Navigating Student Loan Debt

Last Friday, the Supreme Court made a decision to prevent the Biden-Harris Administration from canceling $10,000 to $20,000 worth of student loan debt. Take a deep breath; we're going deep. 🤿

Despite this setback, the Biden administration continues to explore alternative solutions. Yay 🥳. During his recent address, President Biden proposed utilizing the Higher Education Act of 1965 to authorize forgiveness. Wuttt. The HEA grants the authority to "compromise, waive, or release loans" for any government-backed student loans and grants. What's very cool is the HEA has already resulted in over 600,000 federal student loan borrowers having their loans canceled.

President Biden acknowledged that achieving this goal may take longer than anticipated. Bharat Ramamurti, deputy director of the National Economic Council, stated that the first public hearing on the Higher Education Act is scheduled for July. However, the administration has yet to announce when borrowers can expect a significant update. Consequently, there is no evidence to suggest that any changes to student loan forgiveness will be implemented by October 1st when loan payments resume (reminder: interest resumes on September 1st). This means student loan payments will begin October 1st, whether you want them to or not. 

In addition, President Biden introduced the "on-ramp" opportunity to assist borrowers who may struggle with making payments. Under this initiative, missing a payment between October 1st, 2023, and October 1st, 2024, 🚨will not result in negative credit reporting, default, or loans being sent to collection agencies. ⚠️It is important to note that interest will still accrue during missed payments, and if you are enrolled in a loan forgiveness program, these missed payments will not count towards forgiveness.

The administration has also unveiled details of the SAVE repayment plan, which calculates monthly payments based on income and family size. The program considers discretionary income, which is the difference between adjusted gross income and 225%. By making monthly payments, borrowers can eliminate 100% of the interest and prevent their debt from spiraling out of control.

Furthermore, the SAVE repayment plan states that you will not be required to make monthly loan payments if you are single and earn $32,800 or less (or a family of four earning $67,500 or less).

We do not know what the future holds for student loan forgiveness, but we do have agency over what we can control. Here's what I recommend so you can feel empowered by your student loan repayment. 

Student Loan Forgiveness Repayment Plan

While it is crucial to repay our debts, building short-term and long-term savings is equally important. Sacrificing all aspects of our lives and income solely for debt repayment can be detrimental to our emotional, physical, and financial well-being.

Paying off debt without saving can have long-term consequences. Once your debt is paid off, you may find yourself with no savings, and it may take years before you can start setting money aside. This can have a significant impact on your emotional and mental health.

I have witnessed clients who become so fixated on debt repayment that it impairs their ability to envision their future and takes a leading roll in all their financial discussions. It is common for clients to say, "I can't think about the future when I'm in so much debt." 😭 However, the reality is that debt and your future are distinct from each other. Having debt should not deter you from setting goals and pursuing the life you desire.

To effectively address student loan debt, consider this combination of mindset and financial strategy: 

1. Acknowledge that you will need to start making payments on your student loans.

2. Accept that you'll need to start paying them. There is no quick fix tot his solution. 

3. Evaluate your monthly expenses against your income and estimate how much you can pay toward debt per month. 

4. Stay updated by regularly communicating with your loan service provider to ensure compliance and avoid missing any important information when payments resume.

5. For those pursuing public service loan forgiveness, accurately account for the months and ensure your employers have confirmed your employment history up to the present date.

6. If you lack an emergency fund, prioritize building one that covers at least three to six months' worth of expenses before allocating additional funds toward student loan payments. Consider redirecting your monthly repayment amount into your savings account from now until October.

7. ⏰ If you have credit card debt, focus on paying it off before allocating extra funds to your student loans. Start by tackling the card with the highest interest rate.

8. If your student loans have a high-interest rate, work on improving your credit score to refinance for a lower rate. Paying down credit card debt can help improve your credit score by reducing your debt-to-credit ratio.

9. Begin contributing a small portion of your income to retirement savings. Establish a habit of setting aside a certain percentage from each paycheck. If you are currently building cash reserves, start with a 1% contribution and gradually increase it to 2%, 5%, with an ultimate goal of at least 10%.

10. If your monthly student loan payments exceed 10% of your income, saving, paying off debt, and maintaining a comfortable lifestyle may be challenging. Consult your loan provider to explore options for lowering your monthly payments. If they are unwilling to accommodate, consider shopping around and negotiating with other lenders. This shouldn't be the case for income-based repayment plans, as they will only take 5% of your income.

It is important that we acknowledge the emotions you might be feeling right now. This might not have been the outcome you expected, but you will be okay with a good financial support system around you. We are here to support you. In case you need more help.