
that stress. First, create an inventory of
your loans including loan type (private vs
federal), balance, interest rate, payment
amount, and repayment term. This can
be done using your credit report through
annualcreditreport.com for private loans
or studentaid.gov for federal loans.
Once you have collected this information,
you are able to develop a debt management
strategy. First, determine how these
payments fit into your budget. For those
with extra funds, prioritize paying down
the principal of the loan with the highest
interest rate or pay extra on the loan with
the lowest balance to increase future
cashflow. Some may find it financially
difficult to repay their student loans. In
this case, federal loans offer options for
repayment and possible forgiveness.
Private loans have fewer options and
protections, therefore, refinancing may
be the only option to lower payments in
these instances.
Types of federal loans include Direct
Subsidized, Direct Unsubsidized, FFEL,
Direct Plus, or Direct Consolidated.
Federal loans have several repayment
options. For those that can’t afford
standard repayment terms, choosing the
right repayment plan is critical. Under
some Income-Driven Repayment Plans
(IDR), remaining balances are forgiven,
usually after 20 to 25 years or repayment.
This forgiveness may be taxable and
require additional planning. Public Service
Loan Forgiveness (PSLF) is typically
available for those in an IDR plan after
10 years or successful repayment and 10
years of service with a government or
non-for-profit organization. PSLF requires
the borrower to recertify their income
annually. Direct Loans should only be
refinanced if there is no opportunity for
forgiveness.
The Coronavirus Aid, Relief, and Economic
Security Act, (CARES Act) suspended
payment, interest, and involuntary
collection on Direct Loans. This provision,
which is set to expire on January 31,
2022, increased cashflow for borrowers
and allowed borrowers to receive credit
towards their repayment plans. The
paused payments count toward IDR
forgiveness and PSLF as well as on time
payments for those in Rehabilitation
Plans. The CARES Act also suspended
the income tax due on loan forgiveness
amounts to 2025.
Resuming student loan payments may
come with challenges. After 21 months,
some loan servicers have exited the
business. The remaining servicing
companies are preparing for payments
to resume and taking on new loans from
exited servicers. An estimated 10 million
borrowers will need to transition to a
new servicer or are entering repayment
status for the first time. With this in mind,
borrowers should be proactive as January
approaches. Your servicer will be in touch
regarding your payment due date, but
ensuring that your servicer has your
correct contact information is paramount,
as your first payment needs to be made on
time. Another wrinkle will be the annual
income recertification for IDR plans.
Typically, this is done annually, however
the system may be taxed recertifying so
many borrowers at once.
Debt management is an important part
of any financial plan. While student
loans come with their own challenges,
understanding what debt you have and
the options available will help you develop
a plan that works for you. Our team can
help incorporate a successful strategy
into your financial plan.
This material is provided for general information purposes only. Canandaigua National Trust Company of Florida is an affiliate of Canandaigua National Bank & Trust. Investments are not FDIC insured, not bank deposits, not obligations of, or guaranteed by, Canandaigua National Bank & Trust or any of its affiliates, including Canandaigua National Trust Company of Florida. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please contact your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.