How to Choose the Best Student Loan Repayment Plan

May 08, 2015

I had a conversation with a young man in his early 20’s recently who had just started his first “real job” and was about 60 days from his student loans going out of deferral. He was panicking because there are a whole lot of options to repay student loans today that didn’t exist when I had student loans. (My son would like to add that they also didn’t have electricity or cars when I had student loans.)

Looking at the options in front of him, I could understand his dilemma. I had 2 options when I graduated – a straight 10 year term loan and a “graduated” payment plan that started with small payments and increased every 2 years to a level well above the standard monthly payment. Both of those options still exist today, but there are also many other choices. It is a very tough decision, and it can impact the next 10-20 years of cash flow. This is one of the biggest financial decisions a new graduate will make.

The young man I talked to had about $80,000 in student loan debt and had no idea what to do. So he came in and we talked through some options and did some number crunching. Here are a few of his options, along with some financial highlights:

As a starting point, the fixed payment over 10 years would be about $925/month. A graduated payment for him would start at a more manageable $530 and eventually rise to $1,593/month. The flat payment costs $111,000 over 10 years while the graduated would require $119,000 over that 10 year window.
He has the option to do extended term payments, either at a fixed payment or a graduated payment. By extending from 10 years to 25, his fixed payment drops to $555/month but the total payments over the life of the loan increases to $166,000. In the graduated plan, he starts at $453 and increases over time to $793, and the total payments are $180,000. Lesson learned: Extending the payments can help reduce cash outflow for those at the start of their careers, but the total cost of the loan rises substantially! If there’s any way to afford the higher payments by not extending, don’t extend. It’s a very expensive extension.
A relatively new type of option is an income-based repayment (IBR) plan. These loans are popular because the payment is limited to 15% of the borrower’s “discretionary income.” Discretionary income is defined as the gap between adjusted gross income and 150% of the federal poverty guidelines. For this young man, his IBR payments based on his $50,000 salary would be $400-$900 over the 225 month term of his loan as his income rises. He would pay $155,000 in total, which is more than the 10 year loans but less than the extended term loans. Lesson learned: IBR is the “hot option” right now, but it isn’t always better than a straight standard term loan. Know your numbers and you may see a better option. This could be a much better option for borrowers who hope to grow their income over time than the extended payment plans.
Another relatively new option is the “Pay as You Earn” repayment plan. It is similar to the IBR but with a few differences. It’s more difficult to qualify for PAYE than IBR but the payments are 10% of discretionary income rather than 15%. Looking at his numbers, his payments would start at $270 and eventually move to $825. After 20 years, he would have paid $121,000 and would have $66,000 forgiven at the end of his term. Lesson learned: This is a tough loan repayment plan to qualify for, but it eases the cash flow and makes the risk of default quite low. Of all the options, this one made the most sense for him. He can qualify for the lower initial payments and he can increase his payments as his income rises. He can also, with a low initial payment, add principal to each payment with the hopes of paying off the loans well in advance of the full term.

When looking at student loan repayment options, know that the world has changed. These options are available through the Department Of Education and there are other newer options out there like www.SoFi.com, where borrowers can refinance without a bank being involved through peer-to-peer lending. This can be a great way for borrowers to get out of high-interest student loans. What I learned during my conversation with him is that the right answer is going to be different for everyone. There is no single “best option.” Factors like current income, expected future income, cash flow constraints and other goals (buying a house or car) should be considered as well as things like affordability today, total interest paid over the loan’s life and total lifetime payments. It’s a complex web of options, but if you understand which factors are most important to you, the right repayment option should become clear once you start analyzing your real numbers. This post was originally published on the Financial Finesse column on Forbes.com.

