Abacus: How Millennials Can Tackle Rising Student Debt
You may have heard millennials breathe a sigh of relief recently; the reason being the GOP tax bill that was signed into legislation last month. Though it was quite alarming for a time, the bill fortunately leaves millennials no worse for wear regarding their student loans. However, the trouble with student loans do not end there and are still considered quite worrisome. Although troubling, you do not have to be crippled by your student debt.
Research conducted by Goldman Sachs analysts shows that of the $1.3 trillion student loan debt reported by the Federal Reserve Bank, only about a tenth of it is asset-backed securities. The rest of the debt are non-securitized loans which are provided by the Federal Direct lending program. Student loans, especially unsecured ones, are a major cause of outstanding consumer credit and increase in delinquency rates. The research also shows an increase in student loan default, which coincides with the Education Department’s data that found defaulted borrowers are up 22 percent from the previous 17 percent years earlier.
While this information may be daunting, it is not anything to be afraid of. Despite the current situation, there are several ways millennials can manage their student debt. The first step to managing your student loans is prioritization. You need to understand the differences between federal loan and private loan repayment plans.
One way to pay your student loans faster is by scheduling prepayments while still in school. Start by organizing which loans you want to pay off first based on the type of loans you have. Subsidized loans, given exclusively to undergraduates, don’t accrue interest while you are still enrolled. Therefore, any payments you make go mainly towards the principal of the loan and makes a bigger impact on your loans.
Although unsubsidized loans accrue interest as soon as they are taken out, making prepayments towards them is still a good strategy for undergraduates and graduates to have. This is the same for private loans, however you may be charged a fee to make prepayments. It’s best to check with your loan servicer to plan your prepayments with their guidelines in place.
Another way to pay loans is by consolidating your federal loans through the Department of Education at no charge. This means you will make lower monthly payments to only one loan servicer at an interest rate that is the average of your former rates combined. The DOE might also find you eligible for certain income-based repayment plans that have monthly payments even lower than the standard plan. However, consolidation also lengthens the timeline of your payments. A factor of rising student debt comes from enrolling in these kinds of repayment plans that increases the amount of time you spend paying off your loans.
Similarly, you can refinance both your private and federal loans through traditional banks and lending companies. These companies will combine your high-interest loans into one at a smaller interest rate, though at a fee left up to the refinancer. This method works best with high-interest loans that you have only just started making payments on. But be wary of scams that claim to speed up, diminish or erase your student loans for an upfront fee. Only go to credible online student loan refinance companies and banks that offer refinancing services.
Social Finance Inc. (SoFi) and Navient Corp. are the largest and second-largest marketplace lenders for student loan refinance, respectively. However, both companies are currently amid lawsuits from last year that affected the public’s view of the companies. SoFi has been making managerial adjustments that show them getting back on track and working to restore consumers’ trust.
Besides the two student loan giants, there are other banks and non-bank lending companies that provide the same services. Citizens Bank added student loan refinance to their services a few years ago, adding to the many banks that offer this service to its customers with good credit interested in lower interest rates.
First Republic Bank is another such bank, who partnered with Latham & Watkins law firm in 2016 to refinance their entry-level associates’ student loans that met their criteria. The managers at Latham were concerned for their new associates who were stressed by student loan repayments. They hoped that by providing student debt refinancing assistance, it would work to ease work flow.
This brings us to the next idea on how to repay student loans: see what kind of assistance your employer offers towards your student loans. One of the major concerns millennial tax payers held stemmed from the tax bill’s earlier versions that proposed the repeal of employer education assistance. Only a few employers offer student loan repayment as a benefit like Latham does for its firm, with big names like Aetna and Fidelity included, though it’s increasing.
One main reason companies are slow to add this benefit to their education assistance is the fact that repayments made on behalf of their employees are not tax free, which makes it less desirable to both employers and employees. Do not feel discouraged, however, as you should still find out if your employer provides student loan repayment assistance by talking with your human resources department.
The tried and true method to paying off your student loans is to budget yourself and save money. One way you can save is by deducting your student loan interest from your taxes. Millennial tax payers were concerned with the repeal of student loan interest deduction mentioned in early versions of the tax plan. The student loan interest deduction, also known as Form 1098-E, allows you to claim up to $2,500 of your paid interest. Eligible persons include single filers whose modified adjusted gross income is $80,000 or less, with only those with $65,000 or less allowed the full $2,500 deduction. Your claimed interest can result in a proportional tax refund of up to $625, which could be saved for future monthly payments to your student loan servicer.
The sense to save should come easily to you as Bankrate’s recent survey data shows millennials are getting better at savings by curbing their spending habits. The added benefit of putting money away is having another source of money to pay your student loan payments in the off chance of unforeseen financial setbacks, making it one less thing to worry about.
Staying ahead of your student loan payments allows you to think potential future investments more. Millennials often get so overwhelmed by their payments that they put thoughts about homeownership or starting a family on the back burner. Especially with older millennials as evidence from the Fed’s research shows that homeownership among 28 to 30 years olds has declined due to rising student debt. By dedicating a few minutes out of your day to financial literature such as this, you are already taking a step in the right direction on managing your student loans.