With the resumption of student loan payments, many investors find themselves facing a new financial landscape as the burden of student debt is once again a significant factor in their financial lives after a three-and-a-half-year reprieve.
At the end of 2022, the Federal Reserve reported that roughly 43.5 million Americans have student loan debt totaling more than $1.7 trillion. On average, each borrower owes just shy of $38,000. As investors navigate the complexities of balancing loan repayments with their long-term financial goals, they must carefully consider strategies to optimize their cash flow.
Just because you now have a “new” monthly bill that may range between $284 and $584 doesn’t mean the fundamentals of financial planning have changed. You need to maintain your emergency fund with a three- to six-month cushion of expenses, and you still need to prioritize making retirement plan contributions. Above all, it’s essential to avoid defaulting on student loan debt, treating it like any other financial obligation. If, over the past three years, you’ve allowed a “lifestyle creep” by diverting what should have been your loan payment into your monthly spending, it’s time to revisit your budget and account for your current spending levels.
If you set aside your monthly payment during the loan payment pause into your savings account, you may be tempted to pay off a significant portion of your outstanding loans. We recommend considering your interest rate first. Many student loans have an interest rate below 5%. With a low interest rate, some borrowers may be better off making the minimum monthly payment and considering other investment opportunities. You can find high-yield savings accounts paying around 4.8%, bank CDs paying more than 5%, money market accounts yielding about 4.5%, and even 10-Year Treasury bonds at 4.8%, and possibly higher in shorter maturities because of the inverted yield curve. In general, you will come out ahead if you can manage your loan while earning more on an investment than the interest rate on the loan. However, if your loans carry interest rates above 5%, direct your excess cash flow toward paying down the loan with the highest interest rate, saving you more on interest payments in the long run.
After the Supreme Court blocked federal student loan forgiveness, the Department of Education introduced a new income-driven repayment plan, the Saving on a Valuable Education (SAVE) Plan, which calculates a borrower’s monthly payment based on income and family size. Moreover, under this plan, unpaid interest won’t accumulate if monthly payments are made. While there is no income requirement to qualify for the plan, it is generally available to those who hold Direct Loans. This payment plan can also be utilized by those applying for the Public Service Loan Forgiveness program. Individuals working for not-for-profit organizations or qualifying government employers may be eligible for forgiveness after making 120 qualifying payments. Most importantly, borrowers may be able to receive credit as though they made monthly installments during the pause, thus reducing the number of qualifying payments for forgiveness.
In this evolving post-pandemic economy, careful planning and strategic decision-making will be essential for investors as they navigate the return of student loan payments and strive to balance education, career growth, family responsibilities, and retirement planning. To discover the federal loan repayment option that best suits your needs and goals, you can use the Loan Simulator at studentaid.gov.
If you have questions on balancing debt and saving for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the October 28, 2023 “Henssler Money Talks” episode.
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