Don’t Panic About Proposed Public Service Loan Forgiveness Elimination

Executive Summary

Public Service Loan Forgiveness (PSLF) is a specific student loan payment strategy for individuals with high student loan debt who work for the government or a registered non-profit.  This includes government employees, employees of traditional non-profit entities, teachers, and even doctors and nurses who work at teaching hospitals.  Under this program, if you make 120 student loan payments on certain types of loans loans under a qualifying repayment plan, the remaining balance is forgiven after 120 payments.

Originally created under the Bush administration, there have been many rumored changes to PSLF program over the years.  In 2012, the Obama administration proposed putting some caps on the loan amounts that can be forgiven.  And recently, a proposed internal budget memo was leaked indicating that President Trump’s Department of Education is proposing eliminating the program all together.

In this video, I discuss the proposed threats to the PSLF program, and why I don’t think there’s any need to panic about these changes yet.  Ultimately, I believe that the chance that this proposal could become law is incredibly low both in its current form and in the current legislative climate in Washington DC.  And even if it does become law, it almost definitely would need to apply to future borrowers only.  If you’ve already taken out student loans and are counting on PSLF, you very likely have it in writing in your promissory notes that your loan servicer will honor PSLF in the first place!  Which would create massive legal challenges if the government were to revoke that at this point.

Nevertheless, it’s absolutely critical that you pay careful attention to the PSLF fine print if you are counting on this forgiveness.  To make sure you qualify for the program, you need to do a very detailed loan-level review to make sure your loans qualify for the program in the first place, since many of them don’t.  You also need to make sure your loans are on a qualifying repayment plan to be eligible for PSLF.  Finally, you need to submit an Employment Certification Form annually to your loan provider.  Ultimately, remember, this is on you to make sure you qualify!  For more information on qualifying for PSLF, click here and download my free student loan guide.

(Bill’s Note: This video, and the lightly edited transcription below, was originally released as a Facebook Live broadcast on May 18, 2017. If you want to participate in our next Facebook Live session, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!

Finally, click here to grab a copy of the FREE 30 page student loan guide mentioned in this video to learn more about how to qualify for Public Sector Loan Forgiveness.]

Pacesetter Planning Facebook Live Transcript

Welcome, everyone!

I was in the process of filming some things that will be going live at pacesetterplanning.com later today when I noticed the news that came out yesterday about the potential changes to the Public Sector Loan Forgiveness (PSLF) program by the Trump administration.  Particularly, the proposed elimination of the Public Sector Loan Forgiveness program.  I wanted to share a few quick thoughts on this.

Trump Administration Proposes Elimination of Public Sector Loan Forgiveness

In case you missed the news, the Department of Education’s internal budget memo was leaked yesterday to the Washington Post.  And it looks like that this proposed budget will essentially eliminate PSLF.  For those of you who don’t know, this is a specific student loan program that allows people who work for non-profits, or the government, or even some hospitals to be eligible to have the balance of their student loans forgiven after 10 years.  And, essentially, it looks like the Trump administration is going to try to eliminate this program.

Interestingly, that’s not the only thing that was actually proposed in this document.  They also proposed some changes to the Income Based Repayment plans that are available as well.  Those [repayment plans] are typically for people who are either pursuing loan forgiveness or those who don’t have the necessary monthly income to pay their “standard” student loan payment every month.  Under these programs, you have the capability to peg your monthly student loan payments as a percentage of your current income.

The Washington Post leaked that the Trump administration will be changing some of the specific percentages of your monthly income that would make you eligible for this program, as well as the length of some of these income based repayment programs.

There’s nothing new in that particular proposal.  Actually, I wrote on the blog back the week that Trump was elected about that specific change in policy.  It’s something that he campaigned on.  And, I wrote about it on CNBC’s website as well a few months ago. So, there’s nothing new there.  The real news is that this Public Sector Loan Forgiveness program may end up being eliminated.

This isn’t Something to Panic About… Yet

There’s been a lot of panic about that, and justifiably so at first glance, but I wouldn’t panic about this yet. And there’s a few reasons for that.

This Proposal Needs to Go through the Standard Legislative Process to Become Law.  Good Luck with That

First and foremost is that this is not an actual budget that was released.  This is not the law of the land.  If you go back to your 8th grade social studies classes (Schoolhouse Rock, and all that good stuff!), any budget bill has to be originated in the House of Representatives, passed through the Senate, and then signed into law by the President.  So just because the Department of Education has released this as their blueprint or vision for the future, doesn’t mean that it’s actually policy. And in fact, I think it’s probably unlikely that, in its current form, it will ever become policy. I’m not a legal expert, obviously I’m not in government, but based on what I’m seeing right now, I don’t see how that the elimination of PSLF really could possibly be eliminated as they’re proposing.  At least in its current form.

Interestingly, the Obama administration a few years ago actually did try to make changes to the program.  Rather than allowing your entire loan balance to be forgiven in 10 years, they were proposing to put some caps on it as a cost savings device, and that didn’t get through.  So, if that didn’t happen a couple of years ago under the Obama administration, particularly under the legislative climate that we’re in today, I just don’t see this actually happening right now.  Which is good.

This is Unlikely to Affect Borrowers who Already Have Student Loans

And even if it does, there’s a second piece of good news for all of you out there who took out these loans, are in public sector jobs, and are counting on this loan forgiveness.  And that is, that, quite frankly, it is against all precedent in student loan policy that, if this change were to go into effect, it would affect current borrowers.

Going back through all of the different changes in student loan policy over the past 15-20 years, I can’t think of a single one off the top of my head where people who already had loans originated now were affected by the changes. Typically, when these changes go into effect, they are for new borrowers. The good news, is that if you have loans in existence right now and are on track for loan forgiveness, I would just be shocked based on the precedents that have been set and the way these things work, if this were to actually affect you.

