S3E32 Helping Your Kids Understand Student Loans

hey Cole how you doing today doing fantastic how you doing Nick good that was awkward for me it's usually a Dave in there but uh Dave is off today and so we got a a stand in Mr Cole Williams who's been on the show a couple times as an associate adviser here at SRB we are glad to have him he is going to school me and us on some student loan stuff yeah uh obviously a really big uh pertinent discussion for the last couple of years been in the news a lot for forgiveness is there going to be forgiveness is it not going to be forgiveness everybody's got them it's uh it's definitely worth having in the the realm of financial planning for sure because everybody's got them so yeah the government has been trying to make some Headway in cleaning up some of the student loan stuff with forgiveness and things like that but now there's battles in the Supreme Court and so you know it doesn't it seems like every day there's something new in the student loan Saga and what's also interesting to me is we're seeing people have kids later and later and so nowadays I have people showing up at my door talking about retirement oh by the way we also got to get the kid through school and like how to student loans and things like affect them and their planning so retirement planning while planning for college is a new interesting Dynamic that we're seeing a little bit more of lately um than I've seen it certainly in my career so it's all interesting good useful information um so Cole if you wouldn't mind just kind of give us a rundown of what's out there in the student loan world and kind of how some of these things work sure so there are four uh basic financing options that are generally speaking available to everybody um three of which are at least partially subsidized through the federal governments and one exists in the private sector so first of all you have your subsidized loans um which are generally available to all um undergraduate students so what makes it subsidized is that you can take out the and as long as you are meeting the education requirements I think you have to maintain a certain GPA you have to take a certain number of credits um as long as you can maintain those standards they will cover the interest payments while you're in school the second is unsubsidized which is the exact same thing except the interest acrs while you're in school which is obviously not as beneficial um and then the third is you can do the Parent PLUS Loan also also schedule or also subsidized by the federal governments but one really big misconception with this for a lot of clients and a lot of people that I've spoken to personally is that the parent plus loan isn't like co-signing on a car for your student it actually puts you as the primary party that is responsible for paying back the loan um and then the third is obviously you can seek funding in the private sector um through a lot of places like Sofi um that are willing to provide um that funding especially if you're looking to pursue like graduate school tends to be a place a lot of people look for that kind of funding sure so just from like a general en education point one of the things I know if Dave and I have brought it up on the show before but like the goal for student loan financing because surprisingly or not they will let you just rack up as many loans as you want for the most part like I'm sure there's some you know there's some stopping point where they say no no more but it's a lot higher than what most people realize and kind of our goal with C clients and having conversations around you know how to help kids how to think about it is to think of it terms of like what is the average salary of the degree you're going into like what is the average yearly salary you want to be somewhere around or less than that in student loans right so if you get out of school and the average salary for a social worker is 50,000 you're going to social work school your debt load probably needs to be $50,000 or less in order to make sure that you have enough money to pay your loans you don't get into trouble things like that right so what's hard is well well is we have what's called student loan forgiveness now um and theoretically everybody qualifies for this it's just a matter of if you're in the public sector you can get forgiveness after 10 years if you're in the private sector it's 20 or 25 depending on the loan and when you took it out and so there's this thought process out there that you can take on as many loans as you want and eventually they'll get forgiven and while that is currently somewhat true like we are we are starting to to see the first people in the last couple years actually get that student loan forgiveness that's the a big part of what's going on in the Supreme Court and and politically right now is is this something that we can do uh and so it's a little bit trickier than like hey this is going to be the case going forward right like I can't imagine you've got a TW you know you got 20 years to pay on this loan like something's probably going to change between now and 20 years from now like sure betting on that is probably you know pretty risky bet if you think about it so why don't you kind of walk us through a little bit about you know student loan forgiveness and repayment plans and and kind of how to think about that Cole sure um well there are I guess two primary ways that you can that basically anybody can access the student loan forgiveness which you mentioned first is