Being self-employed or working as a freelancer does give student loan borrowers some distinct advantages. Income-driven repayment plans and certain tax strategies can be highly effective for managing debt while also planning for future financial stability. 

Whether self-employment is a side hustle to supplement income or the primary source of earnings, there are several approaches borrowers can take to navigate the repayment process more smoothly and work towards becoming debt-free.

How does Income-Driven Repayment (IDR) work for the self-employed?

Income-Driven Repayment (IDR) plans, such as IBR, PAYE, and REPAYE, are are designed to make monthly student loan payments manageable. Rather than billing you based upon the total amount that you owe, the government bills you based on how much you earn.

This system, while beneficial for many, poses challenges for self-employed borrowers with fluctuating incomes.

Most borrowers address this issue by using their latest tax return to verify their income. When applying for an IDR repayment plan, borrowers can import their tax returns from the IRS and send income information directly to the Department of Education.

Borrowers who have a growing business will benefit from this approach to documenting income. Repayment calculations use earnings from the past year rather than looking at present or projected wages.

However, this approach is a bit more complicated for self-employed borrowers who are experiencing a downturn. Income-driven repayments based upon higher prior earnings can make the slump even more difficult to overcome. Borrowers experiencing this situation may want to immediately recalculate their payments to reflect their current income more accurately.

For self-employed individuals, proving income without a tax return can be tricky. These individuals typically don’t receive traditional paychecks; so, they will need to send a detailed letter to their loan servicer outlining their business income. Preparing for this requires understanding what loan servicers expect in an income verification letter. It is a good idea to call your loan servicer ahead of time to ask about the required contents of the income letter.

Generally speaking, loan servicers will look for the following in an income-verification letter:

• Where you work,
• Your occupation,
• How you get paid,
• How often you get paid,
• How much you were paid in the previous pay period,
• Expenses to run the business during the previous pay period, and
• How much revenue you generated in the previous pay period.

Because there isn’t a standardized form for this, borrowers will need to work closely with their loan servicer to keep them happy.

Be aware that loan servicers can sometimes give out inconsistent information, so don’t be surprised if it takes a couple of tries to complete a satisfactory income verification letter.

Balancing repayment of private student loans and federal student loans

Although income-driven repayment may be tricky at times, it provides excellent protection for the self-employed. Having student loans with the federal government is a great way to ensure that the difficult periods aren’t exacerbated by unmanageable student loan payments.

Borrowers with uncertain future earnings should avoid refinancing federal student loans with private lenders. Although private lenders may offer lower interest rates, no private lender can compete with the federal income-driven repayment plans’ flexibility and security.

The only time self-employed borrowers should consider refinancing their federal loans with a private lender is if they are very confident in their ability to repay the entire debt in full. Once a loan is privatized, it can never go back to being a federal loan. Thus, borrowers should give up the federal safeguards only if they’re sure they won’t need them.

Borrowers with both federal and private loans should prioritize eliminating private debt first. Even if the private loans are at a lower interest rate, eliminating those loans first might be the most strategic move for self-employed borrowers. Private student loans have a more rigid repayment structure and less forgiving lenders. Paying off this debt first can help create future financial flexibility.

All that being said, refinancing private student loans may be a wise decision. With private lenders like SoFi, Splash, and LendKey offering extended repayment terms (up to 20 years), borrowers may qualify for a lower interest rate and dramatically reduce their monthly payments. While paying more than the minimum is recommended, longer repayment terms provide valuable breathing room during leaner times. Extending the repayment time allows for better cash flow management and the pursuit of other financial goals.

How to refinance student loans for freelancers

In the circumstances when refinancing student loans makes sense, documenting self-employment income can present a unique set of challenges.

Student loan refinance companies each have their own methods for assessing applications. The formulas they use to decide who qualifies for a loan and at what rate (better known as underwriting criteria) are closely guarded secrets. Consequently, it is difficult to pinpoint which lenders are most favorable towards the self-employed.

Some companies may be very hesitant to lend money to a borrower who is dependent upon a fluctuating self-employment income, while others may focus only on the total annual income.

All borrowers should check rates with multiple lenders because it is the most effective way to find the lowest interest rate. This is especially true for the self-employed, as some lenders may judge them more harshly than others.

This site tracks lender rankings according to the companies most likely to approve an application and to offer the best rates. It is hardly an exact science and relies upon reader feedback, but the lenders at the top of the rankings should be a good starting point for finding the lowest interest rate.

Student Loan Forgiveness for the self-employed

Sadly, programs like Public Service Loan Forgiveness (PSLF) will likely not be an option. The focus on the “public service” aspect of PSLF is the nature of the employer rather than the nature of the work. For example, an ER doctor at a private hospital would not be PSLF eligible, but an ER doctor at a government or 501(c)(3) hospital would be qualified.

For freelancers and the self-employed, access to certain forgiveness programs like Public Service Loan Forgiveness (PSLF) is generally not an option. PSLF eligibility is tied to the nature of the employer, rather than the nature of the work. For example, an ER doctor working for a private hospital wouldn’t qualify for PSLF, but that same doctor working for a government or 501(c)(3) non-profit hospital would qualify.