In fact, I’ll even take it a step further. For many of you, if you go back to the promissory notes that you signed when you were 18 or 19 years old and took these loans out (you probably didn’t even understand half the stuff because they do a terrible job walking you through it…), the PSLF program is often enshrined in those documents.  So literally, for them to eliminate this program right now, in my opinion (and some of the legal experts I’ve followed since this has come out), I don’t see how they could legally do this.  And in fact, I think this would create a lot of legal programs, if they were to eliminate the program for people who have already taken out these loans and are on track for loan forgiveness.

I think it’s more likely that they might eliminate the program for future people, which certainly could be a problem for folks, but it’s certainly not at the crisis magnitude that cancelling it for people who have all this debt and are really counting on this program being around at this point.

So, I think that a lot of the panic I’m seeing, while it might be justified at face value, really doesn’t justify panic just yet, to be honest.  Because first of all, it’s not on the books. It’s not even close to being on the books at this point. And I think that it would create so many legal headaches for the government to cancel this program that they’ve promised people in writing over the past 10 years, that I just don’t see it happening.

But, You Still Need to Pay Attention to PSLF

That being said, if this is something that you’re counting on, there are a few critical things that you need to do.  And that’s really why I wanted to talk about this today while this topic is in the news.  While I would continue going forward expecting this forgiveness program to be in place until we see anything different (and if we do, we’ll talk about it), if you’re on track for it now, you need to be doing a few things to make sure you do qualify.

Part of the reason that people are so scared about this is because, well, let me ask you- if I was to ask you how many people have qualified for PSLF over the past several years… the answer would be zero.  Because, the law was passed in October 2007.  So, it hasn’t even been ten years since it went into effect.  So, nobody has been eligible to qualify yet. That’s going to be changing later this year and early next year [Note: the application for forgiveness was released in early September 2017, as predicted in this video].  The very first group of people who are eligible for this program are really reaching the end now. But because it’s never been actually implemented, there’s a little bit of uncertainty here.

And so, what I wanted to do was talk through some of the things that, driven by this uncertainty, you should be doing to make sure you’re being taken care of.

You Need to Make Sure Your Loans Qualify for PSLF Under the Current Law

First and foremost, you need to make sure you actually qualify for the program.  We know that you need to hold a public sector/nonprofit type job, but you also need to make sure that your individual student loans qualify.  Because, one of the biggest misconceptions and mistakes that I’ve seen since I founded Pacesetter Planning is people who think they’re on track for PSLF and don’t even qualify for forgiveness in the first place because their particular student loans don’t qualify.

Over the past ten years, student loan policy regulations have changed every few years.  So, you really need to do a deep, loan-level analysis to make sure that you actually qualify.

I’ve made it as easy as I can for you to do that.  Click here to download a free student loan guide that walks you through the steps you need to take. Everything you need to make sure that you can qualify for this program under the current law as it exists, is detailed in that guide.  So, I highly encourage you to download that guide (it’s free, no cost for this!) and do the analysis that is listed there to make sure that your student loans qualify for this program. Because if they don’t, that’s going to be a whole other conversation.

You Need to Make Sure You’re on a Qualifying Repayment Plan

Second of all, this is a little less common of a problem, but make sure you’re on a qualifying repayment plan. If you’re on a standard 10-year repayment plan, it’s very likely that you’ll have paid off your loans by the time 10 years is over. So, double check with your loan servicer what type of repayment plan you’re on, and specifically make sure that this payment plan makes you eligible for PSLF.

This is particularly an issue, I’ve found, with people who have graduated medical school, who are residents but aren’t yet “full doctors”. For those of you who don’t know much about the medical industry, people who graduate medical school typically have over $250,000 in student loan debt, then they go into three (or four, or five, or six or seven) year residency and fellowship programs, where they make a fraction of what they’ll make as full doctors.  Because having a nonprofit hospitals jobs would qualify for PSLF, what I see happen a lot is people who defer their loans while they don’t have a big income during residency, but count that, in their head at least, as counting toward that ten year PSLF qualification.

Just to be clear, that’s not going to work. Because technically, it’s not ten years that qualifies you for PSLF, its 120 payments.  You need to make 120 payments on your student loans in order to qualify for this program.  So, it’s really not enough to go into residency, put your loans on deferment, and start counting the time.  Because if you’re not actually making the payment, it’s not going to count for you. So again, make sure that you know if your payment plan is going to qualify you, and that every payment you make is going to count toward that 10 year (120 payment) goal.

You Need to File an Employment Certification Form Annually

And finally, last thing, unfortunately this is on you to make sure you qualify for this.  Your student loan servicer and the government are certainly not going to be looking out for you to make sure that you’re doing what you need to do in order to qualify.

So, the last piece I recommend is that for people who are in qualifying jobs (working for a nonprofit or the government or things like that), you need to be filling out an employment certification form.  Every year. And submitting it to your student loan processor.  It basically shows that you hold a job that will qualify you, for all the payments you are making this year, toward those 120 payments that would qualify you for PSLF.  If you don’t have that form, click here or send a Facebook message to the Pacesetter Planning Facebook page, and I will send you a copy of that form. But you absolutely need to be filling it out every year.

The Government Accountability Office (GAO) released a study recently that said that 4 million people are “qualifying” for PSLF, but less than 1/8 of them are actually filling out that form.  I think that’s a huge mistake.  And other than having loans that don’t qualify in the first place, which I already talked about, not filling out that form and proving to the government and your student loan servicer every year that you qualify, is the number one mistake I see people make that could potentially lead to problems for them down the road.  So, definitely make sure you do that. I have no issues whatsoever with sending you this form if you send the Pacesetter Planning Facebook page a message.  I’ll make sure we get the form to you.

