Smart Money: Student Loan Repayments and Midyear Money Review

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Uncover actionable tips for ensuring your money is working for you, and how to plan for resuming student loan payments.

This Week in Your Money: Learn how to conduct a midyear financial check-in with help from hosts Sean Pyles and Liz Weston, who offer practical advice for reassessing your financial situation and getting back on track if you’ve fallen behind. They discuss strategies to save on car insurance and cell phone plans and stress the importance of securing the best rates for savings accounts. They also discuss the benefits of conducting a tax projection, looking back at past financial resolutions and preparing for the holidays early to avoid financial stress.

Today’s Money Question: Student loan Nerd Eliza Haverstock joins Sean and Liz to answer a listener’s question about the upcoming resumption of student loan payments after more than three years and nine forbearance extensions. The Nerds discuss the challenges that many borrowers face, particularly with the upcoming end of the deferred interest period. They discuss the implications of withdrawing 401(k) money to make student loan payments and provide insights into the pros and cons of making lump sum payments versus paying off loans over time. They also share details around income-driven repayment (IDR) plans, including the new SAVE plan, and discuss other options such as the Public Service Loan Forgiveness program.

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Episode transcript

Liz Weston: Hey, Sean, be honest. What are you putting off right now?

Sean Pyles: Do you mean in life or financially?

Liz Weston: Either, both, whatever you want.

Sean Pyles: Well, my rosebushes need deadheading. I am about two months overdue for a haircut. And I have been meaning to do a midyear money check-in. Liz, are you volunteering to help me tidy up my to-do list?

Liz Weston: Well, you’re on your own for those first two, but this episode we’re going to help our listeners do a midyear money check-in, even if it’s a little bit past the midway point of the year.

Sean Pyles: Welcome to NerdWallet’s Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Sean Pyles.

Liz Weston: And I’m Liz Weston.

Sean Pyles: This is a show where we Nerdy people answer our listeners’ money questions on everything from how to buy a car to whether budgets are really necessary. So listener, we want to answer your questions and we want to hear from you, too, literally. So consider leaving us a voicemail on the Nerd hotline.

Liz Weston: You can leave that voicemail or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us [at] [email protected].

Sean Pyles: In this episode, Liz and I answer a listener’s question about whether they should pull money from their retirement account to pay off their student loans. But first, Liz and I are going to do that little midyear money check-in, something that I really have been meaning to do for the past month or so.

Liz Weston: OK, well let’s do it.

Sean Pyles: OK, so there are three things that I want to talk about. The first is a look back at the past six months, starting with financial resolutions, those things that you promised you were going to do in January. Bring out that list, however dusty it may be, and see if you are on track with them. Maybe you completely abandoned them. Liz, where do you stand on that?

Liz Weston: I don’t really have resolutions so much as to-do lists of a bunch of little financial tasks I need to take care of, and it feels like I’m always behind on those. So occasionally I will just take a day and knock out as many as I can.

Sean Pyles: Yeah, that’s fair.

Liz Weston: How about you, Sean?

Sean Pyles: I’m kind of in a mixed situation right now. I have this goal of maxing out my retirement contributions this year and that is on track, which is awesome.

Liz Weston: Congratulations.

Sean Pyles: Thank you. I kind of miss that money in my paycheck, but also I’m glad to see my retirement account growing by the day, but also I have been really wanting to get rid of my private mortgage insurance on my house and I’m in the process of doing that as we speak. So that feels great. Off track, I need to shop for car insurance, something that I’ve been meaning to do for a couple months. And also I’ve had a fairly expensive summer so far, so I really want to rein that in. But for our listeners, if they find that they’re not really on track for their financial resolutions, one thing that we like to do, especially if you have a really lofty goal that’ll take many months to sort out, is break it up into smaller pieces and see how you can make progress on that this week or this month to correct course and be able to accomplish what you want in 2023 by the end of this calendar year.

Liz Weston: Yeah. Another thing that’s helpful to do is just look at where your money’s going. Periodically, it’s great to check your bank statements, other account statements for the past few months, and it gives you a better view of basically what’s happening with your money.

