An Expert's Checklist for Student Loan Repayment | Avoid Costly Missteps

Student loan repayment can feel like a cloud of chaos. This checklist will guide you from your first payment to watching that balance hits zero. Along the way in this checklist, you'll learn how to avoid costly mistakes that could set you back thousands and thousands of dollars. With that being said, let's jump into it. Federal student loan repayment can feel overwhelming with all these different options, but we make it simple by focusing on just two financial planning strategies. The first strategy is a payoff strategy. The aim here is to pay off your loans as quickly as possible. The second strategy is loan forgiveness. This approach focuses on keeping your payments low and saving for the eventual tax bomb when your loans are forgiven. Now, we'll dive deeper into both of these strategies, but first, before we do, I said federal student loans. Those are the two strategies. If you have private student loans, then your focus is even clearer and it's easier. You're paying them off, and refinancing is probably going to be the best route that you can go. Now, when it comes to student loan refinancing, make sure you stay throughout this video because we'll definitely be covering that in more detail later on. So again, with federal loans, you have a payoff strategy or a loan forgiveness strategy. Now, let's go in and explore how these strategies work in more detail so that way you can choose which one is right for your situation. So next, we're going to dive deeper into the difference between the payoff strategies and the loan forgiveness strategies. The key terms that you need to understand are required payment versus prepayment. Required payment, you have no control over. Prepayment, you do. So let's jump into why that's important. So we'll use a Fitbux member's example that has eight different loans and $153,000 in student loan debt. As you can see down here, they have a required payment of $1,755 a month. Now, they can't control which loan that this goes to, but if they wanted to pay extra every month, then they could. So for example, if they wanted to say, we want to pay $200 extra every month, they can do so and they can target this high interest rate loan with that extra $200 and pay it off faster. The whole point of making prepayments is to pay off the loans early and save. So for example, this person consistently made $200 prepayments every month. They would save almost $11,000 and shave almost two and a half years off their loans. Next up is loan forgiveness strategies. And these are like the opposite of payoff strategies because in payoff strategies, you're trying to pay them off ASAP. With loan forgiveness strategies, you're actually trying to pay as little as you can. However, let's review how these work because there's a little bit of a catch in there. So on these, your required payment is based as a percentage of your income. So let's just say my payments are $460 a month, but my interest is $850 a month. That difference in interest means my loan balance is either going up or staying flat. It does not go down. Now this will happen for 20 or 25 years, depending on which plan you're in. So after 20 or 25 years, your loan balance, whatever you owe, is forgiven. However, this is where the twist comes in. In that tax here, you have to claim that dollar amount as income and pay taxes on it. So the whole point of these plans, again, is to pay as little as you can, but save and have a saving strategy as part of your financial plan for that tax bomb. It's worth mentioning right now that if you're paying off your loans, student loan refinancing might be your next step. But if you're going for loan forgiveness, you definitely don't want to go for refinancing because you go from a federal loan to a private loan. However, like I said earlier, we'll cover more about refinancing towards the end of this video. For now, let's move on to the next step in our checklist. Hey guys, real quick, if you're still watching this video, it's because you're getting value from it. We enjoy making these videos and when you subscribe to the channel, it helps us grow, which allows us to keep making more and more videos. So if you get a chance, please hit the subscribe button. With that being said, let's jump back into the video. Here's the mistake that most people make. They focus solely on paying off their loans without considering the long-term impact on other financial goals. By doing this, you could be costing yourself tens of thousands, if not hundreds of thousands of dollars over your lifetime. Now to avoid this in this step, what you'll want to do is build multiple financial plans. Now, let's take an example using the same aforementioned Fitbox member. In addition to paying off his loans, let's just say he also wants to buy a house. So he builds a plan where he's paying off his student loans and he builds another one where he's going for loan forgiveness. And in both scenarios, he factors in his goal of home ownership. Now comparing the two, he realizes that over time, the loan forgiveness strategy is better financially. It allows him to buy a house sooner. And if he sticks to the aggressive payoff strategy, he won't be able to save for enough for down payment for several years down the road, delaying his number one goal, which is buying a house. And that's just one example. And let's just say our Fitbox member gets married and his spouse has no student loans, and it might actually make more sense for him to pay off his loans instead of going on loan forgiveness. But you can see how crucial it is to build a comprehensive financial plan that accounts for your student loans as part of your bigger life goals. Without a financial plan, you might choose a repayment plan now and then have to switch it in the future, which can cost you thousands of dollars down the road. Worse yet, it can put you in a situation where you no longer have any choices. So be sure not to skip this step and make sure that you build your financial plan. And well, the next crucial step is once you have your plan, implementing it correctly. And that's we're going to next. Now, the key to long term success is making sure that you update and adjust your plan as your life changes and not just as your life changes, but as the economy changes as well. OK, as you know, life doesn't stand still and neither should your financial plan. You should be reviewing and adjusting your plan at least every one to three months to make sure it still fits your current situation. Now, let's just say you're aggressively paying off your loans, but then a life event happens like, I don't know, your spouse totals the car and now you're facing a high interest rate credit or car loan debt. In that case, it might make sense to reduce your prepayments on your student loans and tackle that high interest rate debt instead. Or maybe something happens economically and interest rates drops and refinancing your student loans becomes a better option. And that's for like payoff strategies. For those of you that are doing an income driven repayment plan, you need to certify your income every year. And that's just the start. Tax laws change all the time. And if you get married, everything in those plans shift. At least once a year, you should be reviewing whether you're saving enough for the tax bomb. You need to adjust your retirement savings and make sure that you're in line with current tax laws. And again, that's especially important because when you're on those loan forgiveness strategies, how you file your taxes can affect things like your Roth IRA and your retirement savings. Staying flexible and regularly updating your plan will save you thousands in the long run by ensuring that your strategy evolves with your life. I mentioned refinancing earlier. And if you're following the payoff strategy or have private student loans, refinancing could be your next step.