Conclusion: Worry About Complying with the Current Laws around PSLF, Not About Proposed Future Changes

Anyway, that’s about it.  Like I said, potential scary headlines about the future of this program.  We don’t really know what’s going to happen yet.  But based on the reasons that I detailed, I don’t think there’s any reason to panic yet.  I think it’s definitely something to keep an eye on. But, like I said, this is not law, it’s not part of the budget at all (in fact, we’re many, many months from even getting to that point). I don’t think this is likely, in fact it’s been tried in some ways before and it hasn’t gone through. Particularly with the climate in Washington DC right now, I just don’t see it happening. And more importantly, it’s against all precedent in student loan policy to affect current borrowers. If they were to eliminate the program, I think it’s much more likely that it would be eliminated for people who are taking out loans in the future, not people who are already on track.

But.

You need to make sure, if you’re counting on PSLF, you have to make sure you’re doing everything you can to qualify. You need to make sure your student loans qualify in the first place, you need to make sure you’re on the right repayment plan for those loans, and you need to filing an Employment Certifiction Form indicating that you work for a nonprofit or government agency, every year, for ten years to show that you’re qualified.

Again, if you have any questions about this, I highly encourage you to either send me a Facebook message on the Pacesetter Planning business page, or download that free student loan guide.  There’s a ton of detail in it and it’s going to give you just about everything you need to know.  Thanks for taking the time today- have a good day!

How to Take Control of Your Finances after Graduation

[Don’t miss the two free giveaways in this post!  Click here to access our new retirement calculator, and click here to download our comprehensive student loan guide!]

The first 90 degree day of the year (at least here in Philadelphia) means a lot of things to different people.  Memorial Day Weekend.  Weekends at the park or pool.  And, of course, graduation season.

Congratulations to everyone in Class of 2017! If you are finishing your undergraduate career this month, welcome to the working world!  If you are finishing a masters or professional degree program, congratulations on finally (probably?) being doing with school!  And if you didn’t graduate this year, stick around anyway- I have some information here for you, too.

As the excitement of your graduation weekend ends and you begin to take the next steps on your journey, whatever they may be, I recommend that you take a step back and take an assessment of your current financial landscape.  Your life is changing (for the better!), and as such, you should take some time to reflect and take action to set yourself up for financial success in your new endeavors.

There’s a lot to take in here – if you have any challenges in any of these areas, I recommend that you reach out to schedule a free consultation about a one time, quick start session!

Congratulations again, and let me know how you are doing as you progress through this list!

Negotiate Your Salary

If you’re still working on lining up your first job out of school, make sure you prepare yourself to negotiate your salary before you accept a job.  If you already have a job lined up, file this one away for your next performance review.

I’ve discussed this in much more detail before, but it’s absolutely critical that you negotiate your salary when starting a new job.

Over 60% of millennials aren’t negotiating with employers at all regarding their salary.  And the worst part?  Three out of four employers have room to negotiate salary by as much as 10%- but only if you ask for it.  And, truthfully, hiring managers and HR are expecting you ask for it.

I know it’s uncomfortable, but you have to do it.

Set a Student Loan Paydown Plan

The bad news? T-minus six months until your first student loan payment is due.

The worse news? The vast majority of millennials are told by their loan servicer how much they owe and automatically start paying the bill, without double checking to make sure they’re paying down their loans in the smartest way possible.

The good news?  You have the power in your hands to make sure you’re handling your student loans with the care they deserve.

I highly recommend downloading my free guide on managing student loan payments. In it, you will learn:

  • How to review each of your student loans and determine what payment plans each is eligible for.
  • How to know if you are eligible for a loan forgiveness program, and what you need to do to qualify for the program under current law.
  • When you should refinance your student loans, and when you absolutely should NOT refinance your loans.
  • How to set goals around your student loan payment strategy (i.e., should you try to pay down your loans as fast as possible, or should you try to minimize your monthly payment?)
  • … and much, much more!

Go ahead and grab your free copy of “13 Steps to Take Before You Make Your Next Student Loan Payment” today.  It will be worth your while to work through the guide in order to set you up for success with your student loans.

Set Financial Goals for the Next Five Years

I remember graduating college like it was yesterday.  The last thing I wanted to do was to try to imagine what the future was going to be like.  I just had the best four years of my life, and was scared to face all of the responsibilities that I knew would fall on my shoulders in the real world.  If you had told me back then to spend some time setting goals for my first few years in the working world, I probably would have laughed at you.

But, I wish I had taken that advice.  I’ve improved my own personal financial situation significantly after I started setting financial goals for myself. (Not too long after I started my first job, luckily!)  And I recommend you do the same.

Take some time and imagine what you want your life to be like in one, three, and five years from now.  Will you be going back to school to get a graduate or professional degree?  Do you want to buy a new car or, a little while down the line, a new house? Are you gunning for a quick promotion at work, or maybe even thinking about launching a business or side hustle someday?

All of these things are great, and they are much more likely to happen if you (literally) put pen to paper to clearly articulate what you want your life to look like.  And, once you have done this, you can manage your finances accordingly to begin to make progress against these goals.

Set Up Your 401(k)

It can be easy, in the flurry of paperwork that accompanies a new job, to accidentally forget or neglect to set up contributions to your 401(k).  Don’t forget, it’s critically important.  At a minimum, you should contribute at least to your firm’s matching point.

So, if your firm matches up to 3% of your salary, you should contribute, at a bare minimum, 3% to your 401(k).  Not contributing up to your firm’s matching point is, quite literally, turning down free money.

And unfortunately, it’s not enough just to set up how much you want to contribute to your 401(k).  You need to choose how you’d like to invest the money you put into your retirement plan, too.

Unfortunately, firms usually give very little guidance to their employees on how to do this.  Which is why I’ve wrote about how to choose investments in your 401(k) in more detail on this blog.

…And If You Can, Save Beyond The Minimum for Retirement

Retirement might be a long way away (spoiler alert: it is a long way away), but that doesn’t mean you shouldn’t start saving aggressively for it now.  In fact, due to the beautiful thing that is compound interest, the more you save for retirement in your early working years, the much better your retirement picture will be.