Sean Pyles: And also in a more emotional way, ask yourself how you feel about your finances over the past six months. Do you feel more confident in what your money is doing for you right now than you did in January? Are you a little bit anxious when it comes to your money? However you’re feeling, you can use that as motivation for the next step, which is adjusting your finances. When you think about your money right now, what is nagging you? I would say find something to fix and take care of it.

Liz Weston: Well, Sean, you mentioned car insurance and now is a really good time to start shopping around. Car insurance has really gone up, so it’s possible you can save some money by either switching your insurer or changing how you’ve got things set up. So that’s one thing to do. Another is a high-yield savings account. Make sure that you are getting the best rates on your money if it’s sitting in a savings account somewhere. And cell phone plans, you’ve got to make sure that you’re still on the best one, because the plans change all the time. I finally checked ours and it turned out we were paying $40 a month more than we have to. So it was really nice to get that knocked off and to realize we’re going to save that money going forward.

Sean Pyles: And what change did you make to save that $40?

Liz Weston: Well, the big thing was we got rid of a line that we were no longer using and that really helped us save a lot. And what was great is the woman actually took a look at the current plans and found out we were better off staying with our old one. So we were grandfathered in, we didn’t have to change and it’s a good one to hang on to for a while.

Liz Weston: So internet coverage, cell phone plans, whatever it is, SiriusXM, it’s always good to check back and make sure you’re still paying the lowest rate possible. Those can really get jacked up over time.

Sean Pyles: And this can apply for all sorts of subscriptions, like streaming services. I think we all know at this point that streaming services have become more expensive and perhaps a little bit less generous with what they’re allowing us to do. If you find that there’s one that you’re paying for now that you really don’t use all that often, just give it the ax.

Liz Weston: Yes. And one more thing to do is to do a tax projection or ask a tax pro to do it for you. This is especially important if anything major has changed for you, like a new job, a new spouse, a new kid, that can all change your tax situation, and it’s so much better to know that and adjust for it now than to face a big bill come April.

Sean Pyles: And the third thing, listener, that we will ask you to do this midyear money check-in is looking ahead, because the holidays will be here before you know it. So prepare now for what will certainly be an expensive time of year.

Liz Weston: We’ve actually got a billboard near my house showing the number of days until Christmas and I was like, no, I’m not ready to think about that yet.

Sean Pyles: No, please. It’s way too early.

Liz Weston: Yes, yes. But it’s great to set up a budget, start putting money aside so it’s not a huge hit when the time comes around.

Sean Pyles: Yeah. I always like to begin to map out my holiday travel around this time of year so I can know where I’m going to be going, how I’m going to be getting there, and thinking about how much that all might cost me.

Liz Weston: OK, Sean, and let’s talk about student loans.

Sean Pyles: Yeah, we will be talking about this more in this episode’s money question segment, but listener, really, really get ahead of this if you have federal student loans that are going to be resuming payments in October. So that means exploring payment plans, know how your budget will need to change to accommodate the expense that you have. Also, if you have a new student loan servicer, set up your account with them. And finally, be on the lookout for scams like we’ve mentioned before on Smart Money.

Liz Weston: And here’s a bonus tip: Find a good money book to read. I think Sean, you found one recently, right?

Sean Pyles: Yes. I am reading the book “Your Money or Your Life” by Vicki Robin and Joe Dominguez. It’s a personal finance classic that was updated a few years back, and I’m about halfway through it right now. And I already feel the way that I think about and manage my money on a day-to-day basis evolving, which is saying something, considering how much I live and breathe personal finance.

Liz Weston: I actually think that is one of the best, if not the best personal finance books out there. So I’m so glad you’ve had a chance to read it.

Sean Pyles: Well, I’m reading it at your recommendation, so thank you.

Sean Pyles: Liz, what are you reading right now?

Liz Weston: I’m reading “Poverty, by America” that was written by Matthew Desmond, who also wrote the book “Evicted,” which was really an eye-opener about the cycle of poverty and what can happen if you get kicked out of your home. It’s really thought provoking, and I’m really enjoying it.

