Smart Ways to Pay Back Your Student Loan

TWENTY MILLION COLLEGE STUDENTS attended college last fall—and two out of three who graduate are likely to graduate with debt. They’ll have lots of company. As of December 2018, Americans collectively owed $1.5 trillion in student loan debt, making it the second-largest source of consumer debt after mortgage loans, according to the Bank of America Chief Investment Office.

How much individual graduates owe is partially dependent upon where they go to school. The Institute for College Access and Success reviewed data from 946 public and nonprofit four-year colleges and found that in states like Utah, for instance, the average student loan debt for the class of 2018 was only $19,750, while in Connecticut it was $38,650.

Finding the Right Repayment Plan for You

There are a number of repayment options available to graduates with federal student loan debt. They include a 10-year repayment plan, a graduated repayment plan with payments that start low and steadily increase, and various income-based plans that may be available to you. Those who work for the government or in the nonprofit sector may also be eligible for the Public Service Loan Forgiveness program. If you owe private loans, the issuing bank sets the repayment terms.

“Deciding which repayment plan is right for you requires thoughtful consideration and a solid strategy,” says Jean Y. Kim-Wall, managing director and wealth strategist at Merrill’s Strategic Wealth Advisory Group. “For instance, having lower monthly payments and more time to pay off your loan may sound tempting, but you’ll likely end up paying more in interest over the life of the loan.” For that reason, she says, “even if you’re eligible for an income-driven plan with a lower monthly payment, unless it reduces your interest rate or suspends it altogether, such as under the CARES [Coronavirus Aid, Relief, and Economic Security] Act, it may not be your best choice. If you can afford to make higher payments, you should.”

Three More Tips from Kim-Wall:

• First, “try to pay the interest on your loans while you’re in school. Otherwise, it will be added to your principal and accrue even more interest, which means a larger loan balance when you graduate.”
• Also, “pay back the loan that has the highest interest rate first.”
• Consistency is key. “Regular payments show future lenders that you have discipline.”

How Recent Legislation May Benefit You

Thanks to the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, you can now use up to a lifetime limit of $10,000 from a 529 education savings plan to pay principal or interest on qualified student loans for the beneficiary of the plan or a sibling of the beneficiary, notes Kim-Wall. The lifetime maximum applies to each of them individually. In the past, putting such assets toward paying off student loans would have been treated as a non-qualified distribution, resulting in federal and possibly state and/or local income taxes and potentially a 10% additional federal tax on the earnings portion of any withdrawal. Such loan repayments may impact student loan interest deductibility, and state tax treatment may vary. Consult your tax advisor.

In addition, the recently passed CARES Act offers relief for many people with student loans. It allows companies to reimburse employees for student loan payments, along with other tuition assistance, up to a combined total of $5,250 tax-free. It also allows most borrowers of federally held student loans (with the Department of Education as the lender) to suspend monthly payments through Sept. 30, 2020, without accruing any interest, Kim-Wall says. During that time, you won’t be charged a penalty for making smaller payments or skipping them altogether, but any amount you’re able to make between March 13 and Sept. 30 will go entirely toward the principal. Federal Family Education Loan (FFEL) Program and Federal Perkins loans owned by commercial lenders or your educational institution may not be eligible for this benefit, however.

“Make sure your loan is eligible for relief before stopping your payments,” warns Kim-Wall. “Otherwise, your credit score may take a hit, and you may face late payment penalties.”