through the income driven repayment plans um that is effectively if you've actually been making legitimate solid progress and consistently making payments for anywhere from 20 to 25 years um you can have that forgiven obviously the thought process from the government standpoint is that you don't want somebody to be paying student loans for longer than that because it's obviously a massive burden for people so in theory the federal government stepping in to try to help subsidize at least the backgound of those loans um the second is the Public service loan forgiveness program um this is specifically for people who are in theory going to be obviously acting in the public need the public good um nonprofits people who are working as teachers in low-income areas um people who are in the healthc care profession also either in nonprofit or in low-income areas people that are taking their skills and probably taking a bit of a pay cut um people are able to qualify through these um if they can make 120 qualifying payments so you know 10 years of making consistent payments um you can achieve some of that forgiveness yeah so walk us through if you can like how does some of those income driven repayment plans work so to my understanding um I think that I I want to say you have to be able to achieve basically just consistency in the way that you pay it I don't know if there's an exact threshold off the top of my head for how much of the loan has to be paid down or what kind of institutes like a minimum monthly payment you have to make on that I believe that might be on a plan by- plan basis but do you know more about that so there I know there's several different plans the one that's kind of been in the news lately is the save plan and this isn't a perfect science they're kind of complicated but a quite to about 5% of your income is what you end up paying back sure and so all student loan repayments are 10 years right like if you get a student loan your repayment is based on 10 years that's like the amount that you pay to with the interest to pay it off and so how the income driven plan works is if you're so let's take the example of the save plan I think the other plans are 10% um but the save plan so 5% of your income is lower than what your 10year repayment schedule would be you would pay the lower payment right and then you obviously you're not going to be paid off in 10 years so whatever's left over after 10 years is what gets forgiven right but you know you also got to think of it in terms of like if your income goes up that payment is eventually going to go up to where you're going to hit the point of like you're paying more than the 10 you know than the 10y year repayment schedule so it doesn't work for everyone you know obviously depending on the size of your loan and your income you might you know you might not be able to sign up for one of these because your income would equate to a larger payment than the 10year repayment cycle and so um there's some complicated factors to it and so we'll see what happens with the save plan and a lot of people switch to the save plan and they're kind of like stuck in limbo right now it's actually just listening to a podcast this morning where basically what they said was like the Supreme Court came in and they they haven't made a decision yet and so the government as a response to that basically stopped payment stopped all interest but it doesn't count for your 10 year or 20 year student loan forgiveness like those months that you miss and so it and it could be six you know 12 months before they figure this all out and so you're basically wasting a year of getting this paid off but and the other thing that's troubling is that right now you can't go in and change repayment plans like if you're in that plan you're basically stuck until they figure it out sure sure well and it's I guess General Financial advice is that you don't want to put yourself in a position where you're financially at the mercy of the government I mean that's always a difficult spot to be in um it it puts you in the crosshairs of political conflicts and actions and you know kind of there's just so many things that are out of your own control which is obviously one thing that we really want to help our clients avoid yeah I mean and that's where we go back to that basics of like Hey try to get out of school with as little debt as possible obviously but also like set yourself up for like at least one year of salary or less and then though that based on that it should be pretty reasonable to pay that off over like a 10year time frame if not faster right and so but it's it's challenging school's expensive and not everybody's prepared for that and so you have to be careful because it you know the my biggest gripe about student loans in general is nobody explains to you what this means in the future right all they tell you is hey you come in here we'll give you money and eventually don't worry about it now but like eventually you have to pay it back and you know we'll figure it out then right and it'll be an amount of money over a period of time and it's fine yeah yeah nobody's like hey this is how much money you're gonna make this is what your student loan payment is going to be and it's about you know 30% of your income so good luck trying to do anything else right yeah exactly well and it's I think that without getting too political it it does make sense that obviously we want to try to provide people with the most opportunity that we can but when you think about if