Travis Hornsby, the founder of Student Loan Planner, joins the show to talk about the impacts of the federal stimulus situation on student loan forgiveness policies.
- Travis has built a team at Student Loan Planner that helps individuals decide whether or not they should pay back their student loans. For many people, this single decision can have a big impact on their finances. With that, it is important to make the best decision for your unique situation.
- On March 13th, President Trump announced that the federal government was pausing federal student loan payments and interest for 60 days. That action alone will likely save many listeners over $1,000 each. After the passage of the CARES Act, that intention was written into law.
- With the passage of the CARES Act, any payments made between March 13th and September 30th count towards income-driven repayment and forgiveness programs. You'll even get credit if you make $0 in payments between now and September 30th. In order to make that happen, you'll need to call your loan servicer for a refund after they process your payment and they'll return the funds within two to six weeks. The pause on student loan payments is only applicable to federal student loans until September 30th.
- If you have direct federal student loans, then you still have the option to make extra payments. However, in this economic climate, Travis encouraged stockpiling as much cash as you can and potentially putting extra funds towards your retirement accounts.
- If you are a recent grad with a small amount of student loan debt, then you should not become obsessive about your debt. Travis recommends putting 5% towards retirement accounts, $100 per month towards taxable investments, and then a reasonable amount towards your student loans. Remember that your savings rate and investment strategy are important to build while paying off your student loans.
- If you owe more than what you earn, then you should consider federal student loan forgiveness. There are two types of forgiveness to consider.
- The first type of forgiveness is Public Service Loan Forgiveness in which you work for a non-profit or government agency for 10 years while making student loan payments based on your income. At the end of ten years, the remaining balance is forgiven without any tax consequences.
- The second type of forgiveness is when you pay for 20 years based on your income, the remainder of the loan is forgiven but you'll have to pay income taxes on that forgiveness.
- If you want to schedule a consultation with Student Loan Planner, then use the ChooseFI link to receive 12 months of email support included.
Table Of Contents
- An Updated Look At Student Loan Forgiveness
- Pause On Federal Direct Student Loan Payments
- Student Loan Relief For Other Loan Types
- Advice For Recent Grads
- When To Consider Forgiveness
- How To Connect With Travis
An Updated Look At Student Loan Forgiveness
Jonathan: All right, everyone, we are following up with Travis from studentloanplanner.com.
Last week, we talked about the impact of Coronavirus and the economy, this economic downturn, this black swan event on millions and millions of jobs, and freelancers, and contractors, and how the PPP, the nuance of that conversation.
Today, what we're going to do is actually have Travis come on and talk about his specialty. He has cultivated a skill set in understanding the nuance of the student loan forgiveness program, and taking that to individual situations, and helping them figure out whether or not it's possible for them to save quite literally tens of thousands of dollars by just understanding how the rules would apply to their specific situation.
We recorded an episode two years ago. I shared that literally over the past two years. Hundreds of you have taken us up on that information, and gone over to his website, and gone through their process. And we just realized now, it's two years later, there's a stimulus package has been rolled out, there's a lot of stuff in the wind about how student loan interest is being handled with the federal government.
And it's a nuanced conversation outside of, “Hey, just go get a refinance.” It's a more nuanced conversation, so we thought we'd have Travis back on the show. With that, Travis, welcome back to ChooseFI.
Travis: Thanks. Yeah, we're about to cross $1 billion that we've made customized plans for.
Travis: So, we're really close to that.
Jonathan: Maybe you will be out once this episode goes live. That's really cool, man.
Brad: That's amazing.
Brad: Travis, talk us through … Obviously, there's lots going on in the economy and there's lots going on in the student loan world. Give us a 30,000-foot view of what's going on. Because people here, like Jonathan said, there's no interest on federal loans, there's this, there's that.
Pause On Federal Direct Student Loan Payments
Travis: I mean, the core thing that we figure out for people is should you pay back your student loans or should you not? That is a super important question and it's one that if you make that decision really efficiently, you can save tens of thousands of dollars. The more you owe, the more you can save.
I mean, the core thing that we figure out for people is should you pay back your student loans or should you not? That is a super important question and it's one that if you make that decision really efficiently, you can save tens of thousands of dollars. The more you owe, the more you can save.