There are other things you should be saving for as well (we’ll get to that in a bit), but if you have some discretionary income, I can’t recommend highly enough that you put some of that into a retirement account.  What type of retirement account – either increasing contributions to your 401(k), opening a Traditional IRA, opening a Roth IRA, or even a nonretirement investment account – can vary significantly depending on your circumstances. This is probably something we should talk one on one about, if you have questions.

If you’re wondering how much you should be saving for retirement, I recommend inputting your data into the free retirement calculator I have right here on my website.  And, particularly, if there’s a big gap between the yellow and blue lines or if you portfolio is projected to run out in the early stages of your retirement, we should talk about ways to close the gap.

Build an Emergency Fund

Like I said, retirement isn’t the only thing you should be saving for.  It’s critical that you gradually build an emergency fund so that if you were to lose your job, you have a way to support yourself during the transition.

The rule of thumb is that you should have enough saved to support yourself for six months (living on reduced expenses, of course – you probably won’t spend as much as you are today if you don’t have an income, after all).  But, when you’re first getting started, I think it’s silly to dwell on six months of savings.  That’s a pretty big and intimidating number for most people.

So instead, start by trying to save up to cover one month of your minimum living expenses.  Once you’ve saved that much, make your next goal to be to save an additional month of living expenses.  And so on, until you’ve hit that six month goal.  By breaking it up into pieces like this, it gives you a very clear way to take small steps, starting now, to work your way up to this major goal in the future.

Keep Your Living Expenses at College-Level For As Long As You Can

If you’re like me, there’s a good part of you that’s sad to be leaving college.  College is hard, sure, but it’s fun!

Do you have that same bittersweet feeling I did about leaving school behind as you enter the real world?  Good!  Hold on to it.  Embrace it.  And channel it into how you manage your finances.

Simply put, if you had a blast in college living on a minimal income, there’s no reason to change that up now that you have a salary.

Sure, you can have some peace of mind that you have some discretionary money at your disposal if you ever were to need it. And there’s certainly nothing wrong with splurging every now and then.

But, since you’re used to keeping your living expenses low, you should continue to do that as much as possible.  Have friends in your new hometown?  Try to get them to sign on as roommates!   Have some more free time on the weekends now that you’re not constantly writing papers and completing homework?  Spend a little of that time learning how to cook so you don’t need to order takeout seven or eight times a week.

Simply put, it’s much easier to maintain your current standard of living today than it is to increase your standard of living, realize you’re overspending, and then try to cut spending back.  You’re better off keeping your monthly spending where it is today, and saving the rest, rather than allowing your lifestyle costs to rise with your income.

And Speaking of Spending…

Yes, you need a budget for yourself.

I’m not the type of person to go through my clients (or my own) spending with a fine-toothed comb, analyzing every little expense here and there.  It’s not fun; it’s not productive; and it’s not an effective, long term, healthy way to manage your finances.

Instead, you should set budget parameters for yourself to make sure you know where your money is going, and track against those.  A free tool like www.mint.com is great for this.

You don’t need to worry if you go a dollar or two over any particular budget category each month.  But, you should pay close attention to your biggest spending areas, and try to find ways to cut back on these highest impact spending areas first, if you’re having a hard time finding the money to save for retirement and build your emergency fund.

Budgeting should be a common-sense driven exercise.  Don’t drive yourself crazy with it, but know your budget numbers and stick to them as best you can.

Increase Your Available Credit (But Don’t Use It)

It can be hard to build your credit score while you’re in college.  After all, most financial institutions aren’t in the business of giving huge lines of credit to college students who have a minimal, if any, income.

But now that you’re out of school, that changes in a big way.  As soon as you have documentable proof of income, you should open up a credit card and use it wisely to start to build your credit score.

Whatever the bank gives you for a credit limit, always keep your credit card balance below 30% of this limit.  Always pay off your bill every month.  In other words, don’t rely on your credit card to bail you out if you don’t have the cash available to make a purchase.  Instead, use it as a tool to begin to build your credit history as an excellent manager of credit.  When you’re ready to buy a house several years down the line, you’ll be happy you did.

An even better way to do this?  Find a credit card that offers some great perks. If you like to travel, find a card that gives good points toward airfare or hotel stays.  If you’d rather just have the cash, find a card that pays you cash back bonuses when you use the card.  There are a lot of options out there, and some of them are fantastic.  If you want to get some more ideas on great credit cards to use, give me a call.

This Isn’t a One-Time Thing

As you can tell, there’s a LOT here.  As you transition in the work force, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide and plugging your numbers into my retirement calculator.  Create a budget, open a credit card, and manage your cash flow (both income and spending) wisely.

But ultimately, most of these things aren’t just for when you make the transition from school to a job.  You should periodically review each of these items to make sure you’re still on track.  Set up a free call with me to talk through how we can implement a system to address each of these items, and more.

How to Allocate Your Money Effectively

[Click here to register for my webinar, “How To Organize Your Finances and Create a Roadmap Toward Financial Freedom”!]

Ever since I founded Pacesetter Planning, I’ve worked with my clients on a wide range of financial topics.  I’ve gotten a variety of questions from clients and potential clients, and while everyone’s situation is a little different, generally they fall into the following categories:

  • How do I manage my finances with my husband/wife/fiance/significant other?
  • How much do I need to buy a house?
  • How much should I be saving for retirement?
  • How do I select investments?
  • Should I put extra money toward my student loans or should I direct that money elsewhere?

As you may have noticed, I’ve addressed a good number of these topics at a high level on this blog already (and will continue to do so).  But, you may have picked up on something else.

All of these Questions are Interconnected

It’s hard to make financial decisions in a vacuum.  Often times, the hard part isn’t answering these individual questions, but finding the right answer to them all at the same time.  It often isn’t practical to increase your saving for retirement and buy a house and pay extra on your student loans all at once.  These decisions need to be made together, and there’s usually not a clear right or wrong answer.

That, of course, is where I come in.  I help my clients develop plans to manage their finances, prioritize their goals, and help them allocate their money accordingly.  We set targets and track progress against these goals, updating as needed.