you were to be 18 years old and go into a bank and ask for an SBA loan for 200 Grand you know you get laughed out of the building but you can go get $200,000 to go you know to Columbia or whatever no problem like that's totally fine so it's a it's it's a weird situation that we're in well and look at you know one of the biggest financial crisis that we've ever had with the whole mortgage you know subprime mortgage basically that same thing was happening you walk in somewhere and they would give you a bunch of money and not verify or do anything they just give it to you and turns out that didn't work out very well in the long run yeah not so not so well and I think the other thing too I saw it on your list here that you sent me earlier but the thing that they don't tell you is like you can't run away from these right like you can't go bankrupt you can't like ignore them like this thing will follow you around for the rest of your life oh yeah so you you have to make a plan for how you're gonna deal with it hopefully before you get the loans well and and by no means are we uh you know advocating for for people to even attempt to file bankruptcy and except for ex circumstances but basically the only way that you can get these things wiped out through bankruptcy is if you can prove to the bankruptcy court that you have uh it's called undo hardship which is almost imposs like basically the criteria for you from a legal standpoint is you have to Advocate that it's pretty much impossible for you to be able to do that which the Court's going to really dig through your finances to see if it really is even remotely feasible so it's it's very very difficult to have that happen yeah another point that I I saw on here too that you had was just kind of relating towards thinking about in terms of public versus private student loans right because there is a difference there and there's a lot of companies right now in the private space like Sofi and some of those other ones where they give you a little bit better interest rate if you refinance and consolidate but a lot of times the terms are very different in order to do that and what they don't always disclose to you or sometimes gets lost in the shuffle is you lose out a lot of the benefits by going with a private student loan versus a public student loan as far as forgiveness and things like that and once you turn on that switch you can't turn it off right like if you consolidate your loans privately you can't go back and decide you want to make them public again yeah doesn't work that way yeah yeah it's uh I guess it's worth mentioning too that obviously like in any sort of financing situation there is the opportunity to refinance which can be really good but we're in a bit of a weird situation where especially over the last 15 into 20 years you know rates have been really really low so if you are a student who's graduating now or if you have a student who's graduating taking on loans there's a pretty good chance that it doesn't really make a lot of sense for you to refinance right now right um unless maybe there's some sort of way where you had private loans in the past at a really terrible interest rate because maybe you had a really rough credit score and it's gotten better there are some circumstances but you know refi for a lot of people probably isn't on the table right now yeah it's interesting because only a couple years ago it did make a lot of sense but now all of a sudden those four five six% interest rates look really good again yeah no exactly exactly so so yeah but um yeah um talk a little bit more about the repayments and like how we can like let's say forget about the student loan forgiveness just attacking it from the standpoint of like hey let's put some extra money on this like how do you figure how do you think through that what's what's what are some of the benefits of thinking of it that way yeah so um what is true with student loans and basically any sort of loan is that obviously making additional payments decreases the amount of time you have to pay off the loan which is great um but what a lot of people don't really understand is that it isn't linear it is something that compounds um so what I did is I found the average loan balance of any undergrad um in the country actually I believe the number I got is for just kind of like your average American which right now is $38,000 um the average interest interest rate at the moment for the subsidized loans is 5 a half% and we just attached a $300 monthly payment to that if you were going to follow that schedule um so in doing that it would take you just under 16 years if you wanted to pay off that loan um you'd be paying about $19,000 in interest now if you were to increase your payments by 50% so you make it a $450 payment you'd be paying off that loan in nine years with only $10,000 in interest payments so if you are somebody who's getting out of school and you are prioritizing you know I want to be able to purchase a home I want to be able to free up cash flow to invest in my retirements or any other financial goals that you have even making small changes to your payment schedule can have a really really big impact on how quickly you can get out of that debt yeah that's a great point and I think of it in terms of like if you're a parent too and you've got a kid with student loans like maybe that's something that you think about of like have you know helping them like you pay the man the the base payment and I'll throw an extra couple hundred dollars on it