Hi and welcome to our presentation today titled, “Managing Student Debt.” My name is Ray Hunsberger, and I will be the education consultant delivering today's presentation.
The majority of Americans who graduate from an institute of higher education have debt outstanding on it. The goal of our presentation today is to help you lay a strong foundation for eliminating this debt as efficiently and quickly as possible. With the dollars you no longer pay to service your student debt, you can then put those dollars towards other financial dreams and goals you may have.
Over the course of your college and early working career, you most likely have seen and learned the value of setting up good habits. Establishing daily routines to make sure you were staying healthy, putting enough time into your studies, carving out time for sports and club activities, provided a framework for your collegiate success. You now want to make sure that you're carrying out that foundation of solid habits over to your finances. For many of you listening, you're now receiving your first true steady paycheck, one that will be able to provide for many of life's necessities like owning your home and saving for retirement.
Student debt, and debt in general, can be very overwhelming. We encourage you to lay the foundation for good financial habits by taking the time to build out a personal or a household budget.
Once built, you should review it on an ongoing basis, like monthly, as an example. This budgeting review habit will provide instant feedback and identify where you have good and bad financial habits.
By completing a budget, one of the things that should become very clear is whether your cash flow is positive or negative. Positive cash flow, which is our goal, is when your income is greater than your expenses. A simple example here is if I earn $2,000 per month and my expenses are $1,000 per month, my positive cash flow is $1,000 for that month: simply the difference between the $2,000 I've earned and my $1,000 expense commitment. Negative cash flow is when your expenses are greater than your income, and over the long term, is an unsustainable situation.
Let's look at some ideas to help you keep cash flow positive. Number one, your total debt should be less than 36% of your gross income. Your gross income is also known as your pre-tax income. That means everything, right? Your house, your housing and rent, student loan repayments, auto loans, credit cards, all that stuff should fit underneath that 36% threshold.
Number two, look at your expenses, as they may change in the next 6, 12 or 24 months, right? It's likely that many of you listening to this have just moved out of your childhood home and away from mom and dad. Now, you may have a mortgage or rent to pay, but with that decision to move out comes other related expenses like electricity, water, HOA fees, insurance, and other additional expenses. Have you factored those into your budget yet?
Number three, when it comes to your housing living expenses, they should total no more than 28% of your gross income. Now, this 28% is not in addition to the 36% threshold number given above. The 36% number above, again, is a baseline for your maximum total outstanding debt load. So, let's look at the example on the screen.
This individual earned an annual gross salary of $60,000 which on a monthly basis is $5,000. Breaking it out on a monthly schedule is easier, as most debt repayment schedules are monthly.
Using this 36% threshold, we find that we want to keep our monthly debt loads at $1800 or less. Now that we know our maximum monthly debt load, we can look at how much of that $1800 can go towards our biggest need, which is housing. So, based on that 28% housing threshold, we can calculate our maximum monthly cash outlay for housing to be $1,400 per month. If we take the $1,800 and subtract our $1,400 housing, we quickly see that we only have $400 left per month to cover additional debts like student debt.
Walking through an exercise like this will quickly lead to other questions, like, do I need to spend 28% of my income on my home? Do I need to find a more cost or rent-friendly neighborhood? Should I look to take a roommate on to split costs? These questions are going to vary depending on your situation, but you will no doubt have a clear picture of your cash flow situation.
So, after completing the previous exercise, we now know what our total debt load thresholds are. Let's now ask some additional questions to see if we can leverage our talents and skills to really attack our student debt.
For current outstanding debts, like credit card debt, does it make sense for you to put more towards one of them? A common strategy here is to put your debt repayment efforts behind the debt with the highest interest rate first, and once that debt is paid off, applying that same strategy to the debt with the next highest interest rate, so on and so forth. You will want to look at balances and take those into consideration as well and look at the interest rates on those. But proceeding in the matter listed above, that's a good foundational strategy for making those repayments.