Unless you’ve established a 501(c)(3) non-profit organization, self-employment work won’t qualify for PSLF, regardless of how much benefit you provide the community.

However, there’s a forgiveness option available to all borrowers, regardless of their employer. Borrowers who completes 20 or 25 years of income-driven repayment can have their remaining student loans forgiven.

Pursuing this type of forgiveness might not be the most cost-effective strategy for every borrower. With repayment spanning over two or more decades, the accumulated interest can substantially increase the total repayment amount. Furthermore, the IRS treats the forgiven debt as taxable income, which could lead to a hefty tax bill. Depending upon your income and loan balance, it may be more financially prudent to pay off the loan more aggressively.

Nevertheless, for borrowers facing a large debt burden coupled with a modest salary, this long-term forgiveness route could offer significant financial benefit.

Part-time freelancer student loan options

Borrowers working a second job have a unique opportunity to accelerate their student loan repayment.

If your primary 9-5 job covers your living expenses, any income earned from a side hustle could be dedicated to eliminating your student loan debt more rapidly. The financial stability provided by the first job mitigates many of the typical concerns self-employed individuals face. As a result, borrowers can attack the debt with less concern about maintaining future financial flexibility.

Depending on your financial goals and lifestyle preferences, once you’ve paid off the student loans, you have more options. For example, redirect the earnings from the second job towards retirement savings or you could quit the second job altogether.

While managing two jobs can be challenging, the potential rewards—becoming debt-free sooner and enhancing your ability to build wealth—can make the effort worthwhile.

Retirement hack: Start an Individual 401(k)

Student loan planning cannot be done in a vacuum. Borrowers should consider other financial goals, with retirement planning being a prime example.

For those who are self-employed, the dual role of employer and employee presents both challenges and opportunities, particularly in terms of retirement savings. While the government requires contributions to Social Security on behalf of both roles, it also opens up a huge advantage when it comes to the 401(k).

In a traditional 401(k), employees can contribute up to a maximum of $19,500 per year (as of the most recent update). Self-Employed individuals have the option of creating an Individual or Solo 401(k). This account allows for combined contributions both as an employee and an employer. Thus, the cap on contributions for an Individual 401(k) is much higher – up to $58,000 per year (as of the most recent update).

By using an Individual 401(k), the self-employed can lower their taxable income and, consequently, their Adjusted Gross Income (AGI). AGI is a consideration for IDR plan calculations. Thus, self-employed individuals can shield large sums of money from being used in their IDR calculations. This means they could save significantly for retirement during prosperous years without it affecting their minimum monthly federal student loan payments.

This strategy isn’t the quickest way to eliminating federal student loan debt, but it offers valuable monthly payment flexibility and increases retirement savings. Self-employed student loan borrowers should give careful consideration to how an Individual 401(k) could be used to accomplish their broader financial goals.

Other financial considerations

For self-employed individuals with student loans, balancing debt repayment with other financial milestones is critical.

Beyond just focusing on retirement and student loans, it’s important to account for significant life events like purchasing a home, marriage, and starting a family. Each of these decisions can significantly influence the best strategy for managing student loan debt.

Another factor to consider that often gets overlooked is the need to have an emergency fund. While it’s easy to overlook in the midst of planning for the future, it is crucial to have money set aside to cover the necessities. Difficult months can extend into years, and without a reserve to cover basic living expenses, the situation can become dire. Emergency funds serve a broader purpose than covering unexpected medical expenses; they provide a buffer that allows for financial flexibility and security in the face of unforeseen challenges. Prioritizing this safety net is a key component of a balanced and forward-thinking financial plan for anyone, especially those navigating the complexities of self-employment and student loan repayment.

Self-Employment at tax time

The interconnectedness of taxes, Income-Driven Repayment (IDR) plans, and retirement contributions adds layers of complexity to financial planning, especially for the self-employed. Navigating these waters to maximize the efficiency of every dollar can be daunting due to the intricate interplay between these financial aspects.

In this context, consulting a skilled tax professional can be an invaluable investment. While they may not specialize in student loan repayment strategies or retirement planning, a competent tax preparer can provide critical insights. They can address pivotal questions and guide you through various scenarios that impact your financial health.

Engaging in smart student loan planning often involves exploring numerous “what if” scenarios, and for the self-employed, these questions multiply. A tax professional can assist in crunching the numbers and steer you towards the most beneficial financial strategies.

Putting together a comprehensive strategy for freelancers

Student loans can, indeed, pose obstacles to achieving many financial goals and can make the pursuit of self-employment seem even more daunting. However, managing student loan debt while being self-employed is absolutely feasible.

The key strategy lies in prioritizing flexibility in how you handle your student loans. This approach ensures that debt repayment remains manageable and doesn’t hinder your ability to successfully navigate the challenges and rewards of being your own boss.

The post Student Loan Repayment Guide for Freelancers and the Self-Employed appeared first on The Student Loan Sherpa.

Starting a small business can be difficult for student loan borrowers, but it is possible. Many student loan programs can be used to help entrepreneurs pursue their goals.

The key is to understand the ways that student loans make things difficult and the tools to mitigate the damage that can be caused by student debt.

Student Loans and Entrepreneurship

Student loans make starting a business difficult in two critical ways.

First, having student loans means having a monthly student loan bill. While business owners can try to cut corners on their housing and personal budget, student loan lenders would have borrowers believe that there is no alternative to the monthly payment. Student loan bills make the idea of an uncertain income especially scary. This extra financial commitment makes steady employment from an established employer more appealing.

The second hurdle caused by student debt is the challenge of getting funding. Many applicants for small business loans have been rejected because their student debt made them too big of a risk to the lender. This lack of funding ends many businesses before they can start.

Fortunately, there are ways around both of these issues.

Student Loan Repayment for Small Business Owners

Running a business is all about cash flow. Having a huge student loan bill can be a major problem.

Borrowers interested in starting a business need to get their monthly payments as low as possible.

Federal Loans – Business owners with federal debt are in luck. By signing up for an income-driven repayment plan, such as Pay As You Earn, monthly payments can be tied to income rather than the student loan balance. If your business is struggling to turn a profit, your student loan payment could be $0 per month. Going this route will mean that your student loan balance will grow, but it affords financial flexibility.

Sherpa Tip: Borrowers who have low income-driven payments due to low discretionary income should seriously consider the Revised Pay As You Earn Repayment Plan, also called REPAYE. This plan forgives a portion of the monthly accrued interest which means balances grow slower.

Private Loans – Student loans from private lenders are much less flexible. Some lenders do have special programs for entrepreneurs, but these are rare. Most borrowers will have to make due by stretching out repayment to make monthly payments as small as possible. Going this route will make repayment take longer and cost more, but it frees up much-needed cash each month.

One of the best ways to stretch out private loans over a long period at a low interest rate is to refinance them.

The following lenders currently offer the lowest 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

Whether you call yourself a freelancer, self-employed, or a small business owner, there are lots of strategies that can provide cash flow flexibility and protection when things get tough.

Small Business Loans with Student Debt

Addressing federal loans with an income-driven repayment plan and private loans with a long repayment period will do more than just lower payments each month. These changes will also help with small business loan applications.

When lenders evaluate any sort of loan application, one of the biggest things they look at is a borrower’s debt-to-income ratio. This number compares the expected income to expected monthly bills.

By tweaking student loan repayment to get lower monthly payments, borrowers can improve their debt-to-income ratio without spending any extra money.

Another way to get the funding necessary to get a business running would be to track down a 0% Intro APR credit card. Credit card companies will often offer the low intro APR to secure new customers. If your business needs a quick cash infusion and the debt can be paid off after a few months, a credit card promotion could be a great option.

A Common Business Owner Mistake

Many lenders will suggest that borrowers interested in starting a business take a deferment or a forbearance to take a break from payments.

While skipping a few months of payments may sound appealing, it can be a huge mistake.

The biggest problem with a deferment or forbearance is that it can derail applications for new loans, such as a mortgage or small business loan. When lenders see a forbearance or a deferment, they usually assume the worst. They see it as a sign of financial hardship and an indication that the loan might be riskier. While income-driven repayment and long repayment terms are commonly accepted strategies, debt that is deferred is seen as more of a red flag.

Sherpa Tip: Save deferments and forbearances for emergencies. Lenders limit the number of times borrowers can get a pass, so use them as a last resort if you get unexpected bills or unforeseen costs.

Saving Money on Business Creation

Having student loans makes it especially important for business creators to find a way to reduce costs.

The less a business costs to operate, the more time the owner has to grow it into a successful business.

There are several different ways to save money on the cost of starting a business:

• Start your business as a side-hustle – Having a regular job in addition to running a business can mean a hectic schedule, but it also means less pressure on the business to be an immediate success. The safety net of a regular job makes starting a business much less of a risk.
• Think about manual labor – Those that want to be self-employed should give serious thought to jobs like landscaping, snow removal, pet sitting, and house cleaning. These blue-collar jobs may not be glamorous, but the startup costs are relatively low, and the hardest workers will be the ones who succeed. As the business grows, employees can gradually be added to the team.
• Pass on the storefront – Retail space can be costly and it doesn’t ensure success. If you are selling a product with your business, start by marketing it online. A quality website costs far less than finding the right real estate. Another option would be to get your stuff on somebody else’s shelves.
• Think about an office share – If you are starting a service-oriented business and what to have dedicated office space, look into shared office spaces in your community. Office shares create a very professional atmosphere for clients at a fraction of the cost.
• Consider moving – Many communities are student loan repayment assistance to borrowers looking to start a business. These communities recognize the hurdle of student debt, and they want to attract new businesses.

Final Thoughts

Politicians like to call small businesses the backbone of the economy, but student loans can present a unique challenge to small business creation.

However, entrepreneurs who get creative with their business strategy and with their student loan repayment can find a way to make things work.

The post Can You Start a Small Business If You Have Student Loans? appeared first on The Student Loan Sherpa.