Laughter Can Be Retirement Medicine

May 01, 2015

Earlier in the day, I had a conversation with a couple who were convinced that they didn’t have nearly enough money to retire any time soon and this was a very problematic issue for them.While she loved her job and said she planned to work until she’s the oldest employee ever at her company, he is absolutely miserable. Through a reorganization at his company, he now reports to a manager that he absolutely cannot stand and he said he feels like life is being slowly sucked out of him. The new boss, in his view, is an absolute megalomaniac who makes life miserable for everyone in their department. Nearly half of the staff has left for other opportunities within the last 6 months and the workload for those remaining is overwhelming to the point that he feels like his health is being compromised. Continue reading “Laughter Can Be Retirement Medicine”

Don’t Pay For Free Stuff

April 24, 2015

I was walking down a long pier with my kids not too long ago and there was a big splash off to our left.I jokingly yelled “Free Willy” and my kids looked at me like I was having some type of out-of-body experience. They had no idea what I was talking about since the movie was made well before any of them were born, and while they’ve seen nearly every Disney and Pixar movie made since their birth, I guess they missed some of the older ones. They know way more about “Finding Nemo” than “Free Willy.” Continue reading “Don’t Pay For Free Stuff”

“Worthless” Hunks of Junk

April 10, 2015

My daughter and I were talking about cars recently.She borrowed mine to “allow me” to drive hers for a few days to see if I could figure out what was the source of a noise coming from her car. After driving it for two days, I couldn’t figure out the noise but I was able to fill up her empty gas tank, check her fluids and inflate her tires. Continue reading ““Worthless” Hunks of Junk”

In Defense of Tax Refunds

April 03, 2015

My friend Sana is awesome. She has the ability to point out a view that I may not have considered before and makes me take a step back a minute and consider other angles. Maybe this blog post can do for others what she has done for me at times.
Continue reading “In Defense of Tax Refunds”

How to Reduce Out-of-Pocket Health Care Costs

April 02, 2015

Are you paying more for out-of-pocket health care costs? If so, you’re not alone. There’s a growing trend to higher deductibles for health insurance policies, which means we’re increasingly having to pay at least $1-2k out-of-pocket before the insurance kicks in. Here are some ways to reduce those costs: Continue reading “How to Reduce Out-of-Pocket Health Care Costs”

It’s All About Perspective

March 27, 2015

Perspective can sometimes be situational. Our perspective today can be very different than it was a decade ago. I have a friend struggling with her birthday right now. She is about to turn an age that ends with a 0. Continue reading “It’s All About Perspective”

Finding Balance

March 20, 2015

I met with a young woman recently who had a few options in front of her and we talked through the choices in front of her.She had just graduated from business school and accepted an offer with her current employer. She is in a two year long leadership development program, and during that program, the company is paying for her living expenses. They do that so that she could maintain her home back in her hometown since that’s where she will eventually live again. This woman had just gotten married and her husband moved to the new city with her and he will look for a job there since he just finished school as well. Continue reading “Finding Balance”

Good News For Credit Scores

March 13, 2015

At a time where I love to look for good news stories to combat all the negativity I’ve seen in the press lately, comes a very good news story for consumers. The 3 major credit bureaus have agreed to overhaul how they handle medical debt in credit reports. I meet with a lot of people who are looking for ways to improve their credit score so that they can buy a car, buy a house, get the nod of approval on a new job or many other reasons. Often, we look at a credit report and the biggest negative is debt from a medical provider. What’s amazing to me is that over half of the debt on credit reports is unpaid medical debt. That is gigantic. Continue reading “Good News For Credit Scores”

It’s Time For Changes to Payday Loans

March 06, 2015

In what is a positive development for many Americans, not to mention society at large, there are some changes coming to the world of payday loans. The CFPB (Consumer Financial Protection Bureau) is rolling out some new regulations for the short-term loan industry that can only be viewed as a good thing by the borrowers. (Maybe not so much for the owners of the lending companies, though.) Continue reading “It’s Time For Changes to Payday Loans”

Don’t Take Financial Advice From Pop Music

February 27, 2015

I was out with friends recently and a new song from Pitbull and NeYo started playing. The song created a rush to the dance floor and given that when I dance, people think I’m either having a seizure or in some sort of pain, I opted to grab beverages for our group instead of risking injury (mostly to others) on the dance floor. As I was waiting for the drinks to be poured, I started listening to the lyrics of the song. Continue reading “Don’t Take Financial Advice From Pop Music”

Conflating and Misremembering

February 13, 2015

It’s been hard to not pay attention to what is going on in the news business lately.Jon Stewart is leaving the Daily Show. Brian Williams has stopped reporting the news and has become the news. Continue reading “Conflating and Misremembering”

Are You On a Crash Course to Disaster?