that goes towards the principal um to you know I think that'd be a great way to help out without you know just taking it on yourself yeah well I mean I'm sure we've all heard the stories of people who you know have been paying student loans for decades sometimes um and though it isn't always a you know you made a bad financial decision type Shame Shame Shame thing but you know I I hear from people who have really high-paying jobs that kind of tell that same story and I'm thinking well like what kind of payments have you been making for 30 years if you really haven't paid off this this loan that you have in this time right um it's like you know if it really was a big priority for you you probably could have found a way to free up some cash flow to do that but at the same time I guess if you are living the life that you want and you're financially comfortable and you're and you're able to find cash flow to do the things that you want to do then I guess as long as you aren't defaulting on the loan not that you can default but as long as you're you know staying current on your payments and stuff if that works for you cool but those sort of people are definitely the exception not the rule for sure yeah yep More Money More Problems right exactly exactly uh so I I think like the main takeaway of today is you know student loans aren't necessarily as easy to understand as maybe we would like them to be and you really want to go in like eyes wide open around like figuring out where you're going to be having that conversation with your kids like hey if you take out this amount of money this is what you're this is where you'll be at the end of four years and this is what that repayment looks like like we've done that with a lot of our kids a lot of our clients kids before just having that conversation we've even gone as far as like hey let's think about okay you're going to be making 50,000 let's do a budget right like what here's your student loan payment and then what's left over so they can really think through like is this the best thing for me is this where I want to be here in four or five years right those are the conversations that I wish like were mandatory when it came to going to school and getting student loans that they're not right and so and you know it's not it's not anything about like one particular kid or you know these people with massive student loan rates are or amounts are you know not smart they didn't make a good financial decision the reality is they didn't know number one and number two I don't know any 18yar olds that make good decisions so like giving them the financial ticking time bomb and and you know asking them to think that through is pretty pretty rare right like I can tell you stories of uh student refund day where my friends you know who had student loans got extra money that they just blew instead of paying the loan back they went out and bought DVDs and cases of beer and all kinds of dumb stuff not thinking about like the amount of cost when you factored in interest rates and things like that for that extra money they got back yeah so like it's just you know it's just the reality of when you're 18 you you know you make a lot of silly mistakes yes you do you absolutely do so yeah have conversations with your kids reach out to your financial planner do the budget exercise these are all great things to think about to do so that you know going in like what that outcome's going to be and you're making the best decision for you yep couldn't agree more especially on the budgeting standpoint I think if you can be able to lay out for your you know college student or recent college graduate you know like you said we're making 50 this is what the average you know apartment costs groceries I mean because I think a lot of college students really don't make a budget until you become adult and frankly a lot of people don't even make a budget anyway which is a big problem but um but you know if you can really lay out on paper or in an app and you can show like hey man like this is how much money you're going to make and this is how much is going to be left over when everything is set and done that definitely can I think have a a positive impact on the career decisions we make and on how much money we're going to take in loans yeah absolutely and I don't want to like scare anybody away from going to college or anything like that because I don't know a lot of kids that go through college become adults and we're like man really wish I wouldn't have gone to school those four years years right like maybe they wish they did a little bit differently or how they financed it or looking more efficiently did it in last time yeah I don't know anybody that's like man I was just you know wasting my time no fun at all thata so um there is a way you just got to have those conversations and figure it out and you know it's it takes a village right um this is is not just a a small family problem this is a Countrywide problem that hopefully we'll get some resolution to here in the future future so yeah absolutely with that being said if our listeners have any questions about student loans you can feel free to email us at info SRB advisors.com we will put Cole to work doing some research on getting some answers back to you uh and as you know Cole's been a pleasure Dave better look out better not take too many vacations uh can see you becoming a regular here on the show well I love coming on I appreciate you having me thanks Cole it's been fun this is a cdia media production