Anwar Adam: Hey everyone and who is a great expert in this particular field, so Nate we are happy to join you here and I think your expertise will be greatly valuable for our extremely engaged newsletter audience that we have.
Nate Hoskin: Thank you and thank you for having me.
Anwar Adam: Yes of course, so you know we have a few questions I think which our audience would greatly love to hear your insights and your expertise on. So I would go ahead and get started on this, and so let’s start with the first question. You know what are the key differences between Federal and private student loans and how do these impact loan repayment options?
Nate Hoskin: That’s a good question. So as a general rule federal student loans have way more flexibility in terms of repayment options than private student loans. When you think about private student loans, it’s reasonable to think about them much like a car payment or a mortgage where once you agree on an interest rate and a payment schedule, that’s what you’re going to be doing unless you choose to take that loan and consolidate it or move it and refinance it to another provider. What you agreed to pay and on what schedule is what will happen until that loan goes to zero.
With Federal loans you have quite a bit more flexibility. Most importantly you have the ability to do what are called income driven repayment plans which essentially means that if you make a lower amount of money, you can adjust your monthly payment to fit your monthly budget and then as your income expands you can pay more and more until you really start to get that loan down substantially.
You can also do things like the save plan which has been a little on and off to say the least in the last year. It was really hyped up and then it kind of got shut down, it got put on pause but it’s a good example of what the federal government is really trying to do with student loans which is to make it possible to get out of debt really quickly.
So the save plan, when it was at least in force, it allowed payers to not have their interest capitalize, meaning that if they were paying less than their required monthly payment because of the income driven repayment plan, the interest wouldn’t add to their account. So when they got to the end of the month their balance wouldn’t be higher than it was at the beginning, and the same thing can go for income driven repayment plans in general.
The other big thing is that you have a couple of different forgiveness options with Federal loans. So you have the PSLF, if you’re working for a nonprofit you can actually get your loans forgiven in 10 years, and then there are a couple of forgiveness options at the 20-year mark depending on which income driven repayment plan you’re actually enrolled in.
Anwar Adam: Thank you so much and let’s move on to our second question. How can someone determine the best repayment plan for their financial situation, you know especially when they’re trying to juggle their other priorities like rent or saving for the future or investments and paying off existing debt?
Nate Hoskin: That’s a really good question and I hear this from clients and people in my community all the time. It really boils down to two questions. One is how much should I pay and should I prioritize this debt over investing or saving for my future.
So if we address the first question of should I do an income-driven repayment plan, should I just pay the regular, what should I do here if I have some options available, my general approach is that you should aim to pay the minimum if your interest rate is pretty reasonable. For a lot of people who got student loans somewhere between 2017 and 2021, those are going to be at very competitive interest rates and so there isn’t a huge priority to pay off those loans quickly because your interest expense isn’t going to be very high.
So if you’re making a smaller amount of money, if you’re in the 40 to 60,000 a year range, an income driven repayment plan will allow you to keep your payment really low, which lets you save more money for your future and you just slowly pay that loan off over time. Expect to have it for a while but it’s not something that’s really going to cost you a huge amount of money.
Now that said, if you make more money the income driven repayment plan might actually have you paying more than your normal monthly payment. So if we stick to that mantra of saying, okay if it’s a competitive interest rate I’m going to pay the minimum, rather than doing an income driven repayment plan and paying more, you should just pay your assigned monthly payment rather than joining that repayment plan with the goal of taking more money and saving it for your future. Making sure that you are prioritizing things like Roth IRA, 401ks, particularly the employer match, really getting those dialed in and using the excess to pay off these loans. And then in the future, particularly if you’re not using an income driven repayment plan or you’re using private loans, then you can start to really pay more towards that as you earn more money over time so that you do inevitably get debt free.
I think it can feel like a very long slog to be in a student loan repayment plan of any sort, so I understand the temptation to pay it off faster and try to get out of that debt more quickly. I think that comes later when you have more flexibility in your life and you can check all those boxes first.
Anwar Adam: Got it, thank you and on to our third question. So what are the benefits and potential risks of refinancing student loans and who should consider this option?
Nate Hoskin: There are definitely some benefits but there are two major risks that come to mind just immediately. The first risk is refinancing to higher interest rate, particularly nowadays. We’ve seen interest rates come down a little bit over the last few months but they are substantially higher than they were before 2021 and 2022. So for anyone who’s looking to refinance right now and consolidate, it’s so important to look at what your interest is on the existing loans because it might feel nice behaviorally or emotionally to have all of your loans in one big lump and you just make one monthly payment, but if that one monthly payment is at 7% and all of your little monthly payments were at 4% or three and a half percent, you are going to pay a crazy amount of money for that convenience and it’s not going to be worth it.
