Taking a less aggressive approach to student debt may be the best choice for your mental health and financial health.

What is the Difference Between Coasting and Aggressive Repayment?

Most borrowers use one of two main repayment strategies:

Aggressive Repayment – The goal behind aggressive repayment is to minimize interest spending. The longer student debt lingers, the more interest it generates. If you pay off your loans as quickly as possible, you minimize interest spending.

Coasting – If you are paying the minimum payment on each student loan, you are coasting to the finish line. This approach is often frowned upon, but there are times where it is the best strategy.

On the surface, coasting looks and sounds like the lazy approach, while aggressive repayment sounds more responsible. However, these first impressions can be misleading.

The Loans that Should Get Paid Off ASAP

Before discussing the advantages of coasting, it is worth mentioning that there are times where coasting is an objectively bad idea. If any of the following apply to you, aggressive repayment is probably the ideal repayment strategy.

• High-interest student loans – Not all student loans are created equal. A loan with a 3% interest rate is a great candidate for coasting, while a loan with an 11% interest should get paid off as quickly as possible.
• Cosigned student loans – If someone was generous enough to cosign one of your student loans, do them a favor and pay it off whenever possible. Cosigned loans make it harder to get credit in the future and are a source of stress for many cosigners. Knocking out cosigned debt is a great way to say thanks. If the cosigned debt is otherwise an excellent option for coasting, look into getting a cosigner release.
• Borrowers with poor impulse control – Even if the loans are suitable for a relaxed repayment strategy, the borrower might not be. Coasting is a mistake if it leads to irresponsible spending or other poor financial habits.

The Benefits of Coasting to Student Debt Elimination

Costing advantages come from a simple fact: if you make minimum student loan payments, you have more cash each month for other goals.

Saving extra money for retirement is an excellent reason to coast. Suppose your employer offers a generous match, or your investments earn far more than your student loan interest rate. In that case, you will come out ahead by directing your resources towards these savings opportunities.

Borrowers may also choose to coast to save a downpayment for a house. The accounting math gets tricky when comparing these options, but for many borrowers, the math is secondary. There are many advantages to homeownership, and only some of them are financial. If buying a home is an important goal, coasting on your student loans may help make that happen. However, there are also times where student debt gets in the way of buying a home. Before selecting a strategy, borrowers should understand the many ways student debt impacts getting a mortgage.

Coasting to debt elimination may have mental health benefits as well. If student loans are a constant source of stress and pinching every penny to maximize payments has become all-consuming, changing strategies could make sense. Here again, every borrower is different, but if your student loan repayment strategy is causing sleepless nights, it is time to explore another alternative.

Finding the Right Approach: If you coast on your student loans, you will spend more money on interest. However, you will have extra money for something else. If that something else justifies spending extra money on student loan interest, coasting makes sense.

Shortcuts to Start Coasting Sooner

If shifting your financial goals sounds appealing, there are a couple of shortcuts available that make coasting more feasible.

For borrowers with federal student loans, chasing after forgiveness is already a form of coasting. If you are trying to maximize the amount of debt forgiven, it means minimizing payments and freeing up cash each month for other goals. Public Service Loan Forgiveness is the most frequently discussed forgiveness option, but there are many different paths to student loan forgiveness.

Private loans don’t have forgiveness options, but refinancing can convert high-interest student debt that needs to be paid off right away into a low-interest student loan better suited for coasting. The hurdle for borrowers wanting to refinance is that it requires a job and a decent credit score. However, for those that qualify, there are excellent options suited for coasting.

The best choice might be a 20-year fixed-rate loan. While stretching out payments for two decades might sound excessively long, it also means minimal monthly payments. With 20-year loan interest rates currently very low, it is a viable strategy.

Right now, the following lenders are offering the best rates on 20-year fixed-rate loans:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

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By quickly repaying student loans, borrowers can save a fortune on interest. The aggressive route can help borrowers get ahead by thousands of dollars.

Because of the immense value of accelerated repayment, this site has sought to help empower borrowers to make fast repayment of student loans as easy as possible.

However, it is worth noting that a singular focus on student debt elimination is not always the best route. In fact, there are several circumstances where borrowers might decide that aggressive repayment was a mistake.

The Need for an Emergency Fund

The drive to get rid of student loan debt can lead to some risky financial decisions. One mistake commonly made by borrowers is ignoring the need to have an emergency fund.

In theory, having an emergency fund makes a ton of sense. It is a resource for unexpected medical bills. It is a source of comfort for people who are concerned about how they would put food on the table if they lost their job. We never know what rainy day may come, but most people will inevitably face some sort of financial hardship where an emergency fund can be a huge asset.

