• Nate Baim, MBA, CFP®

Understanding Your Student Loans


Enjoy this week's edition of the Planner's Beta


Beta (n) - climber's jargon that designates information about a climb This digest's purpose is to share observations, ideas, and treasures found this week which you may also find insightful. Sharing does not mean it's an endorsement. I am endorsing the pursuit of knowledge and exploration.



Mastering Student Loans Part 1 of a Multipart Series Understanding the Federal and Private Loans

At Pursuit Planning and Investments, LLC, I help Millennials, and Gen X families plan their life's pursuit. I do this by assisting them in devising and creating financial plans to help them grow their wealth.


I find many clients are confused and frustrated with student loans. And they have every reason to be. Student loans are complicated. And before working with me, they often feel like they are not getting it or missing out on an opportunity. And with administrative forbearance coming to an end in September 2021, I think now is an excellent time to help folks understand student loans. Understanding how student loans work will help you prepare to decide what to do with your student loans.


I often hear folks get confused about the differences between private and federal loans. Today's segment, which is the first segment of several features to come on student loans, I will focus on helping you understand the difference between federal loans and private loans. They're not the same, and they are very different in what they offer.


The Basics

First, federal loans are backed and issued by the Department of Education. This is your direct consolidated loans, direct unsubsidized or subsidized loans, FFEL loans, and Perkins loans. These loans are serviced by organizations such as Navient, Great Lakes, and Fed Loans. Again, the Department of Education offers these loans. And these servicers help with the paperwork associated with you paying off these loans and helping you when you have issues with the loans.


Private loans, on the other hand, are backed and issued by private financial institutions. SoFi is a private institution. I see a lot of student loan advertisements from SoFi. I've also seen Wells Fargo offer student loans; many different institutions provide private loans.


But the reality is that these two different kinds of student loans, federal and private loans, have pros and cons. Generally speaking, federal loans have more safety nets associated with them. And private loans can offer lower interest rates, which may result in lower payments. You may have federal and private loans. Whenever you're analyzing your loans, you want to define your federal or private loan details (details on how to do that below).


With Federal Loans, you need to understand the safety nets associated with these loans. Federal loans offer a variety of repayment plans and benefits that private loans do not provide. It is super important to understand the safety net features federal loans offer. And it is equally important to understand, if you leave the federal loan system, you can never come back to it, and you lose those safety net features. It is relatively easy to refinance from a federal to private. It's impossible to refinance from a private loan to a federal one. And so it's imperative to remember that if you are making decisions on your loans, you understand some of those decisions are irreversible (and others can be costly).


So let's dive a little bit into the difference between federal and private loans.


Private Loans

A private loan can be an original loan that you took out because you could no longer gain any more funds from the federal program to pay for your education. Or a private loan may be a refinance loan. The payments with these loans are generally fixed. They can be variable, but they're generally fixed. The terms are driven by the contract that you signed when you took on the loan.


When we talk about forgiveness or hear politicians talking about student loan forgiveness, they are not talking about forgiving private student loans. They're talking about providing forgiveness for the loans that are inside the federal loan program. But they are not offering forgiveness for private student loans (at the time of this writing). So if you have a loan at a bank or other private institution, that loan will not receive forgiveness.


Private loans generally don't offer safety nets. As we saw with COVID-19, individual private institutions may have provided some help to their borrowers. Still, that assistance wasn't as widespread and universal as it was with federal loans. Federal loans offer income drive repayment (a way to reduce monthly payments when income is low) or even administrative forbearance during significant economic disruption (like Covid-19). So with private loans, you have to be very careful to understand the loan's terms and what assistance may be available during times of economic stress for the borrower.


You must read the terms of the private loan to understand what happens in the event of death and disability or significant job loss. And generally speaking, with death, the deceased estate will likely include the private loan. Have private loans means that you may need life insurance. With private loans, the bank will probably not be very flexible to change the payment if you become disabled. If you have private loans, you will want to investigate disability insurance if these loans are a significant portion of your net worth.

Federal Loans

Now with federal loans, there are three primary buckets. There are level payment plans, there are graduated payment plans, and there are income-driven repayment plans. The area that I hear the most confusion about is income-driven repayment plans. And I'm not going to dive into too much detail on what those plans are.


I do just want to provide you with some of the terms associated with income-driven repayment (IDR) plans. IDRs are those plans where you could go for REPAYE, PAYE, ICR, and IBR. Those different acronyms are subsets for income-driven repayment plans. And in a future segment, I'll dive into much more detail about these plans, but that's why you do not see those acronyms discussed here because those plans all fall underneath the bucket of income-driven repayment plans, IDR plans.


Federal loans on level payment plans have a fixed payment. It's very similar to a car loan. With graduated payment plans, your monthly cost increases with time. So in year one, you may owe a hundred dollars per month, and in year two, you may owe $150 per month, and in year three, it may be $200 a month. With graduated payment plans, the payment increases based upon the terms and rates dictated inside that loan. It may make sense for somebody who expects their income to increase over time.


