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Loans and Groans:

Basics of Student Loan Debt

Welcome to Society of Grownups. My name is Tyler Dolan, and I'm a certified financial planner professional on the team.

In this class, you'll learn all about student loans. I've noticed it's been quite the popular topic in speaking with grown ups over the years. Trust me, I know how painful it can be to make that student loan payment every month. I just hit the halfway mark, and I feel like I've been paying them off forever. I'm one of the 44 million Americans struggling with student loan debt.

Did you know the average graduate is heading out in the real world with over $37,000 in student loan debt? No wonder why so many graduates are living paycheck to paycheck.

In this class, you learn to become more familiar with your student loans and how to manage them. We'll start with the loan basics, cover the difference between federal and private loans, then we'll dive into your loans. If you feel like you have the background knowledge, feel free to skip ahead to future chapters.

First let's start with the warm up activity. Which of the following statements apply to you?

I keep all my student loan information in one place.

I feel like I can't afford my monthly student loan payment.

I feel like I'll be paying these loans off forever.

We're going to refer to these later on in the class, so stick with me and we'll tackle these issues head on.

On the class web page, you'll see an attachment which we will refer to frequently. If you could print it out, that would be great. If not, feel free to pause the video, and refer to the PDF document as needed. No matter which way you prefer, it'll be really helpful as we move through the class. Also, feel free to pause the video as needed to use the online resources and to take notes.

Let's get started by diving into how loans work. Loans can be broken down into two pieces, principal and interest.

The loan principal refers to the original amount borrowed, or the amount still owed on the loan, separate from interest. For example, if you took out $100,000 of loans to pay for a school, that's your original principal. If you have $50,000 left to go, that's your current principal balance.

Interest is the compensation you paid at the bank for lending you the money to go to school. It can be a pretty significant portion of what you have to pay over time. It's also why your loan balance isn't decreasing nearly as fast as you'd like.

Principal and interest work together to form your monthly payment and the ultimate amount that you'll pay back over time. Take a minute to check your statement or the lender's website to see what your breakdown is.

Here's a quick example: Say you've borrowed $100,000 to help pay for school and your interest rate is 6%. If you're on the 10 year standard repayment plan, how much are you actually going to pay over that period of time?

The total amount you'll pay is over $133,000. That means on top of the original $100,000 that you borrowed, you'll pay over $33,000 in interest. That's pretty significant.

You may not have been aware, but there are two different types of student loans, federal and private. And they both use those same basics. They also have a lot of differences. First, let's take a look at private loans.

They're are a whole different animal than federal loans.

There are student loans that don't come from the federal government. The feds aren't the lender. It's a private institution, such as SoFi, or even your local bank. Private loans are more straightforward than federal loans, but a lot less flexible.

Each private loan will have its own repayment plan and interest rate. The rules were determined by the lender, and you agreed to them when you signed the original documents. Now if you're like me, you probably didn't read the full terms and conditions, but later I'll let you know where to look.

Since it's a private lender, and you sign those original documents, the lender isn't actually obligated to work with you if you aren't able to make your monthly payment. But sometimes they'll work with you if you just give them a call. Yeah, I know how painful that sounds, but I promise it's not too bad, and it's worth a shot.

As you'll learn in the next section, federal loans are a lot more flexible when it comes to repayment options.

Federal loans are those that come from the federal government. It might not actually look like your loan came from the government, because each of your loans has a loan administrator that processes and monitors your payments. If you're not sure, don't worry, I can show you where to find it later.

Federal loans are a bit more complicated than private loans, but we'll go over the different repayment types and repayment options in this chapter. Feel free to pause me if you need to.

There are many different types of federal loans. They all have different rules, terms, and eligibility requirements which you can learn more from the handouts. The majority of student loans are direct or Stafford loans, which come in two different types, subsidized and unsubsidized.

These are just complicated terms to explain how the interest is treated on your loans while you're in school. With a subsidized loan, the government pays the interest while you're in school. With an un-subsidized loan, you're responsible for the interest while you're in school. And you actually have a choice here. You can pay the interest while you're in school, or you can let the interest accrue while you're in school, and that amount is added to your loan balance when it comes time for repayment. It's called interest capitalization and it's a commonly unknown phenomenon. The difference between the two is pretty substantial. Check out your handout to see an example.

