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Managing Debt and School Loans

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The 2010 Survey of Consumer Finances reported that 45% of all American families hold student loan debt; an increase from 33% in 2007. The report raises some serious concerns on how these loans are having a rippling effect on economic growth. Thirty-one percent of 18 to 34 year olds are living with their parents and according to Moody’s Analytics, each child that leaves their parent’s home and heads their own household leads to $145,000 in economic growth. The Federal Reserve statistics report in September of 2014 quotes the average household credit card debt in the U.S. is slightly over $15,500. These statistics among many others show the increasing role that debt of all kinds is playing in our financial picture. For this reason, we must take seriously strategies to control and mitigate debt.

For the vast majority of people, debt in one capacity or another is just part of life and paying it off often seems a daunting task, but common sense and financial planning convention make clear that eliminating the most dangerous forms of debt from your personal balance sheet is critical to financial stability. While it can be a long, arduous process, starting with the right information will make the process more manageable.

Questions to Consider
  • Do you know what kind of debt you are carrying and the amounts?
  • Is it revolving—like credit or retail store cards—or do you have loans with fixed terms and defined pay-off dates?
  • What are the interest rates? Are they variable or set to change at any point?
  • How long until each debt is paid off at the standard payment schedule?
  • Are you eligible for any forgiveness programs?

When dealing with credit card or other revolving debt, investing a little time can often result in more favorable outcomes. Set a goal for yourself for when you would like to have the cards paid off. Put together a payment schedule and stick to it. Sometimes consolidating cards and simplifying the payment process can help to reduce interest payments and make your payment plan easier. Just make sure you know all of the details before shifting balances. A general rule is to pay credit cards with the highest interest rates first, since the money borrowed will “cost” more over the long term.

Loans can come in many shapes and sizes. Student loans, for instance, can either originate from the Federal government or from private institutions. Federal loans can be consolidated (but only with other federal loans), and have a wide array of repayment options. Loans terms often range from 10-25 years. They can also have graduated payment schedules or have payments that are calculated as a percentage of income. Though federal loans generally cannot be refinanced to a lower interest rate, the interest may be tax-deductible to the borrower as it is paid. Private student loans typically have fewer repayment options that are set by the lending financial institution. Interest is not deductible, but can be refinanced to lower rates when available.

There are several ways of handling student loan debt. The Federal Government has a forgiveness program where your monthly payments straight out of college would be based on your current income. The thought process being that your income in the beginning will be significantly lower than your potential earnings 10 to 15 years into your profession. After a set period of time, the remaining balance is forgiven. Certain careers in Public Service allow forgiveness of debt after 10 years of consecutive service in a specific field. Planning for these programs is critical as taxes may need to be paid on the amount forgiven.

Mortgage loans are similar to student loans in that they have multiple options for the length of the loan, and the interest may be tax-deductible. Home equity lines of credit (HELOCs) are tied to the equity in the house and typically have a more variable interest rate. Before making aggressive attempts to pay down mortgage loans, consider what other forms of debt you are carrying and the interest rates associated. Automobile loans and credit cards are considered “unsecured debt” and often carry much higher interest rates than mortgages. It is also possible in some cases to utilize a HELOC to consolidate credit cards and other loans, potentially with a lower interest rate. All costs, scenarios and options should be considered prior to any kind of refinancing or restructuring of debt.

Finally, the best way to get rid of debt is to not accumulate more of it. Growing and maintaining your savings along the way will prevent you from needing to use credit cards or loans when unexpected expenses arise in the future. Certain types of debt can be okay and even necessary. The key is to manage it and create a balance for yourself so you can enjoy today and have the life you want in the future. Make sure to discuss with your financial advisor how debt payment can should be a critical part of your short and long-term goal planning.

This information should not be construed as investment advice. Investments are inherently risky and will fluctuate with changes in market conditions. Consideration should be given to the possible loss of a part or all of principal invested. All economic and performance data is historical and not indicative of future results. For additional information please contact a financial professional.

Please consult your tax professional before taking any specific action. NPC does not render tax advice.

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