Despite the considerable need for an emergency fund, trimming reserves to pay down student debt can be extremely tempting. Lenders routinely charge interest rates of 7-8% or more on student loans. Meanwhile, some banks pay out interest at .01% on savings accounts. Month after month, it can be frustrating for borrowers who do nothing with the emergency fund while they get beat up on student loan interest.

Carefully evaluating how much money should be set aside in an emergency fund is important, but the results are not always satisfying. Unfortunately, the emergency fund frustration is unavoidable. Borrowers should consider themselves lucky if they have an emergency fund, and they don’t have to use it.

No Money for a Down Payment on a House

Borrowers who use every penny they have to pay down student debt will find it challenging to buy a house.

Like with the emergency fund, the money saved for a house earns little interest, while student loan interest can be brutal.

Unlike an emergency fund, owning a house is not a necessity. For this reason, it can be hard to balance the desire to own a home against the desire to pay off student debt.

While there are many strategies for student loan borrowers who want to own a home, most borrowers must answer a simple question: what is my priority?

A homeowner might look back and regret not being more serious about student loans, while the borrower who eliminated their debt may regret not setting aside money for a mortgage.

The simple answer is that there isn’t a simple answer. Borrowers need to carefully consider their goals and balance the pros and cons of each option.

Federal Forgiveness Changes

One of the biggest concerns about aggressive repayment is missing out on student loan forgiveness.

It is certainly possible that the government will decide to forgive large amounts of student debt. It is also possible that borrowers may spend way more than necessary if they pay the minimum on their federal loans in hopes of eventually getting forgiveness.

A good example of how this might play out can be seen in how borrowers responded to Elizabeth Warren’s 2020 Presidential Campaign. Early in the campaign, Warren released a bold plan to forgive large amounts of student debt. Readers wrote to this site asking if it was smart to change repayment strategy in the hopes that Warren gets elected.

Warren didn’t win, but the analysis behind the evaluation of the situation remains. Chasing forgiveness comes at a cost. Borrowers have to figure out how to weigh that cost against the possibility the forgiveness becomes a reality.

Retirement and Investment Opportunities

Each dollar used to pay down student debt is a dollar that can’t be used towards retirement or investment opportunities. In economics, this is called the opportunity cost. Borrowers must choose whether their money goes further planning for retirement or paying down student debt.

In some cases, the decision is easy. Employees who have the opportunity to get an employer match on their retirement contributions will usually want to take full advantage fo the program. On the flip side, few investments will justify ignoring a student loan charging 13% interest.

Some borrowers handle this issue by refinancing their student debt. Those that can secure interest rates in the 2-3% range will have a much easier time justifying getting aggressive in saving for retirement.

Here again, it can be very difficult to know the best choice. The stock market could crash, and the borrowers who attacked their student debt may come out way ahead. Alternatively, thirty years from now, those who started saving for retirement early may look back and be thrilled they didn’t obsess with their student loans.

Borrowers who are unclear whether they should be paying down debt or saving for retirement should first spend some time understanding the many ways repayment and saving intersect. In some cases, borrowers may find that setting aside some money for retirement can actually help their student loan situation.

Final Thought: Always Focus on the Big Picture

Eliminating student loan debt is a massive undertaking.

It takes years of sacrifice to pay off student loans, and while the benefits of quickly eliminating the debt are massive, it would be wrong to say that aggressive repayment is always the best idea.

Borrowers need to consider how other goals, such as retirement, providing for a family, or buying a house, enter the equation. In some cases, borrowers can split the difference to try to get the best of both worlds. In other cases, tough decisions have to be made.

As with most big decisions, there isn’t always an easy answer. The borrowers who want the best outcome should be willing to research their options, carefully consider their plan, and be open to change things as the situation evolves.

Skipping steps may be the quickest route to regretting the decision.

The post Am I Going to Regret Aggressive Student Loan Repayment? appeared first on The Student Loan Sherpa.

Married borrowers are often expected to pay more on their federal student loans than a borrower with the same income who happens to be single.

Income-driven repayment plans are one of the great perks about federal loans because they help ensure that student loan borrowers can always afford their monthly student loan payments.

Unfortunately, the formula for determining what a borrower can afford often includes the salary of their husband or wife.

There is no question that there is a penalty for married borrowers. Instead, the question is, how do I handle this situation and minimize the expense?

The good news is that there are several ways to address this problem.