And so, I want to just start off with one point that's going to save probably thousands of your listeners, maybe over $1,000 each just right away. So, this CARES Act got passed after March 13th, right? But March 13th was when President Trump had that press conference where he just threw everything at the wall and says, “We're going to do this. We're going to put student loans on pause for 60 days,” all these things, right? And then a little bit after that, a couple of weeks after, they passed the CARES Act, which is what codified a lot of this stuff with legislation.
So, what's going on with student loans, in particular, is any payments made between March 13th and September 30th count towards income-driven repayment and forgiveness programs like PSLF, like Pay As You Earn, like Revised Pay As You Earn, Income-Based Repayment.
You get credit even if those payments are $0 million a month. So, what happened is, is if you were enrolled in an income-driven plan as of March 13th, you might have had an auto-debit from your account happen, after that point, between early April when we're having this conversation, right?
So a lot of people had payments pulled out of their bank accounts between this March 13th and early April timeframe. What you can do is you can literally call your loan servicer, and ask for a refund, and they will process that refund, and give you that money back within two to six weeks.
Brad: Okay, payments were completely put on halt. Am I hearing you right? These are federal payments. Talk me through that, first off, just to make sure that I'm right about that. And then are these payments that people … When this is coming, this halt is coming to an end. Are they going to have to pay six months where the payments in September? Does this get put on the end of the loan? Talk me through that.
Travis: No, it doesn't. So this is for people who have federally-owned student loans, so that's any FFEL loans. These are loans from before 2010 that are owned by the Department of Education. There's a lot that are not owned by the Department of Education, so we'll talk about that maybe in a little later.
But most borrowers have direct federal student loans. These are the loans that get 0% interest and $0 million a month of required payments until September the 30th. You don't have to make excess payments or make a bunch of payments at once at the end of this. This is something that is applied automatically, so you don't have to apply for it.
The thing is, is on September 30th, you're going to have to resume your payment, which was probably based off of your income from before this COVID outbreak, right? So, the thing that we're trying to make people aware of is first off, if you're pursuing a forgiveness plan, it's a much better idea to pay zero and get six or seven months worth of forgiveness than to pay $500, $1,000, $2,000 a month, whatever you were paying and getting credit for forgiveness but not needing to pay that, right?
For example, we had somebody last week that she was having to pay a $4,000 a month payment. The first thing is, is they actually miscalculated her payment. Her payment was way too high relative to your income, so that was one problem. And then the second problem was she had made this payment after March 13th.
So I said, “Call your loan servicer, since you have a federal direct student loan, and just say that I heard that I could not have to make that payment. I can get that money back.” And so, that's what we recommended that she do, and she got that $4,000 refunded. That's a huge deal. I mean, that's a lot of people's … That's maybe two months worth of mortgage payments, right? That's a significant amount of money. Even if you're only going to get $300 back, that's a phone call that maybe takes you five, 10 minutes that gets you hundreds of dollars, and that's something that absolutely everybody should be doing.
The only maybe exception is, is if you just wanted to put extra money towards your student loans right now, then fine. But there's no reason why you would really want to go out of your way and do that in an economic downturn like this. We're advising people to hoard cash as much as you can.
If you do have plenty of cash, then maybe that money might be better used towards going to your retirement accounts, or VTSAX, or some sort of investment accounts while the markets are battered so badly, right? So I just wanted to start off. That's just one great tip that will help so many people if you have federal direct student loans right now.
Brad: Yeah, that's really helpful. Not everybody is extremely savvy with their finances. They might not know that they have those type of loans as opposed to another type of loan, right? They're just saying, “Oh, I have student loans.” Are people going to get letters in the mail? Are they going to get emails? How are they going to know they qualify for this, and how to move forward intelligently?
Student Loan Relief For Other Loan Types
Travis: You're going to be contacting your loan servicers, probably going to send you an email message or something along those lines to tell you that you qualify.
So most everyone that started borrowing after 2010 is going to qualify for this. The only people that don't qualify are people with private student loans. So if you refinanced or you took out private student loans when you were in school, you're not going to qualify for this. If you have loans from before 2010 that were under this, basically, this federally-guaranteed student loan program with private banks, you also don't qualify.