Sean Pyles: Great. Well, listener, if you are reading any good books right now, personal finance or otherwise, hit us up, let us know. I’m always looking for new books to read. Well, that wraps up our This Week in Your Money segment. Today’s money question is up next, stay with us. This episode’s money question comes from Brandy, who left us a voicemail. Here it is.

Brandy: Hi there. My name is Brandy and I am a NerdWallet podcast listener. I have a question relating to student loans and the upcoming end of the deferred interest, which should be happening at the end of August. So I have about $50,000 worth of student loans that I still have to repay, and I’ve been paying as much as I can while the interest has been on hold, but I still have about $50,000. I went to law school. And my question is whether or not it would be advisable to cash out some of my 401(k). I currently have about $75,000 in my 401(k). I’m 34 years old. Whether or not it would be advisable to cash some of that out just to pay off my student loans and not have to deal with any more interest, because it’s going to take me a while to pay that off once the interest is starting again. Thanks. Bye.

Liz Weston: To help us answer Brandy’s question on this episode of the podcast, we’re joined by student loan Nerd Eliza Haverstock. Welcome to Smart Money, Eliza.

Eliza Haverstock: Hi, thanks for having me.

Sean Pyles: Great to have you on, Eliza. So I imagine a lot of listeners are going to be in a similar situation as Brandy right now. They might be confused about what’s happening with their student loans and maybe some of the best options for repaying them. To start, can you give us a rundown on federal student loan payments resuming?

Eliza Haverstock: The big thing to know is that student loan payments are going to resume again after more than three years and nine forbearance extensions. So yeah, it’s been a long time coming, but interest will start building again on your federal student loans starting Sept. 1, and payments will start being due in October.

Liz Weston: And borrowers are going to have to start paying on their total student loan balance, right?

Eliza Haverstock: Yeah, on June 30, the Supreme Court struck down President Joe Biden’s student debt cancellation plan, which would’ve canceled up to $20,000 in federal student loan debt per eligible borrower. So it’s a big blow for a lot of borrowers, especially those who are kind of counting on this loan cancellation to go through. So these monthly bills are going to be on your full student loan balance this fall.

Sean Pyles: Yeah, I was really looking forward to some potential debt relief that would’ve halved the amount of debt that I have, but oh well, I guess. A lot has changed around federal student loan repayment since 2020. After the Supreme Court struck down President Biden’s debt cancellation plan, Biden came out and announced a new income-driven payment plan. Can you give us the details on that?

Eliza Haverstock: Yeah, so this new plan is actually going to be a huge deal for borrowers going forward, so it should really help people who are in school now, people who will go to school, people who are currently in repayment. But the new IDR plan is called SAVE is the acronym they’re using. SAVE stands for saving on a valuable education, aptly named, which is replacing the popular repay plan, which is another IDR plan available today. But parts of the new IDR plan will be available this summer, so you actually can start repaying this fall on this plan.

There are a few key components here. It’ll cut your monthly payments in half for borrowers with undergraduate loans, and those with smaller balances of like $12,000 or less will see their remaining debt forgiven after just 10 years of payments instead of 20 or 25 under current IDR options. That can help a ton of borrowers, especially borrowers who went to community college or they have a smaller loan balance. That’ll be great.

Sean Pyles: And is this also the plan that caps monthly payments at 5% of disposable income?

Eliza Haverstock: Yep, so that’s another big change. The new IDR plan is going to cap your monthly payments at 5% of your discretionary income instead of 10%. It also is going to protect more of your income. So when you calculate your discretionary income, it’s going to be a smaller amount than it was under previous plans.

Sean Pyles: OK. Yeah, that’ll make a big difference for a lot of borrowers, too.

Liz Weston: We were talking about the debt forgiven after 10 years. Why would anybody stay on the standard plan then? Because they’d be paying it off for 10 years.

Eliza Haverstock: So the 10-year time frame, that’s for borrowers with smaller student loan balances. So if you have owed $12,000 or less in your principal, your debt will be forgiven after 10 years of payments. But if you owe more than that, it could be up to 20 or 25 years still. So it adds after $12,000, it tacks on an extra year of repayment before you reach forgiveness. So if you had $14,000 in student loans, your debt would be forgiven after 12 years of repayment on an IDR plan. And then it kind of goes up from there.

