Freelancing and self-employment are on the rise in the United States. The unpredictable nature of freelance work can make student loan repayment a challenge. Most student loan repayment plans were designed for borrowers with a steady income. Those who don’t get the same paycheck every two weeks have to get a bit creative to keep student debt under control and eventually pay it off.
Being self-employed or working as a freelancer does give student loan borrowers some advantages. Income-driven repayment plans and specific tax strategies can help borrowers attack debt and plan for the future.
Some freelancers work a side hustle to supplement their income. Others rely upon self-income as their only source of income. Regardless of your situation, borrowers can use several tactics to make student loan elimination go as smoothly as possible.
How does Income-Driven Repayment (IDR) work for the self-employed?
Income-driven repayment plans such as IBR, PAYE, and REPAYE are excellent tools to keep monthly student loan bills affordable. Rather than charging based upon how much you owe, the government charges based upon how much you make.
This presents an issue for the people who don’t have a predictable, steady income.
Most borrowers address this issue by using their most recent tax return to document 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.
Those that have a growing business will benefit from this approach to documenting income. Payments calculations use earnings from the past year rather than looking at present or projected wages.
Things are a bit more complicated for freelancers who are in a slump. Income-driven repayments based upon prior earnings can make the down months or years especially difficult. Borrowers who run into this situation can have their monthly payments recalculated immediately.
Documenting income without using a tax return can be especially difficult for the self-employed. Because freelancers don’t usually get a traditional paycheck, borrowers will need to send a letter to their loan servicer explaining their business income. 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,
- What you do,
- How you get paid,
- How often you get paid,
- How much you were paid in the last pay period,
- Expenses to run the business during the last pay period, and
- How much revenue you generated in the last pay period.
Because there isn’t a simple form to fill out, borrowers will need to work closely with their loan servicer to keep them happy. 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
As evidenced by the previous section, income-driven repayment may be tricky at times, but it provides excellent protection for the self-employed. Having student loans with the federal government is a great way to ensure that tough times are not made more difficult due to student debt.
For this reason, anyone with uncertain future earnings should pass on private refinancing of federal student loans. Refinance lenders may offer lower interest rates, but no private lender can compete with the federal income-driven repayment plans.
The only time freelancers or self-employed borrowers should ever refinance their federal loans with a private lender is if they are very confident that they will pay back all of the debt in full. Once the loan is private, it can never go back to being a federal loan. Thus, borrowers should only give up the federal protections if they are confident they will not need them.
Borrowers with federal loans and private loans should likewise focus on eliminating private debt first. Even if the private loans are at a lower interest rate, it might be best for the self-employed to eliminate those loans first. Private student loans have a more rigid repayment structure and less forgiving lenders. Paying off this debt first can help create future flexibility.
That being said, refinancing private loans with a private lender can be a smart option. Companies like SoFi, Splash, and LendKey all offer 20-year repayment plans. Borrowers may qualify for a lower interest rate and dramatically reduce monthly payments. Paying more than the minimum on private loans is encouraged, but by stretching out the payments of an extended period, borrowers get more flexibility for lean months and pursuing other financial goals.
How to refinance student loans for freelancers
In the circumstances where refinancing student loans makes sense, it can be a challenge for the self-employed to document their income.
When it comes to student loan refinance companies, all lenders evaluate applications differently. The formulas used, better known as underwriting criteria, are closely guarded secrets. As a result, it is hard to say which lenders are best for freelancers.
Some companies may be very hesitant to lend money to someone who indicates they are self-employed, while others may only care about yearly income.
All borrowers should check rates with multiple lenders because it is the best way to find the lowest rate. This is especially true for freelancers who may be judged more harshly by some companies than by others.
This site tracks lender rankings according to the companies most likely to approve an application and most likely to offer the best rate. 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.
Unless you have created a 501(c)(3) non-profit entity, your freelance and self-employment work will not count for PSLF, regardless of how much good you do for the community.
However, there is a forgiveness program that all borrowers are eligible for regardless of employer.
Any borrower who completes 20 or 25 years of income-driven repayment can have their student loans forgiven.
For some borrowers, chasing after this form of forgiveness can be an expensive route. By making minimum payments over two decades, borrowers will spend a ton on interest over the life of the loan. Additionally, the IRS taxes the forgiven debt. Depending upon your income and loan balance, it might make the most sense to focus on paying off the loan as soon as reasonably possible.
In other cases, borrowers with significant student debt and lower salaries can benefit significantly from this form of loan forgiveness.
Part-time freelancer student loan options
Borrowers who are working a second job can get more aggressive with their student loan repayment.
If you can live off your 9-5 job, you could use the side hustle to knock out the student debt as fast as possible. The stability of job one means that the typical freelancer’s concerns may not apply. As a result, borrowers can attack the debt with less concern for future financial flexibility.
