Financial Planning – Student Loan Paydown Strategy for 2021
Student Loan Pay down Strategy for 2021
Last week Joe Biden was inaugurated as our new president and among his slew of executive orders included the extension of federal student loan forbearance, through September 30, 2021. If you have federal student loans you may have received an email from your loan provider with these details. In essence, all federal student loan borrowers can continue to forgo their monthly payments and no interest on those loans will accrue until October 1st, 2021.
At the top each year, I personally like to take time to review my finances and assess the goals I plan to pursue for the year. With the raft of COVID-19 still taking a toll on many of us, I wanted to provide some different strategies individuals with student loans can use, given the new extension.
Step 1: Review Your Finances
Create a Balance Sheet
Updating your balance sheet at the beginning of every year is a great way to keep yourself accountable and measure your progress. You can start by writing down the current value of all your assets (checking/saving accounts, retirement accounts, investment accounts, etc.), your liabilities (credit card debt, student loans, car loans, mortgages, etc.) and then subtract your total assets from your total liabilities to determine your wet worth. Don’t get discouraged if this number is negative, as this is common for many people getting started in their careers or for those who have hit roadblocks along the way.
Once you have this balance sheet put together, go ahead and type some notes on experiences/changes you went through over the year, both the good and the bad (e.g. received a raise at work, got laid off, bought a new car, landlord raised rent, etc.). Doing this reflection will help you explain your progress or shed some light on why you might not have been able to reach your goals.
Review you Cash Flows
At the very minimum you should have an idea of what you are able to net each month (i.e. save). Life is never steady; we all go through waves and so does our savings. You may have months you are able to save more than others, however you should be able to figure out what you are able to save on average each month.
If you have no clue where your money is going, reflect on your expenses over the last month. While it will be time consuming, go through every transaction you had and categorize each of them. Doing this will show you exactly how much you spend on dinning out, online shopping, and other areas.
Assess your Financial Health
Now that you have some concrete information to work off, it’s time to determine what goals to start pursuing. The first thing you can take a look at is your debt. If you have any credit card debt or high interest loans (i.e. debt with 15%+ interest rates) take this time that you have off from making student loan payments and come up with a paydown strategy. If you have good credit, consider transferring your high interest balances to a credit card/line that has a 0% interest promotion. After you’ve determined your options, determine how much of your monthly savings you can use to pay down this debt.
Next, look at your savings. If there’s one takeaway we can all learn from this pandemic, it’s that no one is completely invincible. Whether it be financially or health wise. When it comes to your savings, it’s always good to maintain at least 1-3 months of living expenses in cash. If you don’t have high interest credit card debt, consider checking this box off next.
Step 2: Review your Student Loans
Graduates with Private and Federal Student Loans
Now on to the student loan strategies. If you’re a graduate that has both private and federal student loans, then unfortunately you probably haven’t benefited as much as other. While most private loan lenders have options to put loans into forbearance (if a barrower is going through a hardship), the executive order put in place does not require private lenders to halt interest from accruing during forbearance or even adjust their forbearance policies. On the bright side, interest rates are near all-time lows. Typically, private student loan interest rates can vary from 4% all the way up to the double digits. For those with decent credit, I would look in to refinancing your private student loans. You may be able to save thousands over the life of your loan and pay down your loans faster. For those who can’t qualify for a refinance, consider using your savings from your federal student loan payments to pay down loans that have a high interest rate.
As for the federal loans, I would NOT, I repeat would NOT refinance your federal student loans. Here’s why; The Biden administration has suggested forgiving federal student loans (potentially $10k or more) at some point in the future. While some argue that he could do this in one swift executive order, it’s more likely that he will try to package this in another stimulus bill. Whether or not student loan forgiveness will come to fruition or not is difficult to say, but if it does those with federal loans will most likely be the only ones to benefit. Forgiving private student loans would be an administrative nightmare and not nearly as easy as forgiving federal student loans.
Graduates with Federal Student Loans Only
Lastly, I’d like to touch on those who only have federal student loans. During this time of interest free forbearance you have a few options. You could pay down your loans that have higher interest, you could save towards goals you may have (like buying a home), or you could put your typical monthly payment in to savings and take the “wait and see” approach. At the end of the day your loans aren’t going to get any higher (at least until October 1st), so if you’re not sure which route to take, stay disciplined and save that extra cash. It’s important to note that once you do make a student loan payment, there is no undoing it.
Step 3: Keep yourself Accountable and Stay Disciplined
Creating a goal is only one thing, but executing your goals is another. The best method I have found for holding myself accountable is to routinely review my progress throughout the year. I do this by updating my balance sheet every month and being mindful of the things holding me back. Without accountability, the goals you make are pointless.
Koa Wealth Management
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