Student loan repayment can be a seemingly impossible maze to navigate when everything is going as planned. It gets even more complicated when a major life transition hits, and tosses your carefully laid plans out the window. Here are 5 points in your life where you should check to make sure your current student loan strategy still makes sense.
1. Getting Married
When you get married, most couples end up filing a joint tax return. There are tax advantages for doing so, and it’s the standard tax advice for the vast majority of couples. But if you’re on an income-driven repayment plan, you’ll need to be cautious that using the joint filing status won’t blow up your monthly payment. Example:
Jack is a social worker and has $44,000 of student loan debt and a salary of $52,000 annually. He is marrying Clayton, a software engineer who doesn’t have student loans and earns $90,000 per year.
Before getting married, Jack is on the Income-Based Repayment (IBR) plan, and his monthly payment is limited to $481 per month. After getting married, if they file taxes jointly, he would no longer benefit from IBR, and his payment would be capped at whatever his payment would be on the 10 Year, Standard Repayment Plan.
2. A New Job
When you get a new job, you’ll likely rethink many aspects of your finances. If you got a raise, how are you going to put it to work? Does it make sense to put more towards your student loans, or should you prioritize other debts or retirement savings? Your new employer may make you eligible for forgiveness programs you weren’t eligible for before. For example, if you’re a lawyer in Louisiana and work for a non-profit organization serving low-income individuals, you can get up to $5,000 per year in loan forgiveness.
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3. Interest Rates Change
Recent borrowers have seen historically low interest rates, which has made refinancing loans attractive and potentially saved you thousands if you were able to take advantage of lower rates. If you refinanced to a variable rate loan, you should be cognizant that rates have risen this year, and many experts expect that trend to continue. Your initial payoff plan may look significantly different if rates rise a full point, and you may want to prioritize your student loans instead of other financial goals.
4. A Promotion
Congratulations! You’re amazing and it was well deserved. Now, imagine what that raise that comes with your new promotion could buy. Let’s say you have the following situation:
Loan Balance: $38,000
Interest Rate: 4.8%
Monthly Payment: $412.
Paying just $100 extra each month gets you student loan free more than two years earlier.
On top of all the other financial ramifications of divorce is what happens to your student loans. If you’re on an Income-Driven Repayment Plan, your payment will likely change, and it could go up or down depending on how your earnings compare to your former spouses. If you’re on a standard plan or privately refinanced, you’ll need to be sure the monthly payment is still affordable in your new budget. And, for those living in community property states, if the student loans were taken out while married, you may be responsible for debt incurred by your now ex-spouse. This is where a Certified Divorce Financial Advisor could be invaluable.
Student loan repayment looks different for everyone, so make sure you’re regularly taking stock of your repayment strategy to make sure it makes sense given the changes in your life.