The second risk is losing the benefits of Federal loans. A mistake that I see very often is that people will refinance Federal loans into private loans because they seem more convenient or they might have sort of upfront benefits and the tools that they use to sell those refinances, but then their income might change and now they can’t do an income-driven repayment plan, now they can’t join the save plan, they can’t do any of those things that we were talking about earlier.
So the nice thing is that you can do that in reverse. You can refinance private loans into Federal loans under certain very specific circumstances. That is one example of a person who might use refinancing and consolidation as a tool is someone who has the ability to refinance a private loan into a Federal Loan system to take advantage of those income-driven repayment plans and that sort of thing.
The other group of people who might benefit from consolidation or refinancing would be people who had loans assessed to them in 2022 for example. So if you have a loan that is at a very high interest rate and now that rates are starting to come down you can refinance and save some money and consolidate and make your monthly payment more simple, that’s a situation where it might be worthwhile for you.
Anwar Adam: Got it, thank you and now our next question, our fourth question is more on the Public service loan forgiveness side, like the PSLF side. So my question is what should borrowers know about the PSLF program or any other loan forgiveness options?
Nate Hoskin: So the way the Public service loan forgiveness plan works is that it wants to incentivize people to work for nonprofits or other sort of government affiliated and essentially not for-profit organizations. And if you do so you’re given the opportunity to have your loans forgiven after 10 years.
So one of the more common examples I see are nurses and people working at nonprofit hospitals for example, or people working as teachers and educators. Those are people that very commonly qualify for the PSLF and the idea there is that you can pay the minimum for 10 years. Again you can get on income driven repayment, you can find ways to keep your payments as low as possible and push that balance off to year 10 when you can then get it fully forgiven.
The thing is that PSLF has some weird qualification rules and what I mean by that is you have to very clearly and specifically track the amount of time that you are spending under the employment of that nonprofit or that qualified organization. And some people got a little screwed up by that particularly in COVID where they were unemployed or they had been laid off and they weren’t working but they had a return offer a year later from that nonprofit. So they had a full year that wasn’t being credited towards PSLF. That’s losing 10% of your progress towards getting that forgiveness.
So the nice thing there is that they actually allowed people to go back in and put those hours in for COVID and allow those to qualify. So when we think about PSLF, the first thing you need to think about is do I qualify, and pretty much every single time your employer will tell you that if you work for them you qualify. If anything they will use it as a selling point to employ you. So if you haven’t heard from your employer yet that you qualify for the PSLF, you very well might not qualify.
The next thing to think about is how do I make sure that I am properly recording the time I’m putting in towards that forgiveness. And the way you do that is you report it to student aid.gov. And so you will report that time to qualify for forgiveness and then the final thing to think about is how do I minimize my payments in the interim. So how do I pay the least amount of money while I am required to be making qualified payments towards the PSLF so that I can get the maximum amount of money forgiven.
Anwar Adam: Got it, and you know just as a follow-up question on this question. So let’s say you mentioned nurses and teachers working now, let’s say there’s someone who works at maybe another nonprofit that is not really public service but more like helping in like helping veterans affairs or things of that sort. Would individuals be eligible for that as well if they decide to stay in the nonprofit sector for like 10 to 12 years?
Nate Hoskin: That’s a good question. I’m not sure I know the answer to what job specifically qualify for PSLF. I do know that studentaid.gov has a very comprehensive list of qualifications but the easiest way to do it is probably just to ask your organization. So if you are working specifically for Veterans Affairs for example, you can speak with HR and they will know whether or not they carry that status and whether or not you qualify.
So I think that if you work for a nonprofit of any sort whether it be a nonprofit hospital or Goodwill, whatever it happens to be, it’s definitely worthwhile to ask them whether or not your work qualifies you for PSLF. And then you can double check that against studentaid.gov. So they have the PSLF help tool and this is just a comprehensive list of all of the employers that qualify for the PSLF forgiveness. So you can just double check and say hey this is the name of my employer do they qualify and you will either see them on the list or you won’t.
Anwar Adam: Okay awesome, and you know our fifth question of the day. So what practical tips do you have for managing student loan payments alongside building an emergency fund and planning for long-term financial goals?
