Managing debt after two years of delayed payments
Business owners across the country have had their hands full the past few years, but student loans haven’t been on many people’s radar since March 27, 2020, when the Department of Education froze federal student loan payments.
This pause allowed many owners to focus on challenges during the pandemic, and eventually other goals like paying down other debts. Now that student loan payments are scheduled to resume Aug. 31, 2022, it is time to reevaluate your financial strategy, says Financial Planner Sarah Oliver.
“You’ve had flexibility in student loan payments that may have allowed you to achieve other goals like saving for a home or building an emergency fund,” Sarah said. “With the repayment looming it’s a great time to take a look at your loans and reevaluate your debt paydown strategy.”
REDUCE YOUR MONTHLY PAYMENT
There are roughly 41 million Americans that have federal student loans. Dentists, like doctors, can walk out of school with six figures of student debt. Your monthly payment may be hundreds of dollars or more.
Scheduled payments will resume in September, and the amount of the monthly payment will be the same as it was for borrowers before the freeze.
Some people may be able to pay down their debt significantly. However, a lump-sum payment won’t change the amount you owe each month—the refinancing process is the only way to do that.
“If you make a lump sum payment, without refinancing the loan, it actually does nothing to your monthly payments” Sarah said. “Refinancing is still a good option but with rates rising you need to do a cost-benefit analysis on if it is worth it.”
Refinancing could significantly reduce your interest rate and overall debt burden. Another minor way to reduce your interest rate is setting up automatic payments before Aug. 31. They are offering a .25% interest rate reduction on Direct Loans as an incentive to do this.
SHOULD YOU PAY OFF YOUR LOAN?
Some business owners might be in a position to pay off their student loans entirely and eliminate this monthly expense before it starts.
This, however, might not be the best use of your hard-earned cash. Student debt can be viewed strategically as “useful” debt. This means that carrying the debt with you by paying the minimum monthly payment may work out to your benefit in the long run.
“I would say the strategy here is to take a fresh look at the loan; get the details from your servicer on your balance owed, interest rate, monthly payment and scheduled maturity date, then make a plan from there,” Sarah said. “For some the best move will be to pay it off, but some owners may be better off just making room in monthly cash flow for payments to resume.”
You may have other debts with higher rates, or that have a bigger impact on important things like your credit score. This is where your debt paydown strategy as a part of your larger financial plan should help guide you.
One last thing to consider before refinancing to a private lender or paying off the debt entirely is what you may be giving up.
“You can also lose potential future federal benefits like forgiveness or future pauses,” said Sarah. “The buzz around loan forgiveness may never come to fruition, but if it does, those that have their loan paid off won’t be able to take advantage of it.”
The important thing to remember for borrowers that are reevaluating their student debt is to try to separate emotions from reality, says Sarah.
“Student debt is there to help you generate income over your lifetime,” she said. “It is not designed to have to be paid off immediately or on some artificial emotional target. Trust that you are putting yourself in the best financial position based on your advisor’s recommendations.”
It’s unlikely that the Department of Education is going to extend the student loan pause for a seventh time, although it could happen. Those with federal student debt should take it seriously and begin planning for this monthly expense so they are ready by September.
A CPA and trusted financial advisor can help you navigate what’s best for you and your situation. Talk to a member of our team today.