How can my husband or wife’s income increase my monthly fed loan payment?

Before jumping into possible solutions, it is worthwhile to take a moment to understand why spousal income can cause student loan bills to go up. After all, solving a problem can be really difficult if we don’t understand the problem we are trying to solve.

Borrowers enrolled in an income-driven repayment plan for their federal loans have to certify their income each year. Typically, this income certification takes place using the borrower’s most recent tax return.

The borrower’s Adjusted Gross Income (AGI) will determine monthly payments. When couples file their taxes, the AGI is calculated based upon the combined income of the couple.

Based upon the rules currently in place, the government has decided that an individual’s ability to make payments on their student loans changes based upon the income of their spouse. If your husband or wife has a large income, the government expects you to pay more.

Fortunately, there are a couple of tricks that can be used to minimize the marriage penalty for student loans.

A Special Note for Couples who both have federal loans: Getting married may cause changes in student loan payments.

Some couples worry that their monthly payments will double. This isn’t the case.

However, it is possible that there will still be a marriage penalty, especially for couples with children.

Can I just use a paystub to certify income so that my spouse’s income isn’t included?

If the combined AGI is the number that causes the problem, it would stand to reason that submitting alternative documentation of income, such as a paystub, would fix the issue.

Sadly, it isn’t that simple.

When borrowers certify their income, the form requires information about marital status and spousal income.

Alternative documentation of income will not exclude your husband or wife’s income.

However, there is one tax decision that can make a big difference…

Filing Taxes Separately

Couples that file their taxes as “married filing separately” do not have to include spousal income when calculating monthly payments on certain income-driven repayment plans.

Unfortunately, this approach isn’t necessarily an easy call for married borrowers.

By filing separately, the IRS may impose a larger tax bill. Many important tax breaks are not available to individuals who file separately. Notably, couples that file separately cannot take the student loan interest deduction.

Further, filing separately only helps with certain income-driven repayment plans. Borrowers on the IBR, PAYE, and ICR plans can lower their tax bill by filing separately, but those on REPAYE will still have to include spousal income.

When it comes to tax strategy, many different variables enter the equation. Those considering this route should review the issues that come into play when filing separately to save money on student loans.

Changing Repayment Plans

Not all repayment plans require income documentation.

Borrowers looking for lower monthly payments may be better off with the graduated or extended repayment plans. Monthly payments on these plans are based upon the borrower’s balance. To get an idea of what your payments might be on the various plans, the Department of Education’s Student Loan Repayment Estimator is an excellent tool.

Those considering switching repayment plans need to carefully consider the impact on student loan forgiveness. While the income-driven plans qualify for multiple types of student loan forgiveness, the graduated and extended plans are not eligible.

Aggressive Repayment of the Debt

Some borrowers may find that the higher monthly payment is more of an annoyance than a huge financial burden.

Couples in this situation may want to consider aggressively repaying the debt.

The idea here is that the faster the debt is paid off, the less will be spent on interest. Paying more now means savings in the future. Many refinance lenders will also refinance the loans at a lower interest rate to help borrowers find additional savings.

The downside of aggressive repayment is that you are taking student loan forgiveness off the table. For some borrowers, this is a savvy move; for others, it might be a bit too risky.

Should we consider a divorce?

If there is a “marriage penalty” to student loan borrowers, it would seem that divorce might seem like a possible solution.

While there may be potential student loan savings to be had, getting a divorce involves far more than just signing a couple of forms.

In addition to the many financial and social consequences of a divorce, there are other issues that borrowers must consider. One example would be visiting your spouse during a hospital stay. Those that are divorced have significantly fewer legal rights.

Anyone seriously considering this step should sit down with a divorce attorney so that they can understand the many consequences to getting a divorce purely for financial reasons.

An Important Final Thought

Much of this article has discussed how marriage can impact minimum monthly payments on income-driven repayment plans.

Those planning their student loan repayment strategy should focus on debt elimination rather than monthly payments. For most borrowers, the loan will have to be paid off in full. Paying extra money each month may not be convenient, but it will save money in the long run.

Don’t get carried away focusing on the next 12 months. Instead, think about the next 12 years.

The post Help! My Student Loan Payment Went Up Because I Got Married! appeared first on The Student Loan Sherpa.

While the existence of a variety of income-driven repayment plans and loan forgiveness options are an asset, they also make forming a repayment strategy more difficult.

Today we will discuss the four most common debt elimination strategies and give examples of when each strategy is best utilized.

