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Financial Planning for October, 2021

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Strategies for Paying Off Student Loans

Paying Off Student LoansToday, 70 percent of college students graduate with an average of $30,000 in student loan debt. The average payment is nearly $400 a month and will take about 20 years to pay off. On an individual level, paying off high debt can delay hopes of saving to buy a house, start a family, launch a business or invest for retirement.

On a broader level, the national burden of student debt could impact America’s economic future. When young adults are unable to afford home ownership, that reduces spending on all types of consumer products that accompany home buying. It also reduces property taxes used to support local resources and reduces the insurance pool of property owners used to help repair and rebuild homes after extreme weather crises.

Whether you’re a graduate or the relative of a graduate in this situation, it’s worth considering various strategies to help pay off this debt. After all, it may be better – for both your offspring and the country’s GDP – to financially help them out now rather than later via a larger inheritance.

High Interest and Consolidation Considerations

The strategic way to approach student debt is to focus on paying off high-interest loans first. This generally includes private loans and any others with variable interest rates that may increase over time. Be aware that with federal student loans, there are different types and the borrower is permitted to switch to a different payment plan that better suits his needs over time. Another option is to consolidate student loans. However, if sometime in the future federal student loans are forgiven, your student could miss out on that by transferring or consolidating to a privately held loan.

Employer Assistance Programs

In recognition of student loan debt as both a personnel and national concern, many employers are starting to offer repayment assistance programs – even to parents paying off parent student loans. It’s important to inquire whether or not an employer offers this benefit, as they are not always promoted – especially to current workers. However, these programs have become more appealing to companies since passage of the CARES Act, which extended pre-tax employer-provided educational assistance for up to $5,250 per employee, per year through 2025

Another program that some companies have introduced is the ability for employees to convert the cash value of unused paid-time-off (PTO) toward their student loan payments. In other words, if a worker is not able to use all of his accrued paid vacation days in a given year, he can request the employer contribute that income toward his student loan debt.

College Savings Plans

Each state sponsors a Section 529 college savings and investment plan, which feature tax-deferred growth and tax-free withdrawals when used to pay for qualified education expenses.

In 2019, as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, Congress included a provision that permits up to $10,000 (a lifetime cap, per each beneficiary) from 529 College Savings Plans to be used to repay student loans. For example, if a family has three college students, the parents may withdraw up to $30,000 to help pay off that debt from their 529 account(s). Note that a 529 account owner can change the 529 plan beneficiary at any time without tax consequences.

Be aware, however, if 529 college funds are used to make principal and interest payments on a qualified student loan, that student loan interest cannot be claimed as a deduction on their tax return.

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