Should I Take Student Loans If I Don't Need Them? Are you missing out by not taking student loans? We’re going to talk about the pros and cons of getting student loans in the new era of student loan debt forgiveness.
You don't want to feel like you're missing out because there's free money out there now. You want to make sure that you're being smart while you go to school.
There's a lot to consider. We talk about the potential downsides to depending on debt forgiveness. It may not happen. We talk about parent student loans, how student loans feel, and how to prudently plan for the future.
Our guest is Patti Hughes, CPA.
For more information on Patti, check out: https://lakelifewealthadvisorygroup.com/
00:00 Welcome!
01:01 Free money! Why not?
03:50 Debt Drag of Student Loans
07:37 Parent Loans
10:40 Summary
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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TRANSCRIPT:
Bridget: Are you missing out if you're not getting a student loan? We're going to be talking about the pros and cons of giving the student loans in this new era of student loan debt forgiveness, both for parents and for students. Hi, I'm Bridget Sullivan Mermel, and I've got a family financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And we're really lucky to have as our guest Patti Hughes, who runs a fee-only financial planning practice in Chicago, Illinois. Welcome to the show, Patti.
Patti: Thanks for having me.
John: Great. This is so exciting. We've had you with us talking about the student loan programs here in the past. We're really excited to get into the next level on these things. And before we get started in the conversation, I want to remind all of our viewers to hit that subscribe button that helps other people find this great information online. So hit subscribe and then let's get into this.
I'm really interested in this topic that Bridget brought up about the idea of there being loan forgiveness out there. There're new loan forgiveness plans out there and geez, if I'm planning to pay for college for myself or for my kids, am I missing out on loan forgiveness opportunities? Why don't just I go out and get loans in order to get some of this free money? I hear that in conversations with friends and clients and it's not quite as simple as that, right?
Patti: Right. I think I've been hearing the exact same thing and it's been in the news, and everybody is saying, “Let's jump on the bandwagon and take out student loans,” with the thoughts that they're going to be forgiven because so much has been announced in the last year, all these different waivers and forgiveness programs.
But one of the things I think a lot of people aren't aware of, is that for undergrad, for example, the majority of people take out, they call them unsubsidized loans. And these loans, you start accruing interest from the time you receive the disbursement. So let's just say you're a freshman undergrad and day one you receive a student loan, well, that continues to accumulate interest the whole four years that you're in college and then say you go to grad school after that, it continues to accrue interest.
So one of the things people don't realize is that you get out of school and the loan balance is much higher than what you originally thought it was going to be because most people don't pay the interest while they're in school, so that would be one reason that the loan balance could end up being quite high.
John: But then I get it all forgiven. That's the devil's advocate. It all goes away, right?
Patti: Well, that’s the thing. Now with these latest things that have been announced, people are thinking that that's going to be the case going forward, but a lot of these are limited. For example, the last one that was announced, the one for the $10,000 and the $20,000 loan forgiveness, is only for loans that were taken out prior to July 1 of this year.
So that does not include anything after the fact. That's why I tell people not to count on forgiveness. They were very specific in saying it's only for loans prior to July 1, so there's no guarantee that they're going to come out with another revision to this and allow forgiveness for future loans. This only impacts prior loans.
John: That's such a great point. Being in our business, of course we all pay attention. I often go, “Oh, that's right, I kind of forgot that.” It's not this new thing, right? It seems like this panacea of sorts when you think, “Here's this great thing,” but actually not so much when you look at the details. And I know one of the things, Bridget, you talk about all the time is the idea of debt drag and just the idea of saying, “This might be advantageous, but what's the cost on the other side?”
Bridget: Yeah. Debt drag is a studied phenomenon. People feel worse when they have certain types of debt and student loans are high among that type. We might think that students shouldn't feel bad when they have student loans; they should just take them in stride, like people take mortgages in stride, but people do not.
There's a lot of emotional baggage around student loans. And we were talking before the show about it. In all kinds of different ways, people feel bad about student loans which often stop them from doing other things that are meaningful. For instance, I knew one person who said, “I don't want to retire until I pay off my student loans.”
Now, they had a small student loan, but it was stopping them from retiring. They had plenty of money to pay it off, but they didn't want to pay it off (that's another story). But I'm just saying that there’s an emotional part of student loans that make people feel like there’s a weight on their back, a monkey on their back. I don't think that's to be taken lightly.
John: Yeah, that's such a great point. That's one of the things I love about our show. Usually, I'm such a linear thinker. I simply do the math on these things. However, all three of us are members of the Alliance of Comprehensive Planners and one of our colleagues says, “Spreadsheets don't have to sleep at night.”
It might be the exact right thing to do, but there are other factors that come into these things. And one of the things that strikes me as part of this conversation is that even the plans that we make, don’t necessarily come true. Life changes more than it stays the same. So you think, “Oh, here's how this is going to go,” but then it goes completely different.
