As part of the CARES Act, all federal student loan payments are automatically suspended until September 30th. During this time period, no interest is accruing between March 13^th, 2020 and September 30^th, 2020.

This covers the following loans:

• Direct federal loans
• FFEL federal loans
• Federal Perkins loans

This is a significant relief to student loan borrowers – it’s basically the equivalent of an interest-free loan from the government so you can re-prioritize your cash flow right now.

If you are pursuing either tax-free public service loan forgiveness or taxable loan forgiveness, you will still receive credit towards your loan forgiveness clock, with one small caveat. If you are pursuing PSLF, then you still need to be classified as working “full-time” by your employer. If you are not considered full-time, then you would not receive any PSLF credit.

Unfortunately, the government has no control over what happens to private student loans. A few states are mandating private lenders to allow borrowers to suspend their payments, but not many.

Even if you are receiving a suspension on your student loan payments, what is your repayment strategy when that suspension is lifted?

The reality is that most people don’t want to deal with their student loans. You probably selected a repayment plan when your loans first became due and haven’t thought about it since.

Now is the time for you to reevaluate whether or not your current student loan repayment strategy still makes sense for you.

An overview of the various federal student loans and repayment plans

Take a deep breath. This is super confusing and you may need to read this a few times. It’s honestly ridiculous how complex federal student loans are 🤦‍♂️.

To start, you can find all of your federal student loans by logging into studentaid.gov. Federal loans have the name “Direct” or “FFEL” in them. Direct and FFEL are high-level classifications. You can have the same type of loan be a FFEL loan or a Direct loan, depending on when the loan was issued.

Think of it like how there are different beers with a regular or light option. You can buy a regular Corona (bad example?), or a Corona Light – either way, the beer is still a Corona. Each kind of student loan is a type of beer which can then be a regular beer (Direct loan) or light beer (FFEL loan).

Some loans are subsidized which means the federal government pays the interest while you are in school and sometimes for a brief period afterwards.

Other loans are unsubsidized which means interest accrues while you are in school.

There are 5 types of federal student loans

• Stafford loans – The most common type of federal loan. You likely have these from undergraduate and graduate school. You are limited in the amount of Stafford loans you can borrow.

• Perkins loans – A less common type of federal loan. These are given to people that show “exceptional financial need” and are limited to a few thousand dollars.

• Grad PLUS loans – A common type of federal loan if you attend graduate school. You will likely borrow these after using up your lifetime Stafford loan borrowing amount.

• Parent PLUS loans – A less common type of federal loan. This is available only to parents that want to borrow to pay for their children’s education.

• Consolidation loans – You can’t borrow these loans, rather it’s created if you aggregate all of your existing loans into one or two consolidation loans. For example, if you have 10 underlying loans, you can aggregate those loans into one direct subsidized consolidation loan and one direct unsubsidized consolidation loan. This is not the same as refinancing your loans to a private lender!

There are 7 types of federal student loan repayment plans

You can either pay your student loans according to a pre-specified repayment schedule or based upon your income.

I’ll spare you the pain and only cover the 3 most common types of repayment plans.

• Standard 10-year repayment plan – This plan takes your total loan balance and divides it into 120 equal monthly payments. This means your loan balance would be paid off after 10 years which can be a really high monthly payment depending on your student loan balance.

• Pay As You Earn (PAYE) – This plan ignores your loan balance and calculates your payments using 10% of your income (after a state-specified poverty line deduction). If you are married, you have the ability to exclude your spouse’s income if you file your taxes separately. In addition, there is a maximum payment cap – your monthly payment cannot exceed what your payment would have been if you entered into the standard 10-year repayment plan.

• Revised Pay As You Earn (REPAYE) – Similar to PAYE, this plan ignores your loan balance and calculates your payments using 10% of your income (after a state-specified poverty line deduction). Unlike PAYE, you cannot exclude your spouse’s income and there is no payment cap. REPAYE does have an added benefit of covering ½ of any unpaid interest each year (with added benefits during the first 3 years on the repayment plan).

So how do you decide on your repayment strategy?

This is tricky. It will vary for everyone, but I’ll simplify by classifying 3 camps for your repayment.

Camp 1 – Pay down your student loans as fast as possible

You will likely fall into this camp if:

• Your income > your student loan balance
• Your income is steady
• Your student loans have higher interest rates (>5%)
• You have a sufficient emergency fund (3-6 months of living expenses saved in a bank account)
• There is a low opportunity cost of your money – you would probably just let it sit in a savings account

If this sounds like you, you likely want to explore refinancing your loans to a private lender so you can receive a better interest rate. However, before you refinance, you want to carefully consider the federal student loan benefits you are giving up.

Federal student loans are much more flexible than private student loans and you want to weigh that flexibility feature vs. the interest savings of refinancing with a private lender.

Camp 2 – Pay down your student loans, but with flexibility

You will likely fall into this camp if:

• Your income > your student loan balance
• Your income is more variable
• Your student loans have lower interest rates (<5%)
• You don’t have a sufficient emergency fund saved up
• There is a high opportunity cost of your money – you can be investing, starting a business, buying a home, etc.

If this sounds like you, you likely want to enroll in an income-based repayment plan – either PAYE or REPAYE depending on your eligible loan dates.

Ready to make your head spin?

You are only eligible for PAYE if you have direct loans, didn’t have any student loans prior to 10/01/2007 and you borrowed after 10/01/2011. I’m sorry, what? Yeah…

That’s why REPAYE was created. The only requirement to be eligible for REPAYE is that your loans are Direct loans (no FFEL). More people are eligible for REPAYE compared to PAYE.

Camp 3- Pay as little as possible towards your student loans

You will likely fall into this camp if:

• Your income < your student loan balance
• You work at a non-profit, government agency or own a business
• Your student loans have higher interest rates (>5%)
• You don’t have a sufficient emergency fund saved up
• There is a high opportunity cost of your money – you would be investing, starting a business, buying a home, etc.

If this sounds like you, you likely want to explore tax-free public service loan forgiveness or taxable loan forgiveness.

I highly recommend speaking with a professional if you are pursuing this path. The requirements, documentation and analysis are really complex, and you don’t want to be denied loan forgiveness if you go down this path!

Key takeaways

• Use this time to reevaluate your student loan strategy. Your financial situation has likely evolved since you last reviewed your repayment strategy. Don’t just continue what you’ve been doing, consider how your student loans factor into your other financial goals.
• Carefully consider the federal student loan benefits you give up before you refinance. Don’t let the various banks woo you into refinancing your loans without understanding what you are giving up.
• Speak with a Certified Student Loan Professional (CSLP®). You can find a CSLP here. Most professionals offer a standalone student loan review for a fixed fee, or they wrap it into their comprehensive financial planning fee. I offer both options and you can schedule time with me if you’d like help navigating your student loans!

Disclosures

None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Experience Your Wealth, LLC does not promise or guarantee any income or particular result from your use of the information contained herein.