You Need a Framework to Make these Decisions

While everyone’s circumstances are a little bit different, I use a strict framework and process to help clients make these decisions.

And I’d like to share it with all of you.

On Tuesday, March 7 at 8 PM EST, I’ll be hosting a free webinar called “How to Organize Your Finances and Create A Roadmap Toward Financial Freedom”. You can register for the webinar here.

On this webinar, we’ll discuss:

  • How I recommend clients structure their accounts to keep track of their finances
  • How to implement a system to manage your income month to month to pay yourself first
  • How much money you’ll need to retire, and what it will take to get there
  • How to balance your everyday spending with your short and long term financial goals
We Face Greater Financial Challenges than our Parents and Grandparents.  Plan Accordingly.

Sometimes I get pushback when I say this, but I truly believe that millennials face much greater challenges than previous generations.  Think about it for a minute.

Most of our grandparents worked 40 years at the same job, retired and received a pension from their company to fund their retirement.  They have Social Security.  When they were our age and looking to buy a home, housing prices were about twice the average annual salary.

Many of our parents may have had multiple jobs over the course of their careers, but most of them only had one job at a time.  Some of them may still have a pension, but all will (barring some sort of catastrophe) receive Social Security.  And again, the average home price when they were in their twenties was around twice the average annual salary.

Now?  The average millennial changes jobs four times before turning 32. More than 1/3 of millennials have a side job.  The average price for a home has jumped to about 3.5x the average annual salary. Most of us have some type of student loans.

Pensions? Social Security?   ¯\_(ツ)_/¯

We have some big challenges ahead of us.  The good news is that these challenges can be beaten.  But, you need a method and a plan to get you there.  I’ve got it for you.

I Want to Teach You Everything I Know

I didn’t get into financial planning to only work with rich clients.  My goal is to help make all of my clients wealthy someday.  The more people I can help, the better.

Sign up for my upcoming webinar, and let me know if you have any questions you think I should address.  I look forward to sharing my methodology with you all.

Rising Interest Rates and Student Loans- What’s the Impact?

Interest rates are going up.  In December 2016, the Federal Reserve announced their decision to raise interest rates by .25%.  Not only that, but the Fed also indicated that they intend to raise rates three times in 2017.

For most student loan borrowers, this will not make a huge impact on your payments.  However, it’s critical to review your loans for any privately-issued student loans that have variable interest rates.  In a rising interest rate environment, variable interest rates translate into owing more on your loans.

Make a plan to address this gap on your own, or schedule a free consultation here.  It’s your call.  But if you have variable rate loans, the time to revisit your student loan payment plan is now.

Generally, Rising Interest Rates are Good

The Fed’s decision to raise rates, broadly speaking, is a good thing.  The Federal Reserve raises interest rates when the economy is gaining strength.  Rates have been held at historically extreme lows ever since the recession in 2008-2009.  Increasing them is a great sign that unemployment is low, jobs and wages are expected to grow, and that we are finally getting back on course following an unusually slow recovery from the recession.

While the Fed raises interest rates when the economy is good, the flip side is also true.  They cut interest rates when the economy is shrinking to encourage consumer spending. We should be cheering rising interest rates now to allow for this to happen later.  When the economy does inevitably turn south again sometime in the future, the Fed needs to be able to cut interest rates to help spur growth.

Quite frankly, the Fed kept rates so historically low for the better part of the past decade that many experts were concerned about the possibility that if another recession were to strike soon, the Fed wouldn’t be able to cut rates any lower.  Raising the rates now, while the economy is growing, will protect us in the future.

And finally, higher interest rates will (eventually) mean higher interest rates in your savings accounts.  While it’s true that the first rates to go up will be on loans and mortgages, eventually the bump in interest rates will carry over to your savings.  If you’re sick of earning next to nothing in your bank accounts, there’s some good news ahead in the coming months!

…But Not for New Borrowers or People with Variable Rate Loans

Of course, just because something is good for the economy as a whole, doesn’t mean it will necessarily benefit you.  And rising rates are a great example of that.

For starters, people who take out new mortgages or student loans will have higher rates in 2017 than if they had borrowed in 2016, assuming the Fed proceeds as advertised.  New loans are issued in accordace with the new interest rates.  So, borrowing the same amount of money will cost more this year than it would have if you borrowed last year.

But more importantly for this article, borrowers who have variable rate student loans will be impacted as well.  When I say “variable rate” loans, I am referring to student loans that have their interest rates tied to the current market rate.  As in, a loan whose interest rate will fluctuate over time depending on decisions made by the Fed.

Most student loans, and all loans backed by the federal government, are fixed-rate loans.  For these loans, the decision by the Fed will have no impact. (Although, as previously stated, a new federal student loan borrowed in 2017 will have a higher rate than one borrowed in 2016, all else equal).

But certain privately-backed student loans are issued with variable interest rates.  And if you have these loans, you will be paying more in interest as a result of the Fed’s decision.

There’s no rhyme or reason as to whether your private student loans are fixed or variable rate.  You need to grab a copy of your statement, or Master Promissory Note, and check.  I’m here to help with this step, if you need it.  But you absolutely have to check to determine whether you are impacted.

What to Do If You Have a Variable Rate Loan

Ultimately, there’s no one-size-fits-all solution here.  But there are certain options you have to address this scenario, the most common of which is to refinance the loans.

Through refinancing, you are in essence exchanging your current loan for a new one.  You still owe the same amount left on the loan, but the issuer who lends you the new loan will subject you to different terms than your previous lender.  This can include a different loan term and repayment options, but the key one here is that your loan will have a new interest rate.

This new rate largely depends on your credit score.  Has your credit score improved since you originally took out your student loans?  Then great news, you can (probably) qualify for a better interest rate.  What’s more, you could qualify for a fixed interest rate, rather than a variable rate.

Which means, through refinancing your loans into a new, fixed rate loan, you’ll no longer be subjected to the rising interest rates that the Federal Reserve has indicated are coming in 2017.