Strategy #1: Standard Repayment Plan

Most borrowers are automatically enrolled in the 10-year standard repayment plan. Repaying loans according to this strategy will mean 120 equal payments and the entire student loan will be paid off after 10 years.

The main benefit of this approach is that it is very simple.

When the bill comes in the mail, it gets paid in full each month. Monthly payments will often be higher than they would be on other repayment plans, but the standard repayment plan ensures debt elimination according to a set schedule. No math is necessary.

Who this works best for: If you are looking for the most simple and straightforward repayment strategy, look no further. This approach is also best for people who might struggle with the self-control required for an aggressive repayment strategy.

When not to use this approach: The standard repayment plan is not the most expensive way to pay off student loans, but it isn’t the cheapest either. Borrowers who use this plan risk unnecessarily spending too much on student loan interest.

Strategy #2: Chasing Student Loan Forgiveness

The two most popular student loan forgiveness programs are Public Service Loan Forgiveness and forgiveness coming at the end of an income-driven repayment plan.

Under Public Service Loan Forgiveness, borrowers must make 120 certified payments while working for a public service employer.

There are a number of hoops to jump through to get on the right repayment plan and ensure loans are eligible, but the upside is huge. After 10 years, borrowers can have their entire remaining federal student loan balance forgiven.

Using an income-driven repayment plan, borrowers are responsible for paying a set percentage of their discretionary income for 20 or 25 years, depending upon the plan selected.

After the 20 or 25 years worth of payments are made, the remaining debt is forgiven. All borrowers, regardless of occupation or employer are eligible for this program, and those without a job or with a low-paying job could qualify for $0 per month payments. Unlike the Public Service Loan forgiveness program, when the debt is forgiven the IRS treats the forgiven debt as income, so taxes must be paid on it.

Who this works best for: Chasing forgiveness is the best approach for people who make too little to realistically pay off their debt in 10 or even 20 years.

When not to use this approach: Going after student loan forgiveness can actually be the most expensive repayment strategy. By prolonging payments, the loan generates more interest over the years. Some borrowers may end up spending more chasing forgiveness than they would have if they just aggressively paid off the debt or repaid under the standard repayment plan.

Strategy #3: Aggressive Loan Repayment

The are several different approaches to aggressively paying off student loans, but the simple version is that borrowers chose to pay off their student loans as fast as possible in order to spend as little as possible on interest.

Common tactics that are used include seeking out minimum payments in order to pay extra towards high-interest debt, paying extra each month on the loan with the lowest balance, or refinancing the debt with a private lender to lock in lower interest rates.

The idea behind this strategy is that the sooner the loans are paid off, the less will be spent on interest. For many, this approach will have the lowest possible cost of repayment.

Who this works best for: This strategy makes sense if you are certain you can repay your loans in full. Refinancing can be a risky move because it eliminates federal perks like income-driven repayment plans and loan forgiveness, but borrowers who don’t require these protections can get dramatically lower interest rates.

When not to use this approach: If income stability or future earnings are a concern, it is important to keep federal borrower protections in place as well as having a large emergency fund.

Strategy #4: The Holding Pattern

Borrowers who are not sure which strategy is best can just tread water as they evaluate their options and weigh the various pros and cons.

The best way to do this would be to enroll in an income-driven repayment plan. Borrowers who ultimately decide to pursue loan forgiveness will be glad this step was already taken. Opting for an income-driven repayment plan also affords many borrowers the option to set aside money should they decide to aggressively pay off their student loans.

The strategy here is to get started on a repayment plan eligible for forgiveness but to also set aside money for aggressive repayment at a later date. This gives borrowers a head start on both routes without committing to anything.

Once it is clear which strategy will be most effective, the borrower can then shift strategies quickly and efficiently.

Who this works best for: This option is excellent for recent graduates unsure of what their long-term earnings will look like.

When not to use this approach: This strategy is a mistake for individuals who are just looking to procrastinate on loan repayment. Once future earnings and future expenses are fairly predictable, it is time to come up with a long-term plan.

Choosing the Best Strategy

One mistake that too many borrowers make is that they look at next month or next year and they don’t think further down the road.

Low monthly payments are nice, but debt elimination should be the ultimate goal.

This requires running the numbers to calculate total spending when utilizing the various different strategies. One tool that can be especially useful in this endeavor is the federal student loan simulator. The simulator will help project monthly payments, payoff time, total spending, and loan forgiveness. One important detail to note is that it assumes a 5% raise every year.