January 23, 2015

One of the more interesting stories I’ve seen recently in the world of sports is about a guy named Rob Konrad, a former NFL player, who fell off his boat and swam 9 miles to shore. It took him about 16 hours, he had hypothermia, and he couldn’t walk but at least he survived the ordeal. Along the way, he was circled by a shark and had to fight waves, wind and the dark in order to make it home safely. Continue reading “Are You On a Crash Course to Disaster?”

What to Do for 2015

January 16, 2015

I usually view “what to do at year end” and “what to do to start the new year” financial articles with great disdain (the same way I typically avoid writing “theme” blog posts for Valentine’s Day, Mothers’ & Fathers’ Day, Independence Day [is there any bigger cliché?], and any other over-played theme). However, I have spent most of my work hours early in 2015 talking to people who want to look at things they can do in the next 12 months in order to make progress toward becoming financially secure. It’s only because I have been asked so often that I’ll cave in, become part of the crowd and write a “What To Do for 2015” suggestion list. Continue reading “What to Do for 2015”

Where is Your “Government Waste?”

January 09, 2015

Every year, in the December/January time frame, there are a lot of articles looking back at the prior year or looking forward to the New Year.As a bit of a political junkie, I love reading stories about predictions for the coming year but one of my favorite things to see each year is a look at how the government (mis)spent enormous sums of taxpayer’s dollars. This isn’t a Democratic or a Republican issue; it’s a big organization problem. Continue reading “Where is Your “Government Waste?””

The Price of Inattenton

January 02, 2015

As we look back at the previous year, I have started thinking about people I’ve talked to this year who have left an impression on me. One of the more memorable people that I was able to have conversations with started with a story that was disturbing on a few levels, but has come to a relatively happy conclusion. The fun part for me was getting updates on her progress and seeing the change in her voice, posture and energy level as things got better. Continue reading “The Price of Inattenton”

How Much Progress Can You Make Next Year?

December 26, 2014

One of the joys of being in a role where I can see a person make progress over the course of time is that I can remember where they started and see where they are now. Since they are living in it day to day, they don’t have the perspective that I do as a casual observer. It’s a lot like when my kids were younger, there were cousins we would only see once every year or two. Every time we saw them, I was shocked by how much their kids had grown and they were shocked by how much my kids had grown, but neither of us was shocked by the growth of our own children. Continue reading “How Much Progress Can You Make Next Year?”

Don’t Let Debt Destroy Your Marriage

December 19, 2014

Sometimes when I meet with someone to walk through their finances, I get the distinct impression that our conversation is going to have a significant impact on their life. I had one of those conversations recently with a couple who was very seriously considering separating and divorcing. One of the biggest factors in the stress and tension that is damaging their marriage is how they deal with money or…don’t deal with it. Continue reading “Don’t Let Debt Destroy Your Marriage”

Why Your Choice of School Matters

December 12, 2014

I read this article about parents shouldering a massive burden for student loan debts for their children.This is currently a huge problem in the middle class. Lower income families receive significant financial aid. Higher income families can support the cost of college out of cash flow. It’s the middle class that is getting hammered with this and it’s creating some ripple effects into other areas of life. I have talked with countless couples who are delaying retirement for 5-10 years in order to pay down student loan debt. They all hope that their employers keep them around that long and that they don’t get caught up in a downsizing or have serious medical bills like the family in the article. Continue reading “Why Your Choice of School Matters”

Should You Take a Pension or a Lump Sum?

December 05, 2014

Within the past few weeks, I have had more than a few people ask about a prior employer offering a lump sum payout vs. leaving it in the plan and taking a monthly payout at a later date.I’m not sure if companies are making this “the lump sum season” intentionally or not, but there has been a major influx of conversations about this topic. I’m figuring for every person that is asking, there are probably many more sitting there silently and trying to make the decision on their own. That sounds like a great reason to write a blog post. Here is the process that I walk through with a person to help them evaluate their options when they have a lump sum opportunity. Continue reading “Should You Take a Pension or a Lump Sum?”