The surging cost of higher education alongside stagnant wage growth has forced many students and families to face the financial burden of enormous student loans. Today, more than 44 million Americans hold student debt totaling almost $1.5 trillion. In 2009, the Obama Administration introduced programs that offered income-based payments and loan forgiveness to help students better manage the mounting debt.
Last month, President Trump released a budget proposalthat would dramatically alter these repayment plans for undergraduate and graduate students. The plan would also dismantle the Public Service Loan Forgiveness Program, which forgives loans to public sector employees after 10 years of income-based payments. While these changes would only affect new loans starting in July 2019, the news has likely caused borrowers to rethink how to finance education and tackle existing balances.
As a financial advisor, I have helped young people practically manage student debt, often through the use of the existing federal programs. Regardless of whether Trump’s budget becomes reality, students should use the news as a reminder to revisit plans for paying for school and paying down balances. To help students start the conversation, I’ve highlighted a few considerations for current and future borrowers.
Don’t Take Out Debt In The First Place
While current loan programs incentivize young people to seek education for needed jobs like teachers and doctors, young borrowers don’t always recognize the financial burden massive debt can cause in the future. While income-based repayment plans seem reasonable at first glance, payments often never scratch the surface of the principal balance. If borrowers need to defer because of something like job loss or disability, balances continue to rise with interest.
Regardless of the success of Trump’s proposal, borrowers should spend more time weighing the way debt will affect financial wellbeing for decades. To start, borrowers need to assess the costs and benefits of the loan and job prospects. It’s important to research whether cheaper educational options might provide the same or similar job opportunities. Most importantly, students need to recognize that such a commitment doesn’t allow for much career flexibility.
Protect Your Cosigners
While federal loans make up most of the total outstanding student debt, many borrowers finance education through private banks. Unlike federal loans, these private loans require borrowers to prove a certain level of creditworthiness, an often-difficult measure for young students who have not yet established a credit history. As a result, mom and dad must often become cosigners of these loans, thereby taking on the responsibility of repayment should the primary borrower fail to do so.
Trump’s plan to disrupt federal loan forgiveness has likely reminded private borrowers that they’ve never had access to such programs. As private institutions expect full repayment, the responsibility falls on the cosigner if the borrower can’t repay for financial reasons or if the borrower dies or becomes disabled. Families need to discuss placing life and disability insurance on borrowers to protect the financial livelihood of cosigners facing such difficult circumstances.
For existing borrowers—and those with graduate debt in particular—some banks offer refinancing programs that restructure your payment plan, in some cases even allowing for extended deferment of monthly, income-based payments. Such programs can prove beneficial for certain professionals that can expect significant increases in salary going forward. Doctors, for example, can defer payments through residency and begin paying off the balance as careers advance.
As with any decision surrounding student loans, refinancing to utilize deferment programs comes with risks. Your choice to not pay now means that you believe your income will rise and allow you to make required income-based payments in the future. However, as you defer payments, the loan principal often continues to rise with interest. An inability to work for any reason would dramatically affect your deferment plans. Consider disability insurance that could replace your income in the event you become disabled.
Do The Math
Before jumping into any life-changing financial decision, do the math. Consider whether your job prospects and monthly spending on things like rent would mathematically allow you to pay down your loan balance without the help of federal programs. Even for those currently using income-based payment programs, a monthly budget going forward can show you where every dollar goes, helping you determine where to make needed changes in your discretionary spending.
Finally, remember that life changes. Even if we think the math says we can take on debt today, an endless amount of constantly changing factors should force you to reevaluate tomorrow. By accounting for changes in things like your income or your cost of living, you’ll know when you should rein in spending and when you have a bit extra to invest, save or pay down more of your debt.
Regardless of Trump’s proposal, these basic considerations should help current and future students better manage loan debt. While existing federal programs provide a huge benefit for borrowers, considering other factors and understanding the effects of debt can help you determine the best way to finance your education while protecting your long-term financial well-being.