The biggest mistake a borrower could make is to ignore their student loans and hope for the best. Programs and strategies are available for both high earners and those struggling each month. Ignoring federal loans and not putting together a plan will only serve to make things worse and more stressful.

Those who do not know where to start are probably best suited for choosing the holding pattern. During this time, get familiar with the various repayment plans, refinance options, and overall strategies. The more learning that takes place, the more clear the ideal route will become.

The post The Four Main Strategies to Pay Off Federal Student Loans appeared first on The Student Loan Sherpa.

What most borrowers don’t realize is that a little bit extra can go really far. If you are willing to spend a few extra bucks each month, you can pay your loans off in about half the time.

When you think about paying off your student loans in half the time, it seems like you should have to make double payments. In reality, it isn’t necessary.

The process is pretty simple.

An Example of Gently Accelerated Repayment

Suppose you have a $30,000 loan at 9% interest. Your lender may give you 25 years to pay off that loan. Using these numbers you will have a monthly payment of $252.

When our example loan enters repayment, our payments will pay $225 towards interest and only $27 of the payment will lower the principal balance. That means $225 dollars of income towards your lender and you are only $27 closer to having the loan paid off.

By using the Sherpa Plan, you can pay off this $30,000 loan in about 12.5 years, instead of the 25 that your lender would prefer. This repayment strategy calls for you to pay only a few extra dollars each month, but it saves thousands in the long run.

The Sherpa Plan

There is just one rule to the Sherpa Plan: When you make your monthly payment on your student loans, you pay double the amount going towards the principal. That is it. No calculator necessary, just simple addition.

Using our example loan, instead of paying $252 towards your student loan, you would pay $252 plus an extra $27 (because that is the amount being applied towards principal), for a total of $279.

The numbers for your actual student loan are very easy to find. You likely already know the minimum payment, and the amount being applied towards the principal on each payment should be easy to find on your statement. Keep an eye on your statements and as the amount being applied towards principal goes up, you likewise increase your extra payment.

It may not seem like a lot, but as long as you pay double the amount going towards principal, you will pay the loan much quicker.

Easing into Aggressive Repayment

Early on, our repayment strategy is really easy and really effective. Rather than making a monthly payment of $252, we are paying $279; yet we are doubling the monthly dent in the principal balance.

As we start to reduce the balance of the loan, the amount going towards the principal increases. Each month we will have to pay a little extra (a dollar or two more) to keep up with our plan to double the principal balance.

When we have successfully paid off half of the loan, our statement will show that our monthly payment will apply approximately $114 dollars towards interest while $138 is applied to the principal balance. Using the Sherpa Plan the check to the lender will be for $390. This number is the $252 required for the minimum payment plus the extra $138 to double the dent in the principal balance.

While $390 a month sounds way more expensive than $252 per month, it is important to remember how we got here. We started at a $277 payment. There wasn’t a single month where the payment to the lender jumped by more than $2. Using this plan for this loan literally costs no more than an extra dollar or two each month. This allows you to gradually adjust your spending, so you do not have to adjust to a sudden increase in payment.

Paying off the loan

By the time your principal balance is under $1,000 you will be on the brink of having the debt eliminated. Reaching this point means the monthly interest on the loan is now around $10… the rest is paying down the principal balance. This means our monthly payments will now be nearing double the minimum amount due.

Paying double seems like a lot, but let’s remember how we got here: small increases each month.

After 12 years you are paying nearly $500 per month on the loan, but it is also on the brink of being paid off. Had you just paid the minimum, you would still have 13 years remaining on the loan, and your loan balance would still be over $23,000.

It is from this perspective that the benefit is truly seen. You pay a little extra each month. It isn’t easy, but it is manageable for many borrowers. After 12 years, it may be getting hard, but you are nearly done. You have successfully paid off almost $30,000 in high-interest student debt.

If you just make minimum payments, after 12 years, you still have a balance of over $23,000!

The Perk of the Sherpa Plan

Repaying student loans using this strategy isn’t complicated.

In the beginning, you are paying only a little bit above your minimum payment. As you move along, you are only paying a little extra each month. It is the slow and steady way to pay off your loan extremely fast.

Even if you think you won’t be able to make the extra payment years down the line when it has increased, you can still start right now with the slightly larger payments.

Keep doing it until you cannot keep up.

As the years pass you may surprise yourself as you gradually adjust to the larger payments. Even if you don’t go the distance, you will still have done some serious work on your student loan and your efforts will have gotten you much closer to your goal of debt freedom.

The post The Sherpa Plan for Easing into Aggressive Repayment appeared first on The Student Loan Sherpa.