Now let's talk about federal loan repayment programs.

When you approach a loan repayment, the default plan is called the standard repayment plan. Based on your loan amount and your interest rate, you'll pay a fixed dollar amount on a monthly basis for 10 years. There are three other common options that are related to the standard repayment plan, which can be helpful if you can't afford the default repayment plan.

There's graduated, where your payments start low and then increase like a staircase every two years for a total of 10 years. Then there's the extended fixed, which stretches out your payments over 25 years. So your payments are lower on a monthly basis. Then there's the extended graduated, which stretches out that graduated repayment plan but over 25 years. So your payments don't increase as drastically every two years.

So if you answered in the warm up that you're having trouble affording your monthly student loan payment, one of these options might be a good place to start. You can learn more specifics and eligibility requirements in your handout.

There are also federal repayment plans that are based on your income. Depending on your situation, these repayment plans could offer the lowest monthly payment of the bunch if you're really struggling to make your student loan payment. The calculations are a bit complicated, but they're shown in your handout if you want to learn more.

If you're considering a job or working in public service, there's a special government student loan program that you might be able to take advantage of. It's called the Public Service Loan Forgiveness Program, or PSLF. Public service jobs include, but aren't limited to, law enforcement, military service, nonprofit work, public education, and work in various government organizations. We have a handout with more specifics on who may be eligible for PSLF.

Under the PSLF program, if you make 10 years worth of on time payments to your student loans, that's 120 payments, the remaining balance can be forgiven.  It's really important to mention here that the forgiven amount under PSLF is tax free. Some other government programs also have forgiveness options, but they aren't tax free.

If you're someone who attends on being in public service for 10 years, it typically makes sense to choose the federal loan repayment program that allows for the lowest possible payment in order to maximize the potential future loan forgiveness.

So now that you have a decent background, let's focus on your student loans. If you answered in the warm up that you don't keep all your loan information in one place, here's where to start. Just a heads up this might take a little while, so please take your time. You can come back and do it later if you need do. You think they make these websites a little bit easier to navigate, but just be patient. If I can figure it out, I promise you, you can too.

The first step is to get to know your loans. I know you'll never really be friends, but knowledge is power.

Let's actually take a dive in and check your accounts. You can log in to your loan administrator's website, check your statements, and for federal loans, you can go to the National Student Loan database. So take out a notebook, or create a spreadsheet, and then take inventory of all the following information.

It helps to have everything in one place. For your convenience, we've created a Google sheet template for you to compile all of this information. You'll see the link in the class materials section under the video screen. Here's the important information to look for.

Your loan administrator, your monthly payment, the due date on that monthly payment, your current balance, how long you have left to go, the type of loan, the interest rate, and the original loan amount.

Now let's check out a great resource to find information on your federal loans. The website is called the National Student Loan database, or NSLDS. The website is www.nslds.ed.gov. The best way to use the web site is through the financial aid review. You just have to accept their privacy policy, and now you're at the login page. I just have to enter my login information and we're in.

This website is great because it consolidates your information in a nice way. Your loan types, original loan amounts, and your current balance are all right here on the first page. You can find most of the rest of the information for each loan by clicking on the little blue box next to each loan.

On this page, you'll find your interest rate, the type of repayment plan you're currently on, the due date on your monthly payment, and your loan servicer is right there at the bottom. See, this is a loan that I have at Great Lakes. The only information you won't find here is your monthly payment, and how long you have left to go on those payments.

So we're going to pause here for a second. Go log into your administrator's website to find the rest of your information. You should be able to find it all on the account summary page. If not, check your monthly statement, or call your servicer and demand answers.

So what now? Now that you have all your information consolidated in that one place, let's talk about how to manage your loans.

What's your total monthly payment? Does it fit into your budget? A simple way to think about a budget is the total after tax monthly income minus total monthly expenses. Now the goal is for the difference to be positive at the end of the month so you are able to save some money toward your goals.