Nate Hoskin: So I think there are a couple of things that really come to mind. The first one is that your student loans are a very high priority to pay the minimum because you can’t really default on a student loan, you just have to make those payments. So paying the minimum is one of your highest priorities in your financial life.
That said, paying anything beyond the minimum is a very low priority for a very long time because what you need to do as you mentioned is you need to build an emergency fund and you need to start to invest for your retirement and for your future first.
So the way that I speak with clients about this is that really the first order of business is to protect yourself, that is an emergency fund. It’s going to turn “oh no” into “oh well”. So you’re not going to hit that emergency and just be like what do I do my whole life is ruined, instead you’re going to be like shucks okay guess I need to pay this expense but you have the money available. That’s priority number one.
The next priority is to save about 15% of your income for retirement and future goals. So that might be, for someone that might be maxing out a Roth IRA and getting the employer match on their 401K. That might get them up, if they’re making 100 grand, that’s going to get them really close. Let’s say they contribute 3% to their 401K, they get 3% in a match, and then they do $7,000 to the Roth IRA, that’s 13% so they’re really close to that 15 already, maybe they just have to put a little extra into their 401K.
Only then, once both of those boxes are checked, so emergency fund three to six months of expenses covered in cash and then 15% of annual salary going to retirement and future goals, then you can think about paying more towards debt. And even then you have credit card debt, then you have other high-interest debt, so things like a car loan, those sorts of things, and then at the very bottom you have student loan debt. So you can see how paying more than your minimum is going to be one of your lowest priorities compared to these other things.
Anwar Adam: Got it, and you know I do have one last question because you know I need to ask you this question because you spend a lot of time advising HENRYs and NOYACK is all about for HENRYs as well where we do personal wealth management content for them. With your experience in this field, what are the biggest mistakes that HENRYs make when it comes to paying off student loan debt, and also what strategies and tips do you give HENRYs to overcome this long-term commitment of paying out their hundreds of thousands of dollars in educational debt?
Nate Hoskin: I think the first big mistake that people make is they start paying all the debt off first. So let’s use a doctor for example where they have hundreds and hundreds of thousands of dollars of student loan debt and they are newly employed as a doctor and they just went from making $60,000 in residency to making $300,000 as an employed MD. What they will do is they will probably take half or more of that salary and just nuke it towards the debt and when they do that they make some progress on their net worth, but they completely lose the advantage of compound interest.
So the challenge particularly with doctors is that they’re starting their compounding journey late, so they need to get a jump on it as quickly as possible so they can create that exponential curve between now and when they retire. So that’s mistake number one is saying okay I’m making money I’m going to pay off this debt first and that’s the only thing I’m focusing on, because that guarantees that you will stay right where you are. You will make some progress on the debt but you won’t be investing in your future self.
The other mistake that I very commonly see is that people will use the income driven repayment plan when they make a lot of money. Let’s stick to that same example, they were using the income driven repayment plan when they were making 60 grand and it was cutting their monthly payments in half, but now they are still using the IDR now that they’re making 300,000. Well the assigned monthly payment of the IDR is going to be higher than their normal minimum payment on those loans because it’s a factor of whatever money they’re making.
Anwar Adam: Got it, thank you so much for that because you know personally me, a lot of the insights you have told me, I was actually going towards mistakes which you just mentioned. You know trying to pay off the debt as soon as possible and because that’s just the way I’ve been thought and that’s the way I’ve seen around me and that is exactly what I was planning on doing for myself as well. You know paying off the house as soon as possible, paying off things so that way my head is clear but now hearing your insights now I’m able to think and I’m realizing that I’m missing out on the beauty of compounding interest which is really going to set generational wealth when done right.
Nate Hoskin: Absolutely, yeah well said and hey I’m glad I could help. I hope that you take something away from this.
Anwar Adam: Yes for sure and Nate thank you so much for your time and I think our readers and our viewers and listeners would greatly appreciate your insights that you’ve given because you know as we’re targeting HENRYs, you know we’re all in the same boat and I think your expertise in this matter is greatly valuable for each and every one of us. So thank you so much for your time.
Nate Hoskin: Yeah it was my pleasure, thank you so much for having me on.
Anwar Adam: Yeah thank you. That’s a wrap for today’s episode, thank you so much for tuning in and we hope you found this discussion both insightful and inspiring. And like always, don’t forget to subscribe to our newsletter the Noyack Wealth Weekly, which is the number one newsletter in personal wealth management and we will see you again next week.