With income-driven repayment plans, you have variable payments. These IDR payments are based on some measure of disposable income. Each IDR plan has a unique formula for determining disposable income, your monthly cost, and how long you'll pay. Although not for everyone, these plans can help those who have significant amounts of debt that are hard to pay off.


Now, we generally do not use fixed-level payment plans, and graduate payment plans to pursue forgiveness. If there is an event where the legislature and the administration provide forgiveness to federal loan borrowers, these level payment and graduate plans will likely receive some form of forgiveness. But, again, we generally don't use level payment and graduate payment plans to pursue forgiveness. We possibly use income-driven repayment plans to seek forgiveness. And there are unique stipulations with each income-driven repayment plan and how to attain forgiveness. The two primary buckets of forgiveness are PSLF, public student loan forgiveness, and taxable loan forgiveness. Again, the forgiveness will depend on if you meet the requirements associated with that income-driven repayment plan. In a future segment, I'll talk more in detail about this with all student loans.


With federal student loans, the loan is discharged upon the death of the borrower or the student. If you were to meet the Social Security Administration's disability definition of total and permanent disability, then those loans are also discharged. That's a critical difference that you see between private loans and federal loans. Federal loans offer the safety net for death and disability, with private loans that that risk falls on the borrower.


Now, I want to point out is that once you leave the federal loan system, you may be giving up the ability to use income-driven repayment, graduated payment, and federal level payment plans. If you leave the federal system and move to the private loan system, there is no coming back. You've given up all of these safety nets and options.


Determining the Loans You Have

So how do you determine what loans you have? There are two steps to determine what loans you have. The first step is to retrieve your credit report. Your credit report will list out all your loans and the institutions that hold these loans there; you'll be able to determine if you've got federal loans or private student loans. And to gain details on those loans for your federal loans, you'll go to the National Student Loan Data System, the NSDLS. Inside of your data file that you can retrieve from the NSDLS, you can provide details on your loan type, the origination, the status that's in, whether it's in good standing or not, the payment plan that you're on, your monthly payment, which services that loan, and your interest rates. Whereas with private loans, you'll have to take your credit report and then speak to those specific financial institutions listed on your credit score. Those conversations will help you determine your private loan details.


Next Steps

I help my client create a loan inventory. We gather this information, and then we make an inventory of all of their student loans. By using these two data sources, we're then able to walk away with an understanding of the terms of all their loans, what are the interest rates of all their loans, and if they're in good standing or not, and that serves as a foundation for moving forward.


So in our next segment, I'm going to focus on helping you understand the federal loan system's basics. The following piece is going to be looking at what are direct unsubsidized and subsidized loans. It will discuss consolidated loans and what they are not and help you understand a broader view of how the federal loan system works.


In the meantime, feel free to download these two resources. The first one is a checklist that you can use to help yourself get a little organized. It enables you to consider what issues you should be thinking of while paying off your student loans. And the other one is a decision tree, which helps you determine if you're eligible for income-driven repayment plans with your federal student loans. I think that IDR will be more important for folks, primarily if they're relying on administrative forbearance now, and they're going to need some form of assistance in the future. IDRs may make sense for those individuals. Taking a look at IDRs and understanding it as an option is critical.

Beyond the looking out for my next segments, feel free to call or text me at (971) 803-5948, Or email me at nate.baim@planyourpursuit.com if you have any questions.


I do help folks analyze their student loans. I've helped folks with as little as two $20,000 and as much, or more than half a million dollars in student loans to help them figure out how to get a handle on it and to help them pursue their life's pursuits. To learn more about how I may help you with your student loans, visit my services page.


This Month's Financial Planning Item - Reviewing How to Maximize Your Savings

The K Shape Recovery led some household's savings rates to skyrocket. The personal savings rate is the highest it has been since the 1970s. Now, families may be struggling to optimize their savings strategies because of the assets they accrued.


You may have extra cash on hand, and you want to save for the future. But you may need help identifying all of the different account types to consider for your savings. This 17 point checklist provides a structured outline to guide your thoughts regarding available and appropriate saving strategies. It covers accounts across the following categories:

  • Foundational Savings

  • Healthcare Savings

  • Retirement Savings

  • Employer-provided Benefits

  • Business Owner Savings

  • Accounts To Help Future Generations

  • Tax-Deferred Insurance Options

  • Other Account Considerations



If you need independent advice on managing income and savings, please review the services I offer and place an introductory appointment on my calendar.


If you are a current Pursuit Planning and Investments client, securely upload any documents needing review to PreciseFP. I am happy to help proofread any resumes, conduct mock interviews, or support you with any career decisions you face. We can discuss this in our next scheduled check-in meeting, or feel free to place an appointment on my calendar.



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"More noise occurs from a single man shouting than a hundred thousand who are quiet." - José de San Martín

 

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