Interest on student loans has started accruing again, with the first repayment due next month in most cases. Given the long hiatus, it’s possible that the service providers handling many of these loans have changed. By some estimates, over 17 million of the student loans—about 1/3 of the loans—are now being handled by someone else. If a borrower hasn’t been paying attention, it would be easy to go to their online banking and hit resume on a scheduled auto-payment, only to have it not go to the right place.
If you aren’t sure who is servicing your loan, a good place to start would be by logging into your Federal Student Aid dashboard at https://studentaid.gov/, or giving them a call directly at 1-800-4-FED-AID (1-800-433-3243).
Benchmarks to consider.
If you feel a bit overwhelmed by student loans, realize that you’re not alone in your frustrations. Here are the stats that represent all your peers:
- Data from the U.S. Department of education shows that about 45 million Americans have student loans. That means about 1 in every 5 adults is carrying student loan debt.
- The total amount of student loan liabilities is $1.76 trillion.
- The typical amount of debt held for those finishing a bachelor’s degree is $20-$40 thousand.
Other steps to ensure you’re ready for the first payment.
Even if you are all set knowing who your loan servicer is, there are other things that may have changed that you want to make sure are in order:
If you’ve moved, be certain to update your contact information with your loan provider.
Some loan providers provide a discount if you are set up to autopay though their website – check if that’s available. Even if you signed up before and it’s the same provider, you may need to sign up again to receive the discount.
Although the SAVE plan doesn’t apply to everyone, individuals making less than $30K may qualify for monthly repayments as low as $0 until they increase their income. There are also Income-Driven repayment plans that can reduce the payment needed each month for those with lower incomes. The applications for these programs can take time to process and may not go into effect immediately, so if they seem appealing you may want to sign up right away. More information and the ability to sign up can be found on the SAVE program here, and the Income-driven repayment program here.
Where should assets be drawn from to pay these loans off?
As considerations of adjusting budgets to repay student loans loom, dropping retirement contributions may appear early as a strategy. A recent survey by Fidelity showed that there was an increase in 401(k) contributions during the payment pause. Those contributions may seem discretionary, but they are important for retirement security. Remember that if you assume a 7% return and have a $5,000 contribution today, that will be worth more than $35,000 in 30 years.
If you’re receiving an employer match and stop contributing, you would not only be missing out on the original match but also all the gains it would produce over the years. A small respite to the issue of this choice may come with changes to 401(k) plans by the SECURE 2.0 Act that allows employers to match student loan payments with payments into their retirement plan. The same survey showed that 55% of employers have adopted or plan to adopt this provision.
Some might be considering paying off their student loan in a lump sum from a savings account, in order to put the issue behind them. Before doing so, it may be wise to look over all your assets and liabilities though. The general rule of thumb should be followed, that after minimum payments your highest interest debt such as credit cards should be paid off first.
With the recent increases in interest rates, inexpensive debt is much less accessible than it used to be, and we don’t know how long it will be before inflation is reined in. Therefore, how much you can earn on assets should be considered as well as the new debt you may want to take on. If you have student loans that have locked in a low interest rate, such as 3%, when you could earn more than that in a savings account or CD right now, it may be wise to keep those assets earning or use them to have a larger downpayment on a car or house that’s going to have a larger interest rate. But remember, the interest you earn is taxable, but the interest you pay is not deductible.
What about a trust to help grandkids avoid student loans altogether?
At Garden State Trust Company there are ways to shape an inheritance that can lead to a lasting legacy, rather than a one-time windfall. For example, one way to create a lasting legacy is to take the worry regarding paying for education out of the picture through an incentive trust. The trust specifies that the funds must be used for tuition, so as to promote the goal of education. Other incentives might be incorporated too, such as earmarking funds for home ownership, or ceasing the distribution of funds based on drug tests to help prevent addictions.
Beyond the use of a trust, contributions may be made to tax-privileged accounts for education, such as a 529 plan or Coverdell account.
If you’re interested in ways you can build education funding for children or grandchildren into your retirement or estate plan, please let us know.