Managing Federal Student Loans in Uncertain Times

Michael Lux Blog, Student Loans 0 Comments

As President-elect Trump prepares to take office, many federal student loan borrowers are justifiably worried about what will become of their student loans.  It is definitely possible that repayment plans could change and that borrowers will be facing some complicated decisions.

In light of the possible changes, what is the best way to manage your student loans?

The way we see it, there are two ways to deal with potential changes that might be coming down the road.

Option One: Pay the Minimum and Save

Going this route is pretty simple.  Call your loan servicer and get signed up for an income driven repayment plan.  Once you are signed up, pay only the minimum that you owe and set aside any extra money you have in a rainy day account.  If you are feeling aggressive, you can try investing your money to see if your investment returns can match or beat the interest rate on your student loans.

Signing up for an income driven plan may be a bit of a headache, but most borrowers save a great deal of money compared to the far more expensive standard repayment plan.  In addition to improving your monthly cash flow, these plans also qualify for student loan forgiveness programs, such as public service student loan forgiveness.

The flexibility of paying the minimum and saving is part of the reason we often suggest this plan to most borrowers.  Rather than committing the money now, you have it in reserve for a time you can use it more strategically.  If you decide you are going to target student loan forgiveness, you have paid the minimum.  If you decide on another route, you (hopefully) have built up a large reserve to put your plan into action.

In uncertain times, a plan designed for flexibility is usually a good idea.

Option Two: Get out of the Federal System

If you realize that federal programs like income driven repayment or student loan forgiveness are no benefit to you, it might be time to take your business elsewhere.

Federal loans are normally recommended because of the flexibility that they offer borrowers.  However, that flexibility comes at a price.  That price is higher interest rates.

If you are in a situation where you realize you will definitely be paying off your federal loans in full, and the only question is how soon, this is probably the ideal option.

Removing yourself from the federal system is actually quite easy.  The process is called refinancing or consolidation.  As a borrower you select a private lender who pays off your loan(s) in full with the federal government.  Instead of owing money to the federal government, you now the new private lender.  Depending upon your credit score, income, and the lender you select; your new loan hopefully has a much lower interest rate.

There are two important factors to keep in mind if you go this route.  First, make certain you no longer will be taking advantage of the federal student loan perks.  Once you consolidate, there is no undo button.  You have a new loan with new terms and there is no changing it.  Second, make sure you shop around for the best rate.  We have done much of the research into available lenders, so you know who is out there and how they compare.  However, the only way to know who is best is to apply and check your rates with a least a few different companies.  Even a 1% change in interest rate can make a huge difference on your bottom line.

Bottom Line

President-elect Trump may not even know exactly how he will be handling student loan repayment policy.  Even though we are in a time of great uncertainty, there are ways to stay flexible so that you can take advantage of whatever the future holds.