Once the student loans have been eliminated, the second job can be eliminated, or the money can be put towards retirement.
Working two jobs is difficult, but there are potentially enormous benefits for debt elimination and wealth building.
Retirement hack: Start an Individual 401(k)
Student loan planning and strategy cannot be done in a vacuum. Borrowers need to consider other financial goals, especially retirement.
Being the employer and the employee is a bummer when it comes to paying into Social Security. However, wearing two hats is a huge advantage when it comes to the 401(k).
In a traditional 401(k), employees can contribute up to a maximum of $19,000 per year. Self-Employed individuals can create an Individual or Solo 401(k) and contribute as both the employee and the employer. The cap on combined employee and employer contributions to a Solo 401(k) is $56,000 per year.
Using this retirement savings vehicle, freelancers can shield large sums of money from being used in IDR calculations.
An Individual 401(k) allows borrowers to put aside extra money aside for retirement in good years without it increasing the minimum monthly payment for federal student loans.
This strategy isn’t the fastest way to eliminating federal student loans, but it creates monthly payment flexibility and savings for retirement. Self-employed student loan borrowers should give careful consideration to how an Individual 401(k) can be used to accomplish their financial goals.
Other financial considerations
Retirement and paying off student loans are not the only financial goals for self-employed student loan borrowers.
When planning a student loan strategy, borrowers should also consider buying a house, marriage, and children. All of these life decisions can have a considerable impact on the optimal approach to student debt.
Another factor that often gets overlooked is the need to have an emergency fund. If difficult months become difficult years, it is crucial to have money set aside to cover the necessities. Emergency funds are helpful for more than just unexpected medical bills.
Self-Employment at tax time
Taxes, Income-Driven Repayment Plans, and Retirement Contributions are all tightly intertwined.
The issues and strategy in getting the most out of every dollar become incredibly complicated for the self-employed.
A skilled tax professional could become a very good investment. This individual may not be an expert on repayment plans or retirement planning, but a good tax preparer should help answer many important questions.
Smart student loan planning requires asking many “what if” questions. Self-employed individuals will have many extra “what if” questions. A tax pro can help run the numbers, and point borrowers in the right direction.
Putting together a comprehensive strategy for freelancers
Student loans can stand in the way of many financial goals.
Student loans can also make working for yourself a more formidable challenge.
The good news is that it is definitely possible to be self-employed and manage student loan debt.
The key is to focus on flexibility so that student loans don’t get in the way of being your own boss.
Hi, I am self employed attorney with approx. 56,000 in federal student loan balance and 51,000 in private student loans that I received between 2003 and 2005. My law school consolidated my federal loans in 2005 at a fixed rate of 2.875% held by a bank/guaranteed by the govt. with a payoff date 10 years down the line, consolidated again in 2021 with the DOE to take advantage of the Covid pause. The 4 private student loans are variable (currently sitting at approx. 5.5%) with a payoff date in early 2026. Lastly, I anticipate 10K in federal student loan forgiveness.
I am 63 with no dependents, self employed, rent in NYC/own no real estate and have about 18,000 in retirement savings in an SEP and a 401K-S-Corp retirement account. The S-Corp was created in 2021 and I am its sole owner.
M dilemma: If I minimize my income under the S-Corp., my min. federal student loan payments may be lowered but I won’t qualify for much of a residential mortgage. In the event of an illness or bankruptcy, the value of my home could be shielded from medical debt collectors/other creditors. Also, I do not know the impact of lower social security payments the last few years of working will have on my social security benefits in 7 years. I don’t know what to do. Please offer your feedback.
Diana,
It sounds to me like you are considering all of the relevant factors.
The only obvious thing I see is that you might want to refinance your private loans into a fixed-rate loan. With interest rates on the rise, your 5.5% variable-rate loan is only going to get more expensive.
Another thought that occurs to me is that some items that lower your income for student loan payment calculations may not lower your income for mortgage calculations. I’d suggest talking to a mortgage lender to see if your SEP or 401K-S-Corp contributions negatively impact your ability to buy a house. You might be surprised with what they have to say.
As for the social security component, it think the situation might be similar. I’m fairly certain that the government has calculators for gaming out what your social security income will look like as future earnings change.
Hello, thank you for this article. I believe for-profit public service employers (ie schools, hospitals) can be PSLF-eligible. See here: https://studentaid.gov/help-center/answers/article/what-not-for-profits-eligible-employers-for-pslf
Hi Detrick,
Thanks for taking the time to comment and share a link for reference.
However, I don’t think that link says what you are suggesting. Both the title and the top of the list of job descriptions use the term “not-for-profit”
If you or anyone else is trying to determine if their employer is eligible one of the best tools is the PSLF Help tool on studentaid.gov. You can enter your employer information and get the necessary forms to submit for certification. If there is any doubt, I highly recommend that you check it out.