And Patti, you just said, “Well, geez, don't plan on things being that way in the future.” And you shared a story about how somebody's life had changed, and they decided that they had to leave their job, and they couldn't buy a house or do things because of their student loan debt. Right, Patti?
Patti: Right. I knew somebody; she was an attorney, and then she lost her job in Florida. This was all during COVID, and she moved back to the Chicago area, and she had over $280,000 worth of student loans, so she ended up moving back home in her parents’ basement. And she was just distraught. She kept saying, “This is just so heavy on my mind.” She could have been on an income driven repayment plan.
She was making around $90,000, so the payments wouldn't have been astronomical if she had been on an income driven payment plan, but it was more the emotional things. She was saying, “I just feel like I can't move forward. I don't feel like I should be buying a condo. I just want to get this debt gone.”
In my mind, it's a different mindset. If you take a loan out for a home, you're looking at that as an investment, and you're enjoying it, whereas when you take the money out for a student loan, you just see that big loan balance out there, and people just don't like it. I think it’s more of an emotional thing than actually looking at the numbers.
Bridget: And also going to school and getting your degree is actually hard.
Patti: Right.
Bridget: It's an accomplishment to graduate, or maybe you don't graduate. It's a hard thing, so it's not always something you enjoy. What about parents? Let's talk about parents taking out parent student loans. Parent student loans are now being forgiven. Great. Why not take them? What do you think?
Patti: Well, here's the thing with Parent Plus loans. The latest thing said that the $10,000 and the $20,000 loan forgiveness will include Parent Plus. But all of these other revisions that they've made—for example, the PSLF waiver, the Public Service Loan Forgiveness waiver—parent plus loans aren't included in that. And so, the other thing with these Parent Plus loans is they are only eligible for one income driven repayment plan if you consolidate the loan.
And it's called the Income Contingent Repayment Plan. It's the least favorable of any repayment plan, so people don't want to do this for that reason.
When they look at it how much they're going to have to repay, it's a higher percentage of income as opposed to what these other ones are. So that's something to keep in mind. And the other thing with the Parent Plus loans is that typically those come due just at the point where you're getting ready to retire and that causes a real problem because then you're looking forward to your retirement, but you've still got this big loan. And for some people the loan could be around $150,000. Maybe they're in their late fifties, and they're saying, “Okay, I'd really like to quit work now or in the next couple of years, but then I'm worried about this loan because the loan is coming due.”
And I know somebody who had two kids and took out around $150,000 in loans and the kids told them, “We'll pay you back once we graduate. You take the loan out, but we'll pay you back.” Well, then one of the kids makes around $30,000, the other one is doing an hourly job, making around $15 an hour, and they can't pay them back. And then the parents were saying, “Well, go to a private lender and try to refinance it just out of our name, because we don't want to pay it.” Well, the lender said, “I'm not going to lend the money to them because they don't make enough income and they don't have enough credit history.”
Then you're really stuck; there's no way of getting out of it. So those can be a really bad idea. And I think people say, “Well, my income is going to drop, and I'll be retired,” but they don't realize that anything that goes into their adjusted gross income affects their payment plan. For example, when you take out required minimum distribution, which is required at age 72 from your 401K or your retirement plan, all that gets dumped into adjusted gross income and the payment goes up. And who wants the payment to go up when you're 72 years old? I just think people don't understand it.
Bridget: My takeaway here is that student loans are a long-term commitment, and the commitment is to pay them back. And currently there are some ways to get around paying them back, but you can’t always bank on it. There are so many uncertainties that come up in life that banking on not having to pay it back is just tough. You're setting yourself up for the possibility of a lot of disappointment.
Patti: Right. And I think a lot of people don't realize that the last thing that they announced, the $10,000 and the $20,000 forgiveness, does not apply to the future. They think it's going to be forever, when they specifically stated it was only for loans prior to July 1 of 2022, so there's no provision in there that going forward that this is going to be the case. I think that's really an important thing that people need to realize.
Bridget: It seems like this is a great place to wrap it up. I just wanted to thank you for being a guest on our show, Patti. This has been so great to have you.
Patti: Thank you.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. Our guest today is Patti Hughes. And Patti, if people want to get in touch with you, how do they get in touch with you?
Patti: The best way would be my website: lakelifewealthadvisorygroup.com. And there's a contact form on there, and that's usually the easiest way to get in contact with me.
John: That's great. Lake Life Wealth Advisory Group. And Patti, Bridget, and I are all members of the Alliance of Comprehensive Planners. If you like what you hear on our show and this way of holistic, tax-focused thinking, visit acplanners.org to find an advisor in your area. And don't forget to hit that subscribe button. Help other people find the show. Thanks!
Patti: Thank you.