The average student loan balance for 2016 college graduates was approximately $37,000. Millennials with high student loan burden are nothing new. One could almost argue that incurring student loan debt is a rite of passage to officially be considered a Millennial since nearly 40 million Americans have student loan debt. As each graduating college class continues to walk away with more debt than the previous class, Millennials are looking for innovative options (or any option) to help repay their student loans while leaving enough money for future savings.
Employer Student Loan Repayment Program
A recent survey discovered that approximately 80% of Millennials said they would like to work for a company that offered repayment assistance. In addition to health insurance, retirement benefits, and vacation policies, student loan aid is becoming an increasingly popular company benefit. The same survey also indicated that half of the respondents would prefer student loan assistance over matching 401(k) contributions. With retirement being a distant thought for many Millennials, it might make sense to focus on repaying student debt today and saving for retirement tomorrow.
This is not an entirely new concept; for instance, many corporations offer financial assistance to full-time employees who go back to graduate school. The new benefit that companies are introducing is a loan repayment benefit for existing student loans. A handful of companies have recently introduced this benefit to all existing and new employees. Most of the participating companies are in the technology or higher education sectors, but other companies are beginning to add repayment assistance to their employee benefits packages.
Annual employer contributions vary widely from company to company. Some companies only reimburse up to $500 annually, while the tech giant Nvidia is on the high-end of the spectrum offering to match $6,000 per year or $30,000 over five years. The average annual reimbursement for most companies is roughly $200 per month or $2,400 per year. While some companies offer repayment assistance until all student loans are repaid, others only provide assistance up to $10,000 or 5 years.
One current drawback to employer student loan assistance is that it is considered taxable income by the IRS. While any assistance is better than none at all, this benefit isn’t “free” money like employer health insurance coverage or 401(k) contributions. This tax status might change in the future, but for now, its helpfulness is limited by the government tax system.
Refinancing and Consolidation
Whether your employer offers payment assistance or not, another option to consider is private student loan refinancing which is sometimes equated to loan consolidation. Two primary benefits of refinancing is a lower monthly payment and a potentially lower interest rate. The reduced monthly payment makes monthly payments more affordable, and the lowered interest rate obviously saves money over the life of the loan.
This is an increasingly popular option that is only offered by private companies. Interest rates are determined through a traditional underwriting process for the most part, but some companies factor in future earning potential. Since this is mainly a privatised service, student loan borrowers benefit from competition between private lenders in terms of interest rates and repayment flexibility.
For Millennials with a balance of at least $10,000 in unpaid student loans, refinancing can be very beneficial. Even if they can afford their current monthly payment without refinancing, receiving a lower interest rate can save hundreds of dollars in interest payments per year. With a simplified lump sum loan, it is much easier to keep track of payment due dates. Most consolidation companies will not charge origination fees, late fees, or prepayment penalties which makes the service more convenient. Overall, this is one of the best options for student loan borrowers with decent credit or a co-signer.
Income Based Repayment Plans
Some of the most beneficial government payment programs are income-driven repayment plans (IBR). These programs have become more popular as the average student loan burden has continued to increase each year. There are several different plans available including the Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment Plan (IBR), and Income-Contingent Repayment Plans. These plans all differ, but they follow the same general format. Each plan takes a portion of discretionary income each month and devotes it to the student loan balance. After a set period of time, the remaining loan balance is forgiven.
These plans base the monthly payment on 10% of a graduate’s adjusted gross income. Under most of these schemes, the life of the loan is extended to 20 years and any remaining balance is forgiven. Introduced in 2007, local, state, and federal government employees can enrol in a Public Service Loan Forgiveness (PSLF) program. This program can be paired with an IDR plan which shortens the payment plan to 10 years. AmeriCorps or Peace Corps volunteers, years of service also count for credit with the various IBR programs. Similar to refinancing, interest charges will be larger than non-income based loans because of the 20-year repayment term. Of course, applicants to these programs need to demonstrate financial need. Despite some requirements, IDR plans are growing in popularity considerably each year.
Were you forced to deal with a large amount of student debt? How did you tackle it? Let us know in the comments section below…