The first step to taking control is easy but painful. You need to create a simple spreadsheet that consolidates your understanding of your loans. Most people end up with loans from various lenders (Stafford, Grad Plus, Undergraduate, Private, Bar Prep, etc.) and it’s essential to understand the balance owed, interest rate, date payments begin.
To make that easy for you, here’s a template Google Sheet you can use and the link to Federal Student Aid which will have a record of all your federal loans. Complete this step before moving on to the next step.
👉 Google Sheet
👉 Federal Student Aid
Should you refinance your loans today? Probably not. If you have federal student loans, you are currently paying 0% interest and $0 payments until January 31, 2022. The only reason it might make sense to refinance federal student loans today is if you think interest rates are going to go up in January/February. There’s no penalty for refinancing again later.
Should you refinance after January 2022? People refinance their loans to save money on interest, get a lower monthly payment, or both.
If the median cumulative student loan debt is $160,000 and the average interest rate across all loans is 7%, you would save $26,248 over the lifetime of paying off the loans in 10 years if you refinanced to a rate of 4.25%. If you could get the rate down to 3.5%, you would save $33,067. If you’re not pursuing a forgiveness plan, you will likely save tens of thousands of dollars by refinancing.
Who should you refinance with? The market is hot with student loan refinancing lenders competing for your business. We list the top lenders and keep the rates updated so that you know where to find the lowest rates. Because everyone’s situation is different, we suggest rate checking with a few lenders and selecting whoever offers you the best deal.
How often should you refinance? Refinancing your student loans costs $0 (other than your time). There are no prepayment penalties, origination fees, or service fees. You should check rates every six months to see if you can find a lower rate as your debt-to-income ratio improves.
Income-Driven Repayment Plans
When people hear “IDR” they often get confused with “IBR.” So what is income-driven repayment? IDR refers to the four student loan repayment options where payments are calculated as a percentage of your income.
Income-Based Repayment (IBR). Under IBR, you pay 10 to 15% of your income over 20 or 25 years depending on when you originally took out the loans and whether the loans were for undergraduate or graduate school.
Learn More: Income-Based Repayment.
Income-Contingent Repayment (ICR). ICR is the oldest IDR plan dating all the way back to 1994. ICR calculates the monthly payments based on your income or a fixed repayment amount over 12 years, whichever is lower.
Learn More: Income-Contingent Repayment.
Pay As You Earn (PAYE). PAYE requires monthly payments equal to 10 percent of your income over 20 years. If your monthly payments don’t cover the interest on your subsidized loans, the government will pay the remaining interest for the first three years (this does not apply to unsubsidized loans).
Learn More: Pay As You Earn.
Revised Pay As You Earn (REPAYE). REPAYE requires monthly payments equal to 10 percent of your income over 20 years (for undergraduate loans) or 25 years (for graduate loans). If your monthly payments don’t cover the interest on your subsidized loans, the government will pay the remaining interest for the first three years and half the interest for another three years after that. The government will pay half the interest on your unsubsidized loans at all times.
Learn More: Revised Pay As You Earn.
Public Service Loan Forgiveness. The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. To qualify, you must be employed by certain public service organizations or non-profit 501(c)(3) tax exempt organizations and make eligible payments on your federal student loans.
Learn More: Public Service Loan Forgiveness.
Income-Driven Repayment Loan Forgiveness. Each income-driven repayment plan has its own forgiveness program that typically results in the loans being forgiven after 20 or 25 years. Prior to March 2021, loans forgiven under these programs incurred a “tax bomb” in that you were responsible for including the forgiven amount in your taxable income the year the loans were forgiven. For now, student loan forgiveness is tax-free until 2026. Congress may choose to extend such tax-free forgiveness but we likely won’t know until 2026.
Buying a House While Managing Debt
Most lenders look at your debt-to-income ratio as an important metric for deciding whether to offer you a mortgage. If your student loan debt is high, this can obviously be a problem. Thankfully, there are a bunch of banks that understand selling mortgages to lawyers is a good long-term bet because they want those lawyers as long-term customers. Even better, these lenders understand that a typical recent law grad hasn’t yet had an opportunity to save up significantly for a downpayment, so they offer down payments as low as 0%. Ultimately, your student loan debt shouldn’t keep you from getting a mortgage.
Investing While You Owe Student Loan Debt
There’s an age old question about whether you should invest or pay down debt. There’s generally two main arguments: (1) you should pay down all debt as fast as you can; or (2) you should always invest if you think your expected rate of return is higher than the interest rate on your debt.
Generally, it’s up to you to figure out what feels most comfortable. Some people don’t like debt, so they pay it off. Others are comfortable with debt, so they invest while carrying large amounts of debt. One way to reframe the question is, would you borrow the amount you have today in student loans from a bank at the same interest rate in order to turn around and invest the money? Most people wouldn’t, which is why paying off your debt is usually a good move (there’s not a lot of rich people that also have student loan debt).
More important than deciding whether to pay down debt or invest, is to make sure that your net worth is moving in the right direction each month. Focus on increasing your savings rate and soon it won’t be an either/or question and you’ll be able to do both.