42 percent of employed millennials, 26 percent of Gen X-ers, and 11 percent of Baby Boomers currently have student loans.
Of those with loans, 79 percent of Millennials, 66 percent of Gen X-ers, and 80 percent of Baby Boomers say their payments have a moderate to significant impact on their ability to meet other financial goals.
So, if student loans are the bane of your existence, you’re not alone. Sure, you were educated at the undergraduate, graduate or conservatory program of your dreams. But now those monthly payments have hit the fan with overwhelming velocity, making it difficult navigate the most efficient pay down strategy. And yet with some ingenuity and knowledge of the system, I’ve seen payments go down from $1,000 a month to $0 without impacting the date of loan forgiveness in the future.
The issue here is that each situation is unique and there are no hard and fast rules or formulas to show you what will be the best over the course of your lifetime, especially when you are a freelance performer with an uneven income. When in doubt, here is a hierarchy of questions to ask yourself to get going in the right direction.
- Can you pay your student loan at its current level?
- Can you pay it and save 20 percent of income?
- Can you pay it, save 20 percent of income, and keep all debt payments total under 15 percent of income? (If you can, rock on!)
- Are you struggling to pay your loan at its current level? Or overpaying unnecessarily?
- Have you explored Income Driven Repayment?
- Are you splitting your available money between debt payments and savings?
- Do you have an interest rate that is lower or higher than five?
- Do you work for a not for profit company?
- Is your income significantly higher or lower than normal?
When approaching student loan strategies, first worry about today (monthly cash flow), then a plan for the long term (retirement planning), and then balance the two to achieve maximum lifelong wealth and security. Actors have a unique advantage when it comes to this because their income is inconsistent and they work for a variety of employers. With each tax return, beneficiaries (or victims) of student loans can apply for the payment option that best fits them. While each loan is different, here are the general payment options available:
Standard 10-year Repayment: If you have never changed your payment structure, this is you. It is also generally the highest monthly payment.
Extended Repayment (25 or 30 years): Exactly what it sounds like. You pay longer but the monthly payments are significantly less than the standard repayment.
Income Driven Repayment: You tell the Department of Education how much you make, where you live and your family size, and they determine the percentage of that they require as payment. If there is still any amount of the loan left unpaid, it is “forgiven” at the end of the pay period. “Forgiven” in the world of student loans means that whatever amount is outstanding at the predetermined time you don’t have to pay back in full, however, you must pay income tax on that amount. (If the forgiveness is due to non-profit work, no tax is due either!
But which of these is right for you?! Consider the following:
Debt payments should never (in total) exceed 15 percent of your income, including mortgages, car payments, credit cards, student loans, etc. Why? Well, if about 40 percent of income goes to taxes and fees, and 20 percent is the ideal savings rate, that leaves 40 percent of your income to spread between debt payments and lifestyle. Which would you rather enjoy?
If the interest rates are higher than 5 percent on your loan, they become more of a priority to pay back. If they’re under 5 percent, let ’em ride. Why? Imagine you’re running forward at five miles per hour but there is a headwind pushing back at you at seven mph—you are essentially moving backward by two miles per hour (or 2 percent a year). And why 5 percent? Because that is the average growth in the stock market over the last 90 years.
If your income for a year is low, income-driven repayment may be for you. If that number is high, income-driven repayment might not be the best options (depending on the outstand loan amount) but you also have the option of throwing some extra cash at those high interest loans or doing some extra savings.
Start by inputting your information into the Repayment Estimator on studentsloans.gov and if you need more help or guidance, consult a professional who has experience with student loans and with actors. They’ll have this on lock down.
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and do not necessarily reflect the opinions of Backstage or its staff.