There are still ways to get relief though even for these people that have these older loan types. So just real quick one example. If you have loans before 2010, a lot of people have federal loans that don't realize that they're federal loans. I call it federal loans in disguise because in 2010, President Obama basically made the direct student loan program the national student loan program. Before that, there was different, a lot more different options.
So these people with loans from a longer period back, they can actually consolidate those loans and turn them into qualifying loans. And there's pros and cons of doing that. You might give up a year's worth of income-based credit towards forgiveness, that you might not want to do that even though it would give you 0% interest and zero monthly payments, right?
Just know that there's enormous ways for people to get relief right now. We've outlined a lot of these on our site, but most people are going to get significant relief without having to do anything.
My point is that you can take that extra step, and put in the extra level of research, and you can get even more relief than most people are going to get just by having done that homework.
My point is that you can take that extra step, and put in the extra level of research, and you can get even more relief than most people are going to get just by having done that homework.
Advice For Recent Grads
Jonathan: Right. So, I guess, there's … Just to even take a step back here, an individual went to school to get a degree, to get a job.
Regardless of their qualifications, some of the most qualified people in the world are being let go right now like as a new grad with no experience but a degree, you're in a bad situation in terms of getting scooped up at this exact moment, not to say it's impossible, but it's a pretty dark period of time in this short little window that we're talking about here.
So, someone's listening to this. They're a recent grad, they were excited to get their first job, or maybe they had the first job and they just got let go. Or maybe they're just trying to get a sense for what's my strategy here.
And we could probably figure out who of these avatars, who these individuals are, but there's a couple of scenarios. Like for instance, I had $168,000 in student loans that I knew, I knew I was going to pay that off, but I knew I was going to pay that off because I got a job that was an entry-level, six-figure salary, and the numbers worked out.
Right now, the job market is toast at the moment. Everybody's going to unemployment. People aren't coming off the lines at this exact moment. And so, the calculation might be a little bit different. So I wanted to say regardless of the time scenario, the exact horizon, what's the mentality for … Should I look into student loan forgiveness versus should I just grind this thing out and pay it off? What's the calculation there that's going on at a macro level?
Travis: So here's the different avatars that are out there, right?
You've got the 23-year old that just graduated college, who's listening to this and thinking, “Oh, my gosh, if I set myself up now for the principles of Financial Independence, my life is going to be amazing. I owe $30,000 of student loan debt. I want to get rid of this, but I want to know what order I should do everything in.”
For that kind of person, we generally tell people, “Start with doing 5% into retirement and then $100 a month into a non-retirement account.” So something like Vanguard with VTSAX, or ETFs, or Betterment, or Wealthfront, or something like that, right? And then focus on paying your student loan but then get year's worth of cash in the bank, right?
So that's that first avatar, that kind of young 20s, 30s, single person with not a lot of student loan debt. They do need to eventually pay it off. But a lot of people get obsessive, they get obsessed with their debt. Their debt just becomes they're just, I don't know, like one of that Netflix movie, like with the stalker guy, right, like life and death or something.
Jonathan: I don't know what you're going to see right now. No idea.
Travis: I know. I mean, I can't remember. It's something a lot of my wife's friends really like watching, I think. But it's like this guy becomes a stalker. He becomes obsessed with certain things. People get obsessed with her student loan debt and that's not a good way to do things. Investing and your savings rate are way more important, and people get so obsessed with their debt that they make a lot of mistakes with how they manage it.
So that's the first avatar is that person that has a small amount of debt that's like a car loan, that eventually needs to pay it off, and there's just things that you want to do before focusing on that debt.
You can, for example, if you graduate, you can sign up for Revised Pay As You Earn. Instead of having that full interest apply to you, you can have $0 a month payments for the first 12 months after graduation because they're basing your payment based off of what you earned in the previous year, right? And so that's just an example of how you could cut your interest in half for the first year. That's like that one avatar. In terms of … let me go higher level because I don't want to get too technical here. Basically, if you owe more than what you earn, you should consider forgiveness.
When To Consider Forgiveness
Travis: I'll say that again. If you owe more than what you earn on federal loans, you should consider forgiveness. And there's two kinds of forgiveness.