Your student loan payment acts about the same as your other monthly expenses, such as internet, rent, and other utilities. If your expenses are greater than your monthly income, you may be using high interest credit card debt to make ends meet. Try to cut back on some of your fund money first. If you can't cut back anymore, you may have the opportunity to decrease your monthly student loan payment by using a different repayment plan.

One of the most important things to understand if you're considering changing your repayment plan is if you switch to a lower payment, you're most likely going to pay more interest over the life of the loan because it's going to take longer to pay off. If you can afford to pay more, the opposite is true.

If you have private loans, remember, they're simple, but rigid. Your lender doesn't have to work with you if you're unable to make your monthly payments. But it's worth a phone call. See if they offer any other repayment plans.

If you have federal loans, you may have several repayment plans available to you. Believe it or not, the best resource to learn about your payment options is on the government student aid website. I'll show you an example of how to use it.

The web site is www.studentloans.gov. You'll want to check out the repayment and consolidation tab. The repayment estimator is what we're looking for. Now at the top, you can log in and it will pull all of your federal student loan information from the NSLDS web site. It's a lot easier than entering all of your student loan information by yourself. It won't include any private loans though, so you'll have to add those yourself. For simplicity's sake, this time I'm going to make up an example just to show you how to use the tool.

The first question to pay attention to here is your filing status. For this example, I'm going to pretend that I'm single. I just hope my wife doesn't watch this whole video. The filing status is important because if you're married, your spouse's information will be included in the repayment plan calculations as well.

Let's assume I have $50,000 in federal student loans, I just have to click add, choose my loan type, direct subsidize is the most common. So we'll use that one for now. And I'll enter my balance and my interest rate, which for now we'll assume is 7%.

The next step is entering your adjusted gross income, or AGI. That's a complicated term used by the IRS (shocker, I know) to describe your gross income minus a few adjustments. To use an estimate, you can enter your current salary. But to be more precise, you can check back to last year's tax return. The number is on line 37 of the Form 1040. Let's assume mine is $40,000 and I live in Massachusetts.

Now if you scroll down, you'll see the loan repayment plans that are available to you. We mentioned some of these a little earlier. Remember, you can find more specific information about each repayment plan in your handout.

The standard repayment plan is the default option. My loan payment would be $580, and I'd pay almost $70,000 over 120 months. That's 10 years. Notice that I'll actually be paying a lot more than the $50,000 I originally took out. Yep, the other $20,000 is the interest I'd pay over those 10 years.

So it looks like I'd be eligible for an income driven repayment plan called pay as you earn. Under this plan, my first payment will be $185. Then it would increase over time along with my income. This option would certainly make my monthly payment more affordable, but check out how much I'd be paying over time, almost $87,500 over 240 months. That's 20 years. So I'd be paying an extra $17,500 over the term of the loan.

So if you're struggling to make your monthly student loan payment, consider either calling your private lender or working with the administrator of your federal loans to find an option that works best for you and your budget. Make sure you carefully consider each option for both the short term and the long.

I'm sure you've heard someone mention student loan consolidation or refinancing along the way at some point. But what does that actually mean? They're both actually very different strategies.

Student loan consolidation is mainly regarding federal loans. It's more of an administrative process, where all your federal loans are consolidated together under one lender. The advantage is that you can get all your loans under one roof with one single monthly payment. The weighted average interest rate is used for your new consolidated loan. For example, if you have $100,000 of loans at 7%, and $10,000 at 5%, your interest rate will be a lot closer to the 7% than 5%.

Here's something to keep in mind when you're thinking about consolidation:

If you want to qualify for public service loan forgiveness, consolidation might be required.

Make sure you check with your lender to see if all your loans can qualify for consolidation.

You can lose some benefits by consolidating. For example, you might lose the benefit of a slightly decreased interest rate if you had chosen auto pay.

Your repayment period could also increase. Although consolidation might result in a lower payment, you might actually end up paying more over time.