Of course, things change.  If economic conditions change later this year, the Fed could decide to hold off on the raise.  But all signs at the moment point to multiple interest rate increases this year.  If you have variable rate loans, the time to review your plan is now.

If you want more information on whether this might make sense for you, let’s schedule a free consultation.

WARNING

This is critical. Be very careful in evaluating your options before deciding to refinance your loans.

For the most part, refinancing privately-issued student loans won’t do you major harm.  But keep your overall goals when it comes to your loans (are you trying to pay them off as quickly as possible, or minimize your monthly payments?) before you decide to refinance.  Review the new terms for the refinanced loan carefully before you accept the offer.

But most importantly, think two, three, four, five times before refinancing any federal student loans that you have!  While you may be able to get lower interest rates on private loans if you have a great credit score, keep in mind that refinanced federal loans in most cases will lose all the flexible benefits associated with them.  For example, refinanced student loans aren’t eligible for Public Sector Loan Forgiveness or for the various income repayment plans that are available for federal loans.

In short, it can be a big mistake for certain borrowers to refinance.  Student loans are much more complicated than they appear at first glance.  If you want a second opinion, reach out and let’s talk.

What Student Loans Aren’t Eligible for Public Service Loan Forgiveness?

Student loans are back in the news again. The Government Accountability Office (GAO) released a report earlier this month detailing that the federal government is expecting to forgive over $100 billion in student loan balances in the coming years. While there are many loan forgiveness programs, the Public Service Loan Forgiveness program is one of the most common.  Subscribe to my newsletter to receive a 30 page student loan guide that details the others!

Doctors working in nonprofit hospitals, teachers, government employees, and more can all be eligible for Public Service Loan Forgiveness (PSLF).  But, there’s a catch, and it’s one that many people don’t find out about until it’s too late.

Only specific types of student loans will qualify for PSLF.  Many loans aren’t eligible for the program at all.

Unfortunately, your student loan servicer will not notify you of this.  It’s on you to make sure you are eligible for PSLF, and the sooner you take action, the better.

 

What is PSLF?

Public Service Loan Forgiveness (PSLF) is available to individuals with specific kinds of federal loans who work for the government or a 501(c)3 Non-Profit, including charities and non-profit hospitals, among others.

It’s important to note that it’s your employer that determines whether or not you are eligible.  If, for example, you teach at a for-profit school, you wouldn’t be eligible for PSLF.  So, make sure your employment qualifies before pursuing PSLF.

In order to obtain forgiveness under this provision, you must fulfill two provisions.  First, you need to make 120 payments while on an Income Repayment Plan.  Note that this is not the same as having the loan for 10 years! You must actually be making the payments in order for a month to count toward your total.  At the end of 120 months where you have made a qualifying payment, you are eligible for forgiveness.  Secondly, of course, you must make these payments while holding a qualifying job.

There are many more important details about PSLF that you should review if you seek to pursue this forgiveness plan.  You need to be sure you are on the right type of repayment plan, as I mentioned above.  While not required, you should file a form indicating that you hold a qualifying job with your servicer each year.  To get more information on these other items to consider, schedule a free introductory call or subscribe to my newsletter and download my student loan guide.

For now, the important question I want to highlight revolves around what types of loans do not qualify for PSLF.   And, of course, what can be done to fix the situation if you have these loans.

 

Which Loans are Eligible, and Which Loans Are Not?

Any Federal Direct Loans are eligible for PSLF.  Common types of Direct Loans include Direct Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans, and Direct Consolidation Loans (more on that last type in the next section).  Typically, the information on your monthly statement may not always be enough to determine the specific loan type you have.  Not to keep tooting my own horn, but you can find a step by step approach to confirming what types of loans you have in my free student loan guide.

Unfortunately, not all loans are eligible for PSLF.  If your loans were issued by a private lender, this may come as no surprise.  Regrettably, private loans have very few of the flexible “perks” that federal loans have, and that includes forgiveness provisions.

More subtly, there a few types of federal loans that aren’t eligible for PSLF, either.  One of the most common mistakes I see around PSLF is individuals who have been making payments for years while holding a qualifying job, but aren’t actually eligible for forgiveness at all.  Solely because of the types of federal loans they have.

The main types of federal loans that are NOT eligible for PSLF are:

  • Federal Family Education Loans (FFEL)- Federally-backed loans issued by private banks. The government discontinued this program in 2010, so this typically only affects people who graduated college in 2014 or earlier.
  • Perkins Loans- The federal government funds these loans, but your individual college distributes the funds. Perkins loans aren’t quite as common as Direct Stafford loans, but many colleges include them in financial aid packages.

If you are pursuing PSLF, review your loans to confirm that you don’t have either of these types.  Unfortunately, the current PSLF plan does not allow forgiveness of these loans.

 

What to Do if You Have FFEL or Perkins Loans and Want to Pursue PSLF

Thankfully, you still have options if you have FFEL or Perkins loans and want to work toward forgiveness.  There is a way to qualify these balances.

In order to do so, you must consolidate the other loans through a Federal Direct Consolidation Loan.  In this process, you can combine the federal loans you currently have, including Perkins and FFEL loans, into one direct loan through the federal program.

The purpose of getting a Federal Direct Consolidation Loans isn’t to cut your interest rates.  The rate for the new consolidation loan is a blended average of all the loans you consolidate.  Instead, a major benefit of consolidation is that all of your consolidated loans are eligible for PSLF.  So, if you roll your Perkins or FFEL loan into a Federal Direct Consolidation Loan, the balance may now be forgiven through the program.

Two important caveats, though.  First and foremost, there are a number of unique benefits for Perkins loans specifically that do not transfer over to the new consolidated loan.  If PSLF is a high priority for you, this may not matter, but it is something to consider before deciding.  Work with a financial planner who specializes in student loan planning to review the pros and cons before taking action.

