Managing your student loans as a social worker has some unique circumstances. For starters, many social workers have post-graduate education. This means more debt than many other professions. A high percentage of social workers are employed by the government or a 501(c)(3) non-profit. While this can often mean lower salaries than in the private sector, it also means great perks from the federal government for student loan repayment.
Refinancing student loans could be a mistake for social workers who have student loans with the federal government because borrowers would lose out on federal perks like Income-Driven Repayment plans and loan forgiveness. Refinancing usually works better with private student loans.
Before proceeding with strategy, it is first important to understand the difference between federal government student loans and private student loans. All federal loans can be found in the federal government’s student loan database. If you have student loans that do not show up in the database, it means that they are private. Repayment planning is very different for private loans and federal loans.
Private Loan Planning
Private student loans vary greatly from lender to lender in terms of interest rate and repayment options. What these loans all have in common is that the only way to make them disappear is to pay them off. Unlike federal loans, there are no income-driven repayment plans or student loan forgiveness. As a result, the approach here is to pay these loans off as soon as possible and to minimize the damage of interest.
One of the best ways to reduce interest is to refinance or consolidate the loans. There are a large number of companies providing consolidation and refinancing services. The way the process works is pretty simple. You find a new lender who is willing to pay off your existing student loans (if they pay off one loan, it is called often called a refinance, paying off multiple loans is a consolidation). The new lender pays off the old loans, and then you repay the new lender per the terms of your new agreement. Ideally, you can lock in a much lower interest rate, which could save thousands.
Often borrowers can reduce their interest rate because they are much less of a credit risk than they were when they borrowed the loan (someone unemployed who hasn’t yet earned a degree is much riskier than someone with a degree and a job). Competition between lenders for low-risk borrowers is fierce, so lenders like SoFi offer new customers $150 to sign up. If you prefer working with a credit union, LendKey will set you up with a local credit union and a $100 bonus.
The important thing with the private consolidation and refinancing is that you do not mistakenly include your federal student loans in the process. Once a federal loan is combined with a private loan, it permanently loses all of the federal perks.
Federal Loan Planning
There are two major advantages to having federal loans. First, federal loans offer income-driven repayment plans. Income-driven repayment plans, such as PAYE or IBR, allow you to lower student loan payments to a small percentage of your discretionary income. These plans also count towards the 120 required payments for Public Service Student Loan Forgiveness (PSLF). Once the ten years worth of payments have been made, the remaining federal student loan debt will be forgiven.
The combination of income-driven repayment plans and PSLF help ensure that social workers can work in their field of choice, knowing that they will be able to get their federal student loans paid off.
These protections also mean the repayment of private student loans should be a higher priority than eliminating federal student loans. It might even make sense to pay off a private student loan with a lower interest rate than a federal loan. Normally, borrowers are advised to pay off high-interest debt first, but because the private loans are less flexible, it might be beneficial to pay them off after the private loans.
Federal Student Loan Consolidation
One of the first steps that many federal borrowers take is federal student loan consolidation. However, the process of federal loan consolidation is much different than how it is done in the private sector. Consolidating federal loans does combine loans, but the interest rate stays essentially the same.
The reason federal loans are consolidated is to get the loans eligible for certain programs. For example, if you borrowed federal loans for graduate school before 2010, you may have what are called FFEL or FFELP loans. These loans are federal, but they are not eligible for programs like Public Service Student Loan Forgiveness (PSLF). However, if they are consolidated into a federal direct loan, they become eligible for PSLF. If you think this situation may apply to you, be sure to speak to your loan servicer. Also, keep in mind that the only place to consolidate federal loans is through the Department of Education. If you are using a different website or paying someone else to do it for you, you are making a mistake.
Borrowers should note that consolidation of federal student loans restarts the student loan forgiveness clock. Anyone considering federal consolidation should take some time to make sure they understand the process, the consequences, and the potential benefits.
If you are thinking about consolidating your federal loans with the federal government, be sure to talk through the process with your loan servicer. For many, this is an essential process to get their debt to qualify for PSLF. However, for others, it can be a mistake. If you have one loan that has five years worth of public service payments and you combine it with a loan that has zero, the new combined loan will start over at zero.
If you have minimal federal loans and will not benefit from income-driven repayment plans or loan forgiveness, you may want to consider the private consolidation route. You lose out on all of the federal perks, but it can result in a much lower interest rate.
Bottom Line for Social Workers with Student Debt
Being a social worker requires extensive education. Even though many government agencies may not pay social workers what they deserve, programs exist to help keep student loan repayment manageable.