Student Loan Debt with Her Personal Finance

Eryn

That’s a great question. And I’ll first start by saying, just in case anyone’s still confused as to what exactly Biden has done on student loans. Until September 30th, any federal loans are 0% interest and, no payments due. So, there’s a lot of people that are confused. I think, at this point in the pandemic, most people know, “Are my loans in repayment or are they not?” If they’re not asking you to pay, that’s a pretty good sign that you have federal loans. But I know that was a point of confusion with people like, “Hey, which is which?”

But if you are in that situation where your loans are at 0% interest and zero payments due, it’s a great opportunity and I’d say, first of all, look around. If you have any high-interest debt — and I find especially, I work with a lot of women who have grad degrees, and so you’re capped at how much you can borrow for your grad degree in terms of public loans. So, a lot of them have private debt as well. Or maybe you ended up with some credit card debt, maybe you lost your job during the pandemic, or you’re graduating grad school, they pushed out your start date, something else happened where you ended up having credit card debt. This is a great opportunity to pay off anything that’s high interest. And I define high interest as anything that’s over 5% interest. So, if you have a credit card, if you have an auto loan that’s a really high interest rate, or if you have private student loans – because some of the private student loan interest rates can be pretty high. So, this would be a great opportunity to say, “Hey, I’m going to focus on that other debt while I have 10 months of not having to make a payment on my federal loan.” The other thing that you can do is you can keep paying or keep allocating money towards your federal loans, but you can put some of that money into a high-yield savings account. And what that will do is it’ll enable you to earn interest on that money. Interest rates are pretty low right now, but if you do open up an account, through Ally or through Marcus, you can still get 0.5% which is way better than what you’re going to get through that regular Bank of America or Chase account where you’re getting 0.01%. And you can earn some interest while you’re waiting for the feds to decide what they will do.

Biden’s been pretty clear that he doesn’t want to forgive $50,000 student loans, especially not through an executive order. There has been some clamoring in Congress from people on the left, but I’d say unlikely you’re going to get $50K in loans forgiven. Maybe going to get $10K. And so, the other thing about putting that money in a high yield savings account is, let’s say you have $12K in loans remaining, you are still allocating that money. You’re not spending it. It’s still there for you in that high yield savings account. It’s earning a little bit of interest while your loans are at 0% interest, and you’re giving Congress a little bit of time to kind of get their act together and figure out what the heck they’re going to do. [laughter] I think that’s a really great strategy if you’re trying to figure that out.

And then the third thing that I did want to hit is just thinking about retirement. And you talked about investing. A lot of times people don’t think about putting money in their 401(k) or even an IRA as investing. And I want to just say, you are investing. Most of the time your 401(k) is automatically invested even if you don’t do anything. You should make sure that your IRA– sometimes people don’t realize, “Hey, I’ve transferred money into the account,” that you actually have to take the second step of going ahead and investing it. But I will just talk about retirement because the power of compound interest means the longer that you’re saving, the more those dollars today are worth to you in the future. And the great thing about retirement is, if you’re listening to this and you’re 30, and let’s say you’re not going to touch that retirement account until you’re 70, you have 40 years for that money to grow versus if you wait until 35 or 40 when you’re done with your student loans to really start focusing on retirement. You’re not shrinking that period of time to 35, 30, maybe even 25 years, because sometimes, like for health reasons, you might have to retire at 60, which means you’re really starting to cut into that period of time. Most student loans are less than that 7% return that you talked about, the money that you hopefully can get. And student loans, you can refinance them. Don’t refinance right now if you have federal loans, because you’re going to lose that 0% interest. Let’s say you have a private loan and it’s 6%. You maybe could refinance that to 3% or 2.5% right now. And if you’re paying at 3% interest each year and you’re making 7% in the market, and your student loans, you’re going to pay them off, let’s say, in 10 years versus you’re saving that money for Future You for 40 years. And I’m not telling you that you need to max out your accounts or go crazy, but if you’re only saving 4% right now for retirement, and you can get that to 10%, and really 10% – 12% is really the minimum. You can include any corporate match you get that you should be saving for Future You. Starting that as young as you can will just have such a big impact on your future financial security.

Megumi

Absolutely. I like how you put it that way, that it doesn’t have to be all or nothing, right? It doesn’t have to be like, “okay, during the pandemic, if I have a federal loan, I just ignore that completely and put all of my money into an investment account or a 401(k).” You can put it into a high yield savings account, which I hadn’t even thought about, because that makes sense. You’re still putting money aside. You’re still saving it for the future. So, you’re not caught off guard, hypothetically, or whatever it is. And you’re still putting money towards it out of your budget, while letting it grow instead of just paying off this debt while there’s no interest. And you’re slowly being able to contribute to your 401(k) or IRA, like we’ve talked about, or I’ve talked about previously in multiple different episodes, the power of compound interest, right? You want to be in the market for as long as possible.