Free up resources by cutting costs. Do you need to pay for three music streaming apps a month, or can you get by with one? Eliminating these types of items can be hard, but it can result in hundreds of dollars saved each year.
Sign up for automatic loan repayments. The US Department of Education offers a 0.25% discount on the interest for participants who elect to have their loans auto-debited from their account. Some lenders offer discounts up to 0.50% for auto-debits. So, be sure to inquire with your lender about these potential discount opportunities.
Next up, you can consider enhancing your income. Do you have a talent or skillset that translates into a potential additional income stream? You can always look for help, right? Does your employer have any programs related to assisting with student debt? Taking a few minutes to get familiar with the benefits could save you thousands of out-of-pocket repayment dollars.
Lastly, look at resources outside of your employer, but inside of your profession or industry. Nursing, being a member of our US Armed Forces, and teaching, are three professions where additional debt repayment resources are available. If you're in these professions, I would encourage you to fully explore these opportunities.
While we're focusing on student debt as the theme of this presentation, we would also like to remind you of your long-term goal, which is retirement. So, time is the one thing you cannot get back, so start or continue contributing to your company's retirement plan now that you've laid a foundation for resolving your debt. Our best practices here are to make sure you're contributing today, and if you're not, enter your plans in the next available entry date.
Secondly, if your plan offers an employer match, contribute what you need to, to capture the full employer match.
So now that you've taken control of your debt, and you feel comfortable with your cash flow, make a goal to contribute a set amount to your emergency fund. Emergency funds are dollars that are set away to cover essential living expenses for a certain period of time in the event you suffer a medical emergency or a job loss, as some examples. Emergency funds are usually held in accounts that are liquid, meaning easily converted to cash, and have 24/7 availability like a bank checking or savings account.
The recommended minimum of what you should keep in your emergency account is three months of living expenses. On the other end of the recommendations scale, is having up to 12 months of living expenses. So, you will want to find what works best for you, but those are good guidelines to work within.
So now, let's talk about the four different repayment programs available to Federal loan borrowers. The first is the standard repayment, and that's listed there in the top left. The standard repayment schedule is pretty straight forward with a fixed payment of at least $50 per month for terms of up to 10 years. The second is the extended repayment plan, right? That's in the top-right. The extended repayment plan allows loans to be repaid over a period of up to 25 years. Payments may be fixed or graduated, so it's important to review the offer information and ask any questions to a qualified professional.
The third option is the graduated repayment plan. This option starts with a reduced payment that is fixed for a set period and is then increased on a predetermined schedule. In many cases, the repayment amount adjusts every two years. The final option is the income-based repayment plan, also known as IBR. This plan offers combinations of payment deferral and debt forgiveness based on your income and other factors. Borrowers who pursue this option may have to provide documentation to be eligible for the income-based repayment plan.
The last thing we want you to remember, is to always pay yourself first. Even though some of your dollars are currently going to repay old debts, it does not give you an excuse to stop saving for your future. When you put your dollars into an emergency account, or make a retirement plan contribution, you are paying yourself first. As mentioned earlier, this is easy to do with a checking account and a couple of savings accounts at your local bank. The strategy is that on the same day you are paid, you then have automatic transfers set up to move money out of your primary checking account and into those savings accounts that each have a specific goal. Many of you save for vacations, home improvements or investments, and other savings goals. These would all make great examples of separate accounts you can have your money transferred into.
This concludes our presentation on managing student debt. The three takeaways I want to leave you with are:
Number one, your debt, right, your housing, your credit card, your student loan, your auto debt, should be less than 36% of your gross income. Again, gross income is total income before taxes.
Number two, understand your repayment options and leverage additional resources where offered or available.
And number three, continue to pay yourself first. Start putting dollars away for an emergency fund or another savings goal now. Enroll or increase your contributions if you are already enrolled in your company's retirement savings plan.
So, thank you for taking the time to join me today, and we look forward to providing additional education in the future. Have a nice day.