If you’re one of the millions of college graduates with $100,000+ in student loan debt, it’s safe to say that you’re looking forward to the day when that number reaches $0. But let’s be honest, depending on what you studied, how much debt you incurred, and your annual income, getting a handle on your student loans can be difficult at best.
So, how can you dig yourself out of a significant amount of education related debt? For many, the answer is student loan forgiveness.
There are several different loan forgiveness options available, all with a similar premise of discharging your loans after a specific timeframe. The primary difference lies with the varying terms and eligibility requirements. Among the most common options are the Public Service Loan Forgiveness and Teacher Loan Forgiveness programs — which require that you work in a public service or teaching position (respectively).
Alternatively, there are a host of other programs for careers outside of public service and education, in fact there are even a number of states that will work with debt-saddled graduates to help eliminate their student loan burden.
Sounds like a good deal, right? On the surface, yes…but, as is the case with most things, there are certain factors that must be considered before you decide to take action.
To help you make sense of it all, we’ve come up with a few do’s and don’ts that you’ll need to know if you’re considering a loan forgiveness program.
Do: Understand the Terms
Taking control of your student loan debt may lead you down a path toward unfamiliar terminology and financial jargon. But fear not! You earned that degree by committing hours upon hours of studying, so there’s no reason you can’t revisit that skillset and spend some time acquiring the tools necessary to get a handle on your student loans.
Having trouble understanding what the difference between deferment and default is? Need a refresher on how interest works? This is nothing more than an internet search, or visit to Six-Figure Student Loan (yes, shameless plug) can help you answer.
Don’t: Neglect the Details
Mark Struthers, financial advisor and founder of Sona Financial notes that “the biggest downside to PSLF (*Public Service Loan Forgiveness) is checking all the boxes and making sure they stay checked. The terms are great, the time in repayment is relatively short and the amount forgiven is not taxable. It’s the technical details that get people in trouble.”
He continues, “For example, it requires 120 ON-TIME payments; not 10 years, not 2 payments in one month, but 120 on time payments. I call it curse of the toos — If the payment is too late, too early, or two of the payments are too close together, then it may not count.”
To simplify the process, Struthers suggest that borrowers automate and verify and contends that this is one area where having a fee-only planner can really help.
“Having someone help plan and verify something so critical, is critical. I have also found that information from the loan service provider can be inconsistent and since the devil is in the details with PSLF, it can take persistence to feel confident that everyone is on the same page.”
Do: Account for Taxes
According to Struthers, one of the most often misunderstood elements of student loan forgiveness is are the tax-implications. “Public Service-based forgiveness is not taxable and is a beautiful thing. But Income-Driven is taxable and given after 20-25 years the amount forgiven can even equal the original loan amount, the tax bill can be HUGE.
He continues, “If you make over $100k and you throw another $100k of gross income the year it is forgiven, it could throw you into the next tax bracket. You could easily be looking at a $25,000-$33,000 tax bill – and that may not include state taxes.
To say you need to plan for this is an understatement.”
Don’t: Consolidate Too Soon
The allure of student loan consolidation is in it’s simplicity. By consolidating, all of your outstanding loans, you could go from managing multiple payments, all with different due dates, payment amounts, and interest rates, into one loan.
However, choosing consolidation limits your loan repayment options, such as aggressively paying private loans while keeping federal loans in forbearance, or utilizing the popular “avalanche payoff method” of repaying your higher-interest loans first.
“Consolidation, albeit a popular option, might not be beneficial to you from the onset — so you want to be able to take advantage of it at the right time and not use it too soon” says Daniel Wrenne, financial advisor and founder of Wrenne Financial in Lexington, Kentucky.
Additionally, if there’s a chance you qualify for a forgiveness program, it may be in your best interest to hold off on consolidating your balances. “If you’ve been working for a qualified public service employer, consolidating your loans may eliminate several years of eligibility, depending on which loan types were already benefiting from the program,” Wrenne says.
Do: Have a Strategy
While student loans may seem like a fact of post-grad life, attacking your debt with a sound strategy can save tons of money and shave years off of your repayment window. On the surface, it might seem as simple as picking a repayment plan and setting up the automatic draft to take the minimum payment from your checking account. While that is ‘a strategy’, it’s But remember: the decisions you make today and during the course of the loan will affect how much interest you pay in the long run.
That’s why an effective repayment strategy is so important, because it ensures that you don’t spend a penny more than is necessary.
Start by sitting down and taking a look at your current financial situation. A fee-only financial advisor could prove to be a great resource to help put things into perspective. Together, you can come up with a strategy that fits within your financial capacity and one that will likely prove far more effective than simply paying the minimum balance month after month.
Don’t: Default
Of all the do’s and don’ts listed in this article, this final one may be both the most simplistic AND most important. Don’t default on your student loans. I repeat, DON’T DEFAULT ON YOUR STUDENT LOANS.
Honestly, I almost feel like it should go without mentioning that you shouldn’t default on your student loans, but with the far-reaching effects of delinquencies on your financial future, I’d be remiss if I didn’t at least cover the topic in passing.
For context, most servicers will consider your loan delinquent the first day following a missed payment and will continue to do so until the account is brought current.
But that’s not all.
All loan servicers will report delinquencies greater than ninety days to the major credit bureaus, which could seriously affect your credit rating. This is extremely important considering your credit score affects everything from your ability to secure a place to live like renting an apartment or buying a home, in addition to rates you pay for car insurance — even your chances of getting a job.
*Regarding the PSLF program, please c