If you owe more than what you earn on federal loans, you should consider forgiveness. And there's two kinds of forgiveness.
One is the 10-year Public Service Loan Forgiveness where you're working at a not-for-profit or government employer full time. You make payments based on your income for 10 years. At the end of the 10 years, that loan balance, if there's any left is forgiven without any income taxes. It's just gone.
So that's the kind that people hear and think that that's … Well, I don't work for that kind of employer, right, or I don't owe enough or something, so that doesn't apply to me. But there's another kind of forgiveness that applies to literally everyone even if you are not working at all, even if you live abroad, if you live … if you're working part-time, for-profit, not-for-profit, whatever, and this is somebody that if you pay for 20 years based on your income, then at the end of those 20 years, that loan balance if there's any leftover is forgiven and you have to pay income taxes on that.
So, what does that work out to? So, a simple way to explain it is you can either have this debt be a tax or a debt. That's a profound question. It's something that people don't think about a lot, right?
So, Jonathan, I only ask you a question. So, you as a pharmacist, right, if somebody said, “We're going to completely cover pharmacy school for you, but in exchange, you have to pay 10% taxes for 20 years,” would you have agreed to that?
Jonathan: Oh, gosh, I need more time to think about it. That would be a paralysis by analysis. Brad, would I agree to that once I'd had more time to think about it?
Brad: I suspect you probably would have said no based on what you're going to earn, let's say, 10% times 20, not considering any kind of time value of money. I suspect you might reflexively say no.
Jonathan: I'm not giving you a piece.
So, now, what if you could save the maximum in your 401(k). So, now, you can save $19,500 and reduce your taxable income, and, now, that 10% is taking a smaller bite, right?
What if you get married and have kids? Well, now, you get a bigger deduction. As a single person, you get a $20,000 deduction before they take 10%, but if you're married and have kids, maybe you get a $40,000 deduction before they take that 10% number, right?
If you lived in California, which is a community property state, let's say, that your spouse made a lot less money than you. There's a loophole where you can file your taxes separately and pay on 50% of your household income on that 10% versus all of your household income. So you can pay drastically less than your student loans in that case.
So, also, too, you borrowed for tuition prices that you can't borrow at today. Is that fair?
Jonathan: The tuition price will be [crosstalk [00:13:48].
Brad: You're really on the hot seat here, Jonathan.
Jonathan: Yeah, no kidding. I was like, “Dude, this, for me, was like 2009 to 2013, right?
Travis: I know.
Jonathan: Yeah, probably.
Travis: Yeah. The thing is that somebody that's going to graduate school 2020 to 2024, they're probably going to borrow 50% more because they've jacked up the price of tuition a lot worse, right?
And so, now, if I tell you, you have this option to pay 10% of your income but you have to borrow $300,000 or $250,000 instead of $160,000, now, that trade is starting to look a little bit more enticing, right?
So my point is if you're really careful with very careful tax, and student loan planning, and you really know all the loopholes, then I've knocked off 20 grand for your 401(k), I've knocked off $7,000 for your HSA, maybe 40 grand for your family size deduction and you're paying 10% of that.
And so, then what you can do is you can also realize that your student loans don't compound on the interest. So, if somebody takes out like we were joking about travel rewards credit cards in an earlier episode, if they take that out and they don't pay their balance or they pay the minimum, then that is going to compound against them, right, and their interest is going to get really big.
Well, student loans, if you actually pay the minimum and your interest is growing, they actually grow to a simple rate of interest instead of a compounded rate of interest. So this is a huge misconception. Everybody assumes that student loan interest is the worst thing ever, and because it's simple interest instead of compounded interest, what happens is, is there's not really a big difference between simple and compound interest at the beginning of something.
So for the first couple of years, you can think about like in high school algebra, right, Y equals X and Y equals X squared, right? I hope I didn't lose half the audience there.
Jonathan: It's like I hope this question is going to Brad.
Travis: I know, yeah. But the interest, the difference between those two lines is like basically nil early on, right? But then long-term, it gets super huge. The difference is massive.
And so, people look at what happens in the beginning of their student loan repayment and they make all these mental mistakes because they're like, “Oh, my gosh, student loan interest is the worst.” But if I model out somebody's student loan's worst-case scenario growing at a simple rate of interest, they're basically … their balance is going to grow like inflation. It's not going to compound, and grow, and explode, and just get so bad, right?