Second, and most importantly, consolidating your loans in this way will “reset” your 120 payment counter for forgiveness on any direct loans you are consolidating with the Perkins and FFEL loans.  The US Department of Education says it best (emphasis added):

If you have both Direct Loans and other types of federal student loans that you want to consolidate to take advantage of PSLF, it’s important to understand that if you consolidate your existing Direct Loans with the other loans, you will lose credit for any qualifying PSLF payments you made on your Direct Loans before they were consolidated. In this situation, you may want to leave your existing Direct Loans out of the consolidation process.

That’s a very critical point.  Consolidation has huge benefits for PSLF because it can qualify balances originally issued under Perkins or FFEL loans.  But, if you have other direct loans as well, make sure you only consolidate the needed loans if you have already begun payments to avoid resetting your 120 payment count.

 

Student Loans Are Complicated

There are many different types of student loans, and all of them are eligible for different benefits, including PSLF.  Even in a 1300+ word blog post, I wasn’t able to touch on all of the potential complicating factors.  Download my student loan guide to learn more, and if you are contemplating pursuing PSLF, consolidating your loans, or making any other adjustments to your particular loans, it’s never a bad idea to get a second opinion.

Should I Pay More Than the Minimum Toward My Student Loans, or Should I Save More for Retirement?

Over 40% of people under 30 are currently making student loan payments.  That’s a staggering number.  And while we often think of how these payments affect our current financial picture (I certainly know how it feels to see that withdrawal come out of my account every month!), the effect on our financial future is very much overlooked.

Simply put, how will our student loan payments affect how much we save for retirement?

Well, that’s not a hard question to answer.  If we can’t save as much now, we’ll have less later.  Thanks for that, Bill.

Fair enough.  Let me rephrase the question.  Say you are at a point in your career where you have some flexibility in your budget.  Even after you’re making your loan payments, you’re still able to save for retirement each month.

The question then becomes- is it better for you to pay down you loans quickly by making more than the minimum payment, rather than putting that money into a retirement account?

That’s a much more interesting question.  Let’s take a look.

Research Says…

Earlier this year, HelloWallet (a Morningstar-affiliated company) produced a report on the relationship between student loan debt and retirement.  The results, while not unexpected, were alarming.  They found that student loan balances directly correlated with having less money to spend in retirement.

HelloWallet even puts a number on it- for every dollar in student loan debt you owe, you’ll have $0.17 less in retirement.  Financial guru Clark Howard (one of my biggest influences) extrapolated from the report that because of the negative effects student loans have on retirement balances, “… in most circumstances, it’s better to save more for retirement than pay extra toward your student loans…”

Generally speaking, they’re right.  If we are just looking at two goals- paying off your debt versus saving for retirement-  most borrowers will come out ahead in retirement if they make the minimum student loan payment every month now and put their excess savings toward retirement, rather than trying to pay off the student loan ASAP at the expense of retirement saving.

It’s All About Compound Interest

What to do with the money you save each month comes down to the rate you earn and the length of time you are saving.  Investing more for retirement early in your career has exponential benefits to the money you’ll have available at retirement.

Take a look at the numbers.  The chart below shows how much you’ll have at age 65 if you start saving $100 a month at certain ages, assuming a 6% growth rate:

blog-post-3-chart-1

Notice anything?  Take a look at the difference in retirement values if you start saving at age 25 versus age 30.  For the 25 year old, over 25% of the account value at retirement comes from the $100/month invested between ages 25 and 30!

This idea of compound interest clearly illustrates the perils of paying down student loans at the expense of your retirement savings.  The earlier you start saving for retirement, the exponentially better off you will be when it comes time to retire.  The degree to which your student loans impact your saving will directly impact your retirement picture.

Let’s take a look at an example.

Meet Sarah

Sarah is a 25 year old lawyer who is hoping to retire at age 65.  She has a total of $25,000 in loan debt (point taken, after 3 years in law school, she probably has a lot more than that, but let’s keep the numbers easy to work with, OK?) and is on a standard 10 year repayment plan, paying $265.16 each month.  Her loans have a 5% interest rate.

On top of these loan payments, she’s able to save $200 extra per month to put toward retirement.  Once she’s done paying off her loans in ten years, she will put that extra $265.16 toward retirement as well, increasing her total monthly retirement savings to $465.16.  Sarah’s retirement savings earns 7% a year (about what the stock market has historically made on average).

Sarah is wondering whether or not she should continue to save $200 dollars per month for retirement now, or whether it might make sense for her to, say, put $100 of that money each month as an “extra” payment on her student loans to pay off the loan faster, and keep contributing the remaining $100 toward retirement.

What’s Sarah’s Best Option?

In the first scenario (saving $200 a month), by the end of her 10 year loan payment period, the loan is paid off and Sarah has ~$35,000 saved for retirement.  She then increases her payment amount as scheduled, and by the time she retires, her retirement accounts are worth $853,399.48.  Not too shabby!

But, what happens if she uses half of her monthly savings to pay off her loan faster? She is able to pay off her loan in just over seven years, and the second she pays off her loan, she increases her retirement savings per month from $100 to the full amount of $465.16.  Even though she’s able to contribute more over the first ten years in this example, take a look at her retirement account value.  She only has $823,844.59 at retirement this time.

blog-post-3-chart-2

This is a great example of the power of compound interest.  The more Sarah starts to save for retirement today, the more she’ll have at retirement.  Even if she has to pay a higher amount on her student loans.

