Each month, people like my friend Christine have to make a choice: pay the interest on their student loans (while watching their balance tick up) or use that money to buy groceries, health insurance and other necessities. “I try not to think about it,” she says to me, “because the more I think about it, the angrier I get.”
It is no secret that student loans have cast a dark shadow on the finances of many, particularly millennials. National statistics on student debt levels keep growing—the average undergraduate in 2015 is leaving school with over $35,000 in debt. Tack on any graduate, law school or medical school debt, and that number quickly multiplies.
Managing Your Loans
For all those out there grappling with student loans, including clients of Abacus Wealth Partners, what is the best way to manage your student loan debt?
Get the best rates: One of the most frustrating things is hearing about today’s low interest rate environment while paying student loans in the 8% or higher range. An increasing number of companies like SoFi, Lending Club and Upstart allow you to refinance your student loans into one loan at a lower rate. Be warned, though—if you are refinancing federal loans and have any plans to work in the public sector, you can lose certain benefits like income-based repayment and debt forgiveness options.
Don’t forget the tax deduction: One of the things that make student loan debt better than car or credit card debt is the potential for a tax deduction. If your modified adjusted gross income (MAGI) is under $80,000 (single) or $160,000 (married filing jointly), you can deduct up to $2,500 in student loan interest a year. If your debt is manageable and your interest rate is low, there is no rush to pay it off.
Prioritize debt by interest rate: If you are able to make payments beyond the minimum, should you? It depends:
- Do you have federal loans and plans to work in the public sector? Then it may not be worth it based on some government forgiveness programs that you could save money on.
- Do you have other consumer debt? If you have higher-interest credit card or auto debt (which is not tax deductible), make it a priority to pay those debts off first. As tempting as it may be to pay a little extra on every form of debt, remember that paying the highest-interest debt first will save you the most in the long run (it’s called the “debt snowball” effect).
- Are you maximizing other forms of savings, like having a three- to six-month emergency fund and contributing at least enough to your 401(k) to get the company match? If student loan debt is your only debt and you are meeting your savings goals, then have at it.
- Do you have a bunch of loans at the same interest rate? Pick the smallest balance and put all your extra payments into that one loan; then when that one is paid off, put the rest into the next highest balance. The “avalanche method” can help build confidence by seeing loan after loan eliminated.
As frustrating as student loan debt can be, remember that this is often considered one of the “good debts,” because you are investing in yourself and your earning potential. Hopefully things will change and graduates won’t have to shoulder such high burdens in the future. But until then, make sure you approach your debt strategically—don’t pay more interest than you need to, remember your taxes, and pay highest-interest debt first.
