After three years of forbearance, Student loan repayment will be restarting in the Fall of 2023.  To the student loan borrower, this means reviewing their current loan repayment options especially since their income or marital status may now be different.  The new graduates will also have to decide on their repayment method based on their job type and salary.   Student loan repayment advice is difficult to find.  As the stress of repayment increases, more people are getting inappropriate advice in the hope of an easy answer.

What most borrowers do not understand is that a person’s debt structure, marital status, tax filing decision, and employer are all factors in finding the right answer.  Student loan repayment decisions can be complicated and confusing.

According to the Federal Reserve, student debt is over $1.77 trillion.   As this crisis grows, the lack of good student loan repayment advice continues to lag.  More borrowers are the victims of improper advice than ever before.

The Consumer Financial Protection Bureau report focused on the complaints submitted by consumers against student loan servicing practices.  It deals with the timeframe of the the early months after the resumption of student loan repayments after the thee years of payment pause due to the Covid-19 emergency.  Borrowers faced long hold times and abandoned calls, significant delays in the processing of their income-driven repayment plan applications and inaccurate and untimely billing statements.

Why is Student Debt happening?

There is a lack of financial literacy among the public and financial professionals regarding this student loan borrowing and repayment topic.  For many people, the financial consequence of their borrowing decisions is not known until after graduation or when the person stops going to college.  The cost of education is an intangible asset and the value is often not seen until after the degree is earned.  Most other items we borrow or finance are tangible assets, like a house or car.  This is a reason why the bankruptcy rules concerning student loans are less generous.

The college investment is one of the few purchases where the buyer does not see the total final cost.  Colleges only provide information about financial information one year at a time.  Financial transparency is another major cause of the student debt problem.

Student Repayment is Not Easy

Another issue is the perception that student loan repayment is easy.  Student loan repayment is one of the most complicated personal financial decisions that a person will make in their lifetime. Here is a list of items that need to be considered before selecting the best repayment method.

• Types of Student Loans (Federal or Private)
• Multiple federal loan repayment methods
• Loan forgiveness
• Tax filing status
• Negative amortization (Loan Balance increase)
• Co-signer release
• Interest rate
• Affordable Repayable amount

As you can see from this list of items, the decision is not easy to understand.  To make things worse, if you are a married couple the decision becomes more confusing.  A married or engaged couple has over 126 combinations of options to decide on before the best decision can be made.  More families are also relying on Parents PLUS loans to finance college funding and must now calculate this debt in relation to their retirement plans.

Student Loan Repayment Advice is Fragmented

Due to both the complications and high loan balances, students and parents are searching for proper advice. The biggest problem with finding the proper advice is it is fragmented.  The student loan servicers typically put you in the lowest payment to help people to stay current.  In most cases, this is not good for your long-term financial wellness.

For married couples, how a person files their tax can have a significant impact on the couple’s payments.  The tax advisor is looking at lowering your taxes and rarely sees the impact on the loan repayment options and amounts.  The tax filing decision should be reviewed each year when a life event happens such as: getting married, having a child, changing employers, or finishing a degree.

The last most common resource is private student loans.  For many, this could be a great option if you need a more structured schedule or you can get a better interest rate.  The borrower must realize that this decision is final.  The federal loan repayment options offer the most flexibility.  Once you decide to refinance under a private lender, the borrower is no longer able to return to the federal loans with those loans.  In addition, a private consolidation early will limit the options for a married couple since only one will have federal loans.

The other problem facing many student loan borrowers is their financial and personal lives are in constant change just after college.  If the student is a traditional student, many will be changing jobs and maybe getting married.  For non-traditional students, they may have a home or children.  All of these items impact a person’s taxes and are an important part of the student loan repayment decision process.

These are some of the reasons why we have created our Student Loan Repayment Software or Student Loan Repayer.  It gives the borrower and married couples a view of all of their options in one place.  It is objective and independent, a trusted second opinion.

Complexity of Income-Driven Methods & Hidden Risks

As college costs rise more people are borrowing higher amounts.  People over the age of 50 are the fastest-growing group of student debt borrowers.  As a result, the government has repayment options that are based on a person’s income which can be helpful when planning your student loan debt strategy.  These options are called Income Drive Repayment methods or IDR.  These same plans are also used for the Public Service Loan Forgiveness plans.

The IDR methods offer a payment amount based on a borrower’s adjusted gross income.  There are various options based on the timing of the distribution of the loans.  What is often not explained is these loans have a financial term called negative amortization.  This means the IDR monthly payment does not cover the interest charge of the loan.  The student is staying current but the loan balance is increasing.

As this may be a good option in some situations, this is typically not a good long-term solution since the student loan balance is increasing.  For many, this becomes a surprise when they want to buy a home or a car and are unable to because of their debt-to-income ratio.

Summary

As student debt continues to rise, a serious problem is getting worse.  People are unable to find the proper advice for a variety of reasons as stated above.  At Pay For ED, we have taken steps to improve this situation.  We have developed two training programs and financial designation for financial planners and CPAs.  There is the College Funding and Student Loan Advisor or CFSLA and the Student Loan Repayment Advisor or SLRA. These advisors offer a holistic solution to the paying for college and student loan repayment process.  In addition, the CFSLA and SLRA Advisor must act in a fiduciary manner which means they will need to act in the client’s best interest.  We hope the combination of the Advisor training program (CFSLA & SLRA) and our innovative Student Loan Repayment Software will be the first steps of many to solving the student loan crisis.