Liz Weston: OK. So it sounds like something that people just need to go and look at their individual situations and see what would make the most sense for them.

Eliza Haverstock: Yeah, absolutely. And there’s a loan simulator calculator on the Federal Student Aid website, which is really helpful for that. And on NerdWallet we also have a discretionary income calculator, so you can figure out what your payments would be under the new IDR compared to the current repay plan. And there’s a few other options out there as well.

Liz Weston: That’s super helpful. And we’ll have links to that in our show notes. And this is an income-driven repayment plan, you said. So who qualifies for this?

Eliza Haverstock: So any borrower with federal student loans can sign up for an income-driven repayment plan. And this new plan, called SAVE, is probably going to be the best deal for most borrowers. It’s the most generous income driven repayment plan yet, and it could cut payments by at least half, especially for borrowers with undergraduate loans. And that change that Sean mentioned from capping your payments at 5% instead of 10%, that’s for borrowers with undergraduate loans only. So if you have graduate loans, it’s still going to be that 10% cap. So yeah, something to consider.

Sean Pyles: OK. And are there any income caps on eligibility for these plans?

Eliza Haverstock: There’s not any specific income caps, but if you have a really high income, something like this might not make a lot of sense. You might just want to stick with the standard 10-year repayment plan, because when you’re on an IDR plan, it’s going to probably extend your repayment term, the number of years that you’re in repayment. So you might just want to get it over with sooner.

Sean Pyles: Yeah, that’s good to know. And then there’s another new program called Fresh Start. What are the details of that?

Eliza Haverstock: Yeah, this is a great program for borrowers who had federal student loans that were in default before forbearance began back in March of 2020. So the Fresh Start program will allow borrowers with student loans that were previously in default to get them back into good standing. And they can access IDR plans like this new SAVE plan, it’ll clean up their credit score, they can take out more federal student loans if they want. So this is going to be really helpful for those borrowers because default can be really damaging.

Sean Pyles: All right, so Brandy is thinking about cashing out some of their 401(k) to wipe out their student loan debt. And I really relate to just wanting this debt out of your life, especially after not paying it for three years, but withdrawing money from a 401(k) has some really serious downsides. So let’s discuss them. The first one that comes to mind for me are taxes, income taxes, plus the 10% early distribution tax penalty for pulling money out of a 401(k) before you’re 59 ½ years old. Our listener is saying they want to pull out $50,000 that they’d need to wipe out their debt and that would cost them at least $24,000 to do.

Liz Weston: Yeah. So basically they’d be taking their entire balance plus some, because once you take out 75 versus 50, that also increases the income tax and penalties. So it’s a big chunk, but that’s not even the worst part. That $75,000 withdrawal could cost over $750,000 in the future in lost retirement money. And that’s assuming that the money would earn about an average 7% annual rate of return over 33 years. So once again, a $75,000 withdrawal could grow to 10 times that much if it were left alone.

Sean Pyles: The bottom line here is really that withdrawing from your 401(k) to pay off this debt is a risky solution to a relatively short-term problem that brings some serious long-term repercussions to your potential financial viability and security in retirement.

Liz Weston: Yeah, we keep saying that we don’t tell you what to do with your money, but really, really, really think hard before you take money out of a retirement plan.

Sean Pyles: Brandy’s question also hits on a theme that we hear a lot from our listeners, which is it better to just wipe out a debt in a lump sum payment if you have the cash? Or is it better to keep paying it off monthly, even if it will take many years to do that? I’d love to hear each of your thoughts on this.

Liz Weston: Well, I will start out because I obviously have strong opinions on this. But if it truly isn’t cash, if it’s sitting in a savings account and you don’t need it for another purpose, then by all means take that money out of savings and pay off the debt, especially if it’s a high-rate debt. But most of the time people are looking at taking money out of other sources rather than just having it sitting idle in savings. So in that case, I think it makes a lot more sense to just make those payments. And if you’re mad about the debt, maybe it can inspire you to make some changes in your budget so that you can pay it off faster, put more of your income towards paying down the debt. How do you think about this, Eliza?