Eryn

Totally agree. And I know it’s so counterintuitive to be thinking about Future You today, especially if you have this crushing debt. And I had a woman who’s taking my money boot camp right now, who was saying, “I’ve got debt. I can’t think about investing or think about the future.” But you can’t live off of being debt-free, unfortunately. And I used to think about this a lot, because I have these huge student loans, but I also wanted to be saving for retirement and things like buying a house one day and starting a business. But it is a balance, and you can do different things in different moments. And I will also say that my husband and I have a dream. We want to retire by 55 and hike the whole Appalachian Trail before our knees are too crickety for us to be able to do it. That means we had to be saving for retirement even while paying off loans. And my husband was lucky. He didn’t have student loans. He went to Georgia on the Hope Scholarship and then did a PhD, which is really eye-opening to me because he got paid to go to school versus the $100,000 a year about that an MBA costs. But on the flip side, definitely higher earning power with an MBA. So, it is possible to achieve all of those things. And yeah, unfortunately – debt, it’s so tangible. You want to get to debt-free, but you can’t live off of that. So, making sure you’re putting some money towards Future You is also really important.

Megumi

Do you recommend then that for people with student loans that aren’t super expensive, they just pay the minimum amount and then focus more on retirement, or whether retirement and other future goals like buying a house, for example? What kind of budgeting percentages did you use personally?

Eryn

I have a framework that I like to talk people through, and personal finance – it’s all very personal. But if you have student loans that are less than 4% interest and you’re not maybe where you want to be for retirement, there’s a good benchmark. This is not perfect, but by the time you’re 30, you should have about your salary saved for retirement. And it’s your salary, not an absolute number, because somebody making $50,000 a year needs to have a very different amount, say, than somebody making $150,000 a year. So, if you’re looking at this and you’re about to hit 30, and you’re like, “Hey, I really haven’t started saving for retirement.” In that case, saving for retirement and trying to — I always try advocate for people saving 20% for Future You. For me, I couldn’t save 20% for retirement while paying my student loan, but I hit 17% saving for retirement. Well, actually, I wanted to pay my loan off quickly. I was putting 30% of my salary towards my student loans, which is high. But I will also say, we did a lot of things like we live in a fourth-floor walk-up with no elevator and no dishwasher, and laundry is in the basement. And those are things that I’m totally fine with because it meant that I could work towards this goal of hiking and doing this really cool thing and also pay off my student loans. I paid them off within five years of business school while working for a social enterprise and not optimizing my salary.

So, there’s lots of different ways to do it. But if you’re not where you want to be with retirement, making sure to think about that. And if you do have higher interest rates on your student loans, also thinking about refinancing. Again, if you have public loans, do not do that right now because you lose the 0% interest. But if you have private loans and they’re over 5% right now, if you have a good credit score – and check your credit score before you try to do this – but if you’re over a 700, you should be able to refinance and get a lower rate.

Megumi

And don’t check your credit score just on Credit Karma or Mint.com or something. Actually, go check your actual credit score.

Eryn

So I would love to talk to you about that for a second because I just did myannualcreditreport.com. And it was very hard to look at and opaque and I actually find that I like to start with Credit Karma, because Credit Karma makes it really easy, showing which categories are the ones driving things. And then I check the annual credit report to make sure everything’s good there. But I like to start with Credit Karma because I think it makes it easier to see where you’re behind. But I am open– I always love hearing– people don’t get into the details on all this stuff enough.

Megumi

Oh, yeah. I don’t check my annual credit report regularly. I don’t even think– can you even check it super regularly? I think you only get it free–

Eryn

Once a year.

Megumi

–once a year. Yeah. Sorry, I don’t mean that don’t go to Credit Karma ever. But I posted something about this recently, where someone went to the car dealership and she thought she knew her credit score because she only checked Credit Karma. She hadn’t been regularly checking her actual credit score and it was significantly lower than she thought it was going to be. But I think I use– yeah, I guess I usually just go to Mint.com to check. But I do like– or sometimes I go to Credit Sesame. I do like, like you are saying, it tells you what is impacting your credit score, which is great.

Eryn

Yes. It’s a great point because Credit Karma only checks Experian and TransUnion and there’s also Equifax. What is that number? [laughter] When you go to buy a house or car, they’re going to average all– I think they take the lowest sometimes or an average of the three. So the lowest really matters. But yes, doing both is important and really good if you do want to check out a refinance or you’re going to buy a house or any of those big financial purchases. It’s really important to know what your credit score is.

Megumi

Should there be a big difference in approach between paying off your federal and private loans, or is it mainly just about that interest rate?

Eryn

It’s a good question. I think COVID has shown that the federal government is going to be more forgiving a lot of times about student loans. Private lenders are not going to forgive $10,000 of your loans. It’s just not going to happen. Sorry. And so, I would say all things being equal, you want to look at the interest rate, but if you have comparable interest rates for the two or even if the federal loans a little bit higher, I do think paying off the private loan first can make more sense, just because you’re more likely to get some sort of perk from the government. They’re generally more forgiving with forbearance if you have a period where you can’t pay your loan. So definitely, private loans are things to be wary of. But one thing the Biden administration is trying to do is make it easier to discharge student loans. Right now, even in bankruptcy, it’s pretty much impossible. And that is one thing the Biden administration is looking at so that may change in the future. But for now, the private loans are definitely not quite as flexible.