You can apply for student loan consolidation on the student loan dot gov website. Also, you can learn more about student loan consolidation on the web site studentaid.ed.gov.

Student loan refinancing mainly regards private loans. But federal loans can be included too depending on your lender. Most people refinance their loans because they are able to find a lower interest rate. Basically, at the end of the refinancing process, you'll have a new loan with hopefully a lower interest rate. It might even be with a different lender.

Depending on your situation, this strategy can make sense, especially in an economy with low interest rates. Although the idea of a lower interest rate sounds great, it's not always a slam dunk. Make sure you take the following into consideration when you think about refinancing:

If you refinance federal loans into new private loans, you give up the flexibility inherent with federal loans. Particularly repayment options, forbearance, and loan forgiveness.

Be careful about origination fees, and or refinancing charges, these are fees that can be charged by the bank for actually doing the work to close your old loan and start a new one. Sometimes these fees can actually outweigh any interest savings that you have by refinancing.

So your interest rate will be very dependent on your credit score. So make sure to check your credit score as you're doing your research. If your credit score is low, your interest rate might be higher than you'd expect. If you have a high credit score, you might be able to find a lower rate. You can see your credit score for free by using creditkarma.com. If you find that you don't have a good or excellent credit score, check out our class called Can I Have Your Number to find suggestions on how to improve your score.

Be mindful of the new repayment term. A new loan means a new repayment term. So if you're three years away from getting your loan repaid, you may be able to find a better rate with a refinance. But if the term of that loan is 10 years, you'll probably end up paying more over that time.

Carefully consider fixed first variable interest rates. Sometimes lenders will offer a lower initial rates, but then they're variable in subsequent years. This can be dangerous if your interest rates increase. That can increase your monthly payment and cause you to pay more over time.

We have a great tool on our website where you can test how different scenarios can impact your student loans. We creatively call it our loan repayment calculator. And it could be a great way to visualize how refinancing, or paying more, may significantly affect your student loan situation. I'll start by showing you a quick refinancing example.

Let's use one of the examples earlier. A $50,000 loan with a 7% interest rate. And let's assume my minimum monthly payment is $500. Once we click calculate, we'll see that my loans will be paid off in August of 2029, and I paid $25,000 of interest over that time.

So remember, the main point of refinancing your loans is to get a lower interest rate. With all else being equal, let's see what would happen if I found a company to refinance my loans at 5%: my loans would be paid off almost two years earlier and I'd save almost $10,000 of interest over that time.

Again, keep in mind that when you refinance your loans, you're taking out a whole new loan and the clock starts over again. If you're close to paying off your loans, it may not make sense to take out a new five year loan, even if you find a better interest rate.

We're commonly asked if it ever makes sense to pay more toward your student loans. The answer is different for everybody. It's important to consider all your goals in a holistic way. Do you have other goals that are more important to you than paying off your debt? For example, do you have an emergency fund? If not, you may consider it more of a priority to start an emergency fund with any extra cash you have rather than paying down your debt. And if your student loans keep you up at night, by all means, pay more. You'll end up saving both time and interest payments if you do. Use our loan repayment calculator to see how paying even just a little bit more per month can affect your final payment date and the total amount of interest that you'll pay over time.

Now that you have some background and some handle on your student loans, what now?

Keep your student loan information in that one consolidated place.

Be honest with yourself if your student loan payment fits into your budget.

Make sure you're paying at least your minimum monthly payments and on time.

If you're having trouble making those monthly payments, consider the following options: Switch to a different federal loan repayment program, consolidate your federal loans, refinance your loans into one private student loan with a lower interest rate.

If you can afford to pay more, consider your goals first. If it's a priority, pay more towards a loan with the highest interest rate first.

If you're in public service, check to make sure you're eligible, then consider choosing the repayment option that comes with the lowest monthly payment.

I hope this class has been helpful to you in getting a handle on your student loans. Please visit societyofgrownsups.com to learn about other grownup topics. Our blog is a great resource for personal finance and lifestyle topics. And our tools and resources are a great way to apply what you learn to your own situation. I want to thank you for taking the time to attend our class today.

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