People don't understand that so much so that I get emails all the time for people being like, “Hey, I saw your calculator, man, it's wrong,” and like, “This interest is going to destroy you. You're going to owe like $4 million or something if you don't pay this off.” It's like, “No, the interest stays the same every single year if you do it the right way,” right?
So that's like a huge opportunity because then … I told you the example of you can pay 10% of your income, right, but you have all these deductions. So when you back that out, you can get that down to maybe 6% or 7% of your income. Now, you're like, “Well, do you pay a 6% or 7% of your income, you borrowed $250k, or you're going to pay $2,500 a month.”
Well, shoot. I mean, that's like saying worst-case scenario, this works out, you'd still have a great situation. Best-case scenario, you're only having to worry about paying a little bit of extra interest, which is really not that big of a deal.
Brad: Right. Travis, quick question. So the simple versus compound interest, is it simple interest on any type of student loan? I know you mentioned there's the pre-2010 federal, the post-2010 federal, and the private, does that hold true for all three?
Travis: Well, for private, you're not allowed to pay a negatively amortizing number, right? For private, you have to pay something that's going to pay the loan off every month, right? There's a couple exceptions. But in general, if you refinance your loan and you're paying $1,000 a month, guess what, too bad, so sad, you're paying $1,000 a month.
Now, there are some lenders that because of the Coronavirus outbreak, I've said, that we'll waive payments for three months. But generally, you should expect to have to pay a large minimum amount when you refinance because the only path forward is paying it off in full, which is a great path for a lot of people. Like I said, if you're in the private sector and you make more money than what your debt is then, yeah, you should eventually refinance.
If you have federal loans, don't refinance right now because they're at 0%, but if you have private student loans, absolutely refinance if you can find a lower rate. All the time, people don't refinance and they should, if you can find a lower rate, that's a no-brainer.
So, the point is, is what happened with undergrads, what happens with undergrads is they cannot borrow more than about $57,500. That is like the physical maximum that you can leave undergrad with.
The only way you can leave undergrad with more than that is through a parent because the parent has to borrow with the Parent PLUS loan. So the Parent PLUS loan is unlimited. And so we have parents that owe $200,000, $300,000, $400,000 for their kids' education because they have an expected family contribution, and then they have to make that or meet that up. If their kid went to maybe a school with a smaller endowment, the school is just going to be like, “Hey, where's your money at?” And then you're having that difficult conversation that you didn't have it on the front end of do I ask my kid to drop out, or do I sign up for this $50,000 a year Parent PLUS loan?
And then, now, I have three kids that I want to send to private Catholic university in the Northeast or something at a high cost of living area, right? And then the person just signs up for that, for all of them because they're really dreading that conversation of telling their kids no.
And so there's relief for that person. That person can do a really complicated thing. I don't want to get into because it's not going to apply to most people, but you can get that loan to be paid as a percentage of their income, get most of that person's retirement income, and Social Security, and pay a lot less.
How To Connect With Travis
Jonathan: All right, so I want to take a step back for this and just help people figure out like assess where they are and whether or not it would be a benefit for them to talk with you. There's a lot of information coming through this. I'm sure someone just press rewind just to hear it a couple of times because there's a little bit of nuggets in there, but here's my take. I hate the idea of student loans.
First of all, before we can get into this, what would it look like to do college for less, have very minimum student loans, something that you can crush and pay off quickly.
The counterpoint to that is you are where you are, right? Best time to plant a tree 10, 20 years ago. Second best time, today, we are where we are. We're going to get started.
If you have significant student loan debt, I think there is a calculation in your mind about should I just crush it and pay this thing off gazelle intense, keep my face down, just get it done. I'm an emotional person, so I'm the first to say it. But at the same time on this show, we also just say it's just math.
Sometimes you're a little bit too emotional, you're a little bit too close to it, and you can't see the bigger picture. There is a point at which you should take a look at all the programs that are out there and come up with a customized plan for yourself. One that is done through the lens of my goal is to reach Financial Independence. The student loan it's a obstacle for me getting there, but what is the best way to approach this with the nