Monday, April 17, 2017

Approach to Managing Student Loans

Most of us have or will have student loans along our professional education. Some of my friends owed $250-300,000 after completing professional school.

Here is my general approach and principle to managing student loans:

1. Take out the minimum you need to pay for your education. Unlike a mortgage, you don't get a house after 30 years a payment. You pay for the education up front, so any interests that accrues is more money out of your pocket. My advise is to take the minimum loans to reduce the burden when you're done.

2.  Pay off the interest plus part of the principle: when you are in repayment, there are different ways to reduce your monthly burden. For example, the government has REPAYE programs, etc to help young, working, poor professionals manage their student loans. My general approach is to aggressively pay as much loan as you can; any money you save, earn extra from moonlighting, etc, etc should go towards your loan payment. Unless you plan to take advantage of 10 year public service program or other publicly funded loan repayment program, I would use any left-over money to reduce the student loan burden, especially if you have an unfavorable interest rate. For example, FedLoans offer fixed 7% interest rate for student loans, which is ridiculously high. With such high interest, student-loan is equivalent to a for-profit business.

3. Set a plan to pay it off within 5-10 years after graduation. My friend took out $260, 000 federal loans for law school at 7% interest. She was jobless for almost two years after graduating from law school (she graduated shortly before the 2008 market crash). Her loan balance had accrued to $300,000 over the past year! She had plan to participate in the 10 year public service loan forgiveness program and needed 5 more years left. In five years, her loan balance will be half a million dollars! We did a payment plan for the next 10 years for her to pay off her interest and loans and have her aggressively make a dent on her loans so that if the public service program kicks in after 5 years, her balance will be $200,000. But, if the program does not kick in (which is a possibility in our current political environment), at least she will not be in the red with half a million dollars.

She really wants to buy a house despite her $300,000 student loan burden. At this rate, a house is probably not a good investment because if her student loans sky rockets, there will be a lean placed against her home when she decides to sell her house.

Some additional ways to help pay off the loans:
  • Borrow money from your parents to help pay off your student loans and instead pay your parents with a fixed interest rate, if they'll agree. 
  • Live with your parents or get a roommate and save on rent. Use this money to pay the loans.
  • Spend less. I use (free) to track my spending. 
  • Move to a different state without state taxes. Save on state taxes and use the money for your loans instead.
  • Find a higher paying job and make larger payments. 

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