Some Caveats

Again, there are a lot of factors at play here.  Not everyone is in the same position as Sarah.  This example doesn’t take into account a few points:

  • If your situation is an outlier, I’d recommend crunching the numbers to evaluate the strategy before you make a decision. What do I mean by outliers?  Cases where one of the factors we are looking at is either very high or very low.  For example, If you have a very high student loan balance, or very high interest rates, or are a very conservative investor (ie, you might not want to invest in a way that will lend itself to a 7% annual growth rate as identified above), carefully evaluate these factors before making a decision.
  • Of course, in this post we’re only looking at two goals: paying down student loans and retirement saving. If you have multiple goals you’re trying to save for at once, a more detailed plan is needed.  In particular, if you are weighing paying down student loans quickly versus a more near-term savings goal (ex: buying a house in five years), this decision is much less clear cut and needs to be evaluated.
  • This whole exercise assumes that you can afford to save beyond your monthly budget. If you can’t, definitely make the minimum payments on your loans.  In addition, you should review whether an income repayment plan may be a good fit for you.  Finally, review your budget to see if there are any ways to trim back on spending or increase your income.
  • We haven’t even addressed that most employers offer a match on funds that you invest in your 401(k). If your employer matches, putting extra money toward your loans at the expense of retirement saving becomes even costlier.  Employer matches on 401(k)s are the closest thing out there to free money, after all!
  • Most importantly, Sarah in the example above is incredibly disciplined financially. Not only is she diligently saving $200 a month (either in her retirement account, or split between retirement savings and making payments on her loans), but she also has the discipline to redirect her entire student loan payment amount into her retirement savings the second her loan is paid off.  This is much harder to do in practice than it is on paper, so it’s important to plan ahead and hold yourself accountable.

A Word on Interest Rates

Interest rates on student loans vary wildly.  Some can be as low as 2-3%, others can be in double digits.

Like I mentioned earlier, the average return in the stock market has historically been about 7%.  If your student loan interest rates are higher than this, it’s not a bad idea to prioritize payments to pay down the high interest rate loans first.

Particularly if these high interest rate loans are private loans, refinancing into a lower rate loan is a great option for those who have good credit scores.  For more information on this, sign up for my newsletter to download a free copy of my eBook on student loans.

Conclusion

There’s some good research out there that recommends to usually save for retirement before making extra student loan payments.  Don’t take that as the gospel truth, but generally speaking, this approach is the correct one.  In most cases, the benefits of having money in your retirement account to compound in value over time will outweigh having to pay your student loans a little bit longer.

Carefully look at your personal budget, student loan balance, interest rates, and retirement goals to make these decisions.  And don’t be afraid to reach out to an expert for a second opinion.

Trump’s Proposed Student Loan Policy Changes

Politics is way, way outside the scope of this blog.  But now that the 2016 Presidential Election is behind us, I wanted to quickly highlight some significant changes that President-Elect Trump proposed during the campaign regarding student loans.

Student loan repayment plans are one of our primary focuses at Pacesetter Planning.  As such, I wanted to share an update on some of the changes possible in a Trump administration.

A New Income Based Repayment Plan?

Currently, borrowers who have federal loans are automatically put on a standard 10-year repayment plan after graduating.  However, there are several alternative payment plans that allow borrowers to adjust their payment term and monthly payment amount based on the borrower’s income.

I won’t rehash all the details regarding who qualifies for which plan here since I outline each of these options in detail in my FREE eBook, “13 Things to Do Before You Make Your Next Student Loan Payment”.  Subscribe to our newsletter here and I’ll send you a free copy today!

Mr. Trump proposed a new version of these income based repayment plans in a policy speech in October.  Essentially, the president-elect argued to allow borrowers to cap payments on federal loans at 12.5% of their monthly income.  Even more, Mr. Trump proposes to forgive all debt for borrowers making these capped payments after fifteen years.

To repeat, payments capped at 12.5% of income, and forgiveness for any remaining federal loan debt after 15 years.

Comparison to Current Policy

It’s a mixed bag, but overall, this proposal compares very favorably to the existing options.  While some of the current plans are limited based on your income level and when you borrowed the loans (again, download my eBook for more details), generally speaking the existing policies allow borrowers to do one of two things:

  • Cap borrowers’ payments at 10% of monthly income, and offer forgiveness after 20 years, or
  • Cap borrowers’ payments at 15% of monthly income, and offer forgiveness after 25 years

How does President-Elect Trump’s proposal compare?  Partially, it depends on your strategy around student loan payment.  For borrowers who want to minimize their monthly payment at all costs, one of the existing income repayment plans will probably be a better deal for you, since they cap payments at 10% of monthly income rather than 12.5%.  But, for people looking to earn loan forgiveness, Mr. Trump’s plan could be a huge bargain.

Cutting the forgiveness window from 20 or 25 years down to 15 years is a big deal for borrowers.  By slightly increasing the monthly payment amount but reducing the payment timeframe by five or ten years, many borrowers will be able to save thousands of dollars in repayment costs over the life of their loans.

Unknowns

Of course, none of this is official policy yet.  As such, there are still many things we don’t know about this proposal.

  • Will the proposal apply to all borrowers? Some of the current income repayment plans allow for individuals regardless of income level to sign up.  But many others restrict eligibility to only those who either have a low income level, high loan balances, or both. We don’t yet know how wide-reaching Mr. Trump’s proposal would be if it goes into effect.
  • Will the proposal only affect newly-issued loans? Or, to put it another way, will this proposal only apply to loans borrowed after it goes into effect?  Trump has not offered details yet on whether or not borrowers who are currently in the process of repaying federal loans would be eligible for the 12.5% monthly income payment cap and 15-year loan forgiveness.
  • Will the proposal actually go into effect? As we all know, and we certainly don’t have to rehash here, President-Elect Trump campaigned on many issues with more passion than he did regarding student loans.  Will this be a high priority item for him?
  • If so, will the plan need congressional approval? In the past, President Obama issued changes to student loan repayment terms without needing to go through Congress.  Will the future President Trump seek to do the same?

We will provide updates on President-Elect Trump’s student loan plans throughout the course of his administration.  But, in the wake of a divisive national election, I wanted to quickly highlight this important proposal and its potential benefits to hundreds of thousands of student loan borrowers across the country.

To learn more about how to implement your own student loan repayment strategy, click here to download a free copy of by eBook, “13 Things to Do Before You Make Your Next Student Loan Payment”.