Eliza Haverstock: I definitely agree with all that, Liz. I’m actually planning to do kind of a lump sum. I have a relatively small amount left in federal student loans and I was able to do kind of what you’re describing, putting money aside in a savings account just in case forgiveness didn’t go through. But this isn’t an option for everyone, and that’s OK. There are a lot of other ways to manage your student loan payments, like those income-driven repayment plans and things like that as well. Do you have any other thoughts, Sean?

Sean Pyles: Well, I’m just going to suck it up and start paying my loans back the way I was before, because I’ve been taking advantage of not having my $440 monthly student loan payment over the last three years to do things like buy a car. I bought a house. I’ve been able to make huge headway on my various savings goals and I want to continue to make progress on them for as long as I can. So eventually, once payments do resume, I’m going to siphon money from my savings goals and just direct it toward my regular loan payoff and trudge through it over time because that’s just the easiest way for me to do it. And I want to keep the money that I’ve accumulated in my various savings buckets for the purpose that they’re designated for, and I just don’t want my student loans to take that from me. So I’m kind of bitter about it maybe.

Liz Weston: Well, I understand that totally. But I love the fact that you’ve thought it through and it can be really satisfying to pay off a debt, but sometimes the cost is much higher than if you would just wait and pay it off over time.

Sean Pyles: Yeah, there are a lot of trade-offs, too. Like what are you not going to be able to do if you pull all this money from an investment account or savings accounts? Think about tax implications like we mentioned before. It’s just not worth it for me personally.

Liz Weston: So Eliza, how should people prepare for payments resuming?

Eliza Haverstock: First off, you’re not alone if you’re feeling frustrated and kind of unsure about what to do right now. It’s been a very confusing three years for borrowers with all the back and forth about forbearance and debt cancellation and all that. I spend 40 hours a week in the weeds with student loan repayment plans and debt cancellation lawsuits and I still get confused sometimes.

Liz Weston: Well that’s good to hear it’s not just me.

Sean Pyles: Well that’s why we do this work though, is to help people figure out the best way to navigate their student loans, because it can be really confusing and add an emotional component of feeling frustrated and maybe a little bit wronged on top of that. And it can be overwhelming. So I recommend people take a breath and really sit with your feelings for a minute because it just sucks for a lot of borrowers. That’s the bottom line. This is going to be a huge blow to their budgets.

So appreciate that. Maybe give yourself a moment to sit with it, but then move on and think about what repaying the loans is going to look like for you in very real terms. Where are you going to be pulling money from elsewhere in your budget to be paying this off on a monthly basis?

Liz Weston: So what’s a good first step once you’ve gotten over the feelings?

Eliza Haverstock: I think the first step is to just figure out how much you owe and where your student loans are. Student loans are managed by servicing companies or servicers, they’re often called. And to find out who your federal student loan servicer is, you can log in to your account on the Federal Student Aid’s office website, which is studentaid.gov. This is really important because nearly half of federal borrowers have had their loans transferred to another servicer during forbearance, and they might not even have been aware of that, like if they moved or they didn’t get the letter in the mail.

So yeah, definitely check who your servicer is, figure out where your loans are, who you’ll have to start paying. And at least one servicer, Edfinancial, moved its loans to a new servicing platform. So that actually happened to me. So I still have Edfinancial as my servicer, but I had to make a new account on a new website that they set up. It’s kind of confusing, so I think it’s a really good idea to just figure out where things stand before you have to start paying.

Liz Weston: And people who’ve left school since March 2020 may not have ever made a student loan payment. So this is all new to them, right?

Eliza Haverstock: Yes, absolutely. So it’s a whole new world, servicers and all that, so definitely take some time now to get acquainted with things.

Sean Pyles: Yeah. Well figuring out different new payment plans like we talked about before can be really confusing. Can you recommend any resources for folks to use to figure out whether they might be better in one repayment plan or another?

Eliza Haverstock: Yeah, absolutely. So your servicer can actually help you figure out what plan may be best for you. You could just call them and ask, put me on the plan with the lowest monthly bills or put me on the plan that’s the best fit for me. But it’s always a good idea to go on to these calls with some knowledge so you make sure that they are giving you the correct advice. So those income-driven repayment plans can be a big help for borrowers because they’ll lower your monthly payments to a set percentage of your income, though they may kind of extend the time you’ll be in repayment. And what’s really cool and important to know about these IDR plans is that your payments could actually be $0 a month. So if you’ve lost your job or your income is really low, that’ll really help you out. And even when you’re making these $0 payments, you’re still making progress towards that eventual student debt forgiveness down the line.

Sean Pyles: And people should also realize that they’re not locked into one specific payment plan forever if they choose one. And then they realize later on that the one that they selected isn’t right for them. Is that correct, Eliza?

Eliza Haverstock: Yep. Yeah, you can change repayment plans at any time.

Eliza Haverstock: Beyond just a straightforward IDR plan, there are also other forgiveness options out there for your student loans. So if you work for the government or a nonprofit, maybe you’re a teacher or a nurse or in the military, definitely check out the Public Service Loan Forgiveness program. This can forgive your remaining debt after just 10 years of monthly IDR payments instead of 20 to 25 under current IDR plans. So that can help a lot of people.

Sean Pyles: So Eliza, do you have any final thoughts for Brandy and our other listeners who are trying to figure out how to pay off their student loans?

Eliza Haverstock: Well, to your point earlier, Sean, it’s just really important to get equipped with knowledge and don’t just ignore the situation even though it’s very stressful and it really sucks for a lot of borrowers, but really make a plan to pay your bills or look for help now. This can mean reevaluating your budget. A lot of borrowers have maybe made some financial decisions or had some more flexibility in the past three years without considering their student loan payments. So this might mean looking for a cheaper apartment or seeing where else you can cut back your spending. And you don’t need all the answers right now. They’re also a lot of different nonprofit organizations out there with resources or there’s also credit counseling agencies and things like that can help you.

Sean Pyles: Just make a plan of action and do it. Don’t ignore this.

Eliza Haverstock: Yeah, absolutely.

Sean Pyles: All right. Well thank you so much for talking with us, Eliza.

Eliza Haverstock: Yeah, thanks for having me.

Liz Weston: So Sean, you were looking forward to having some debt forgiveness and that’s not happening. How are you thinking about this now?

Sean Pyles: I am, like I mentioned, sitting in my feelings for a minute, and then I’m planning to take advantage of the time that we have right now to figure out what this is going to mean for my budget. I said I’m going to be pulling back on some savings goals, that’s going to happen. I might be pulling back from my monthly investments to my brokerage account because I need to free up some cash, but I want to play out a few different scenarios with my finances to see what makes the most sense for me long term.

Like I mentioned, I might pull back from my investments, but then what’s that going to mean down the line for me if I’m not investing as much right now? Or if I withdraw from a certain savings account, how is that going to give me more or less flexibility down the road? I just want to make sure that I’m understanding the different options that I have personally with my financial situations. So I’m going into this as informed and prepared as possible. And I recommend that for anyone that’s in this situation.

Liz Weston: And we do have a little time to do some research and make some plans. It’s not like payments are going to resume next week.

Sean Pyles: And even if listeners are hearing this after payments have resumed, you can still do this exact exercise, sit down and play out a few different ways of reshuffling your budget to find that money to pay your student loans or explore a few different repayment options to make it work for you.

Liz Weston: And the one thing I wanted to highlight that Eliza said, nearly half of student loan borrowers have had their servicer change, and then there’s a lot of people who have either graduated or left school since the pandemic started who’ve never made a single payment, don’t know how to do any of this. So we have resources on our site. And there’s also the Department of Education has information as well.

Sean Pyles: Exactly. OK, well that is all we have for this episode. If you have any money questions about student loans or anything else, really, turn to the Nerds and call or text us your questions at 901-730-6373. That’s 901-730-NERD. You can also email us [at] [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.

This episode was produced by Liz Weston and myself with help from Tess Vigeland. Kaely Monahan and Kevin Tidmarsh mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help.

Liz Weston: And here’s our brief disclaimer. We are not financial or investment advisors. This Nerdy info is provided with general educational and entertainment purposes and may not apply to your specific circumstances.

Sean Pyles: And with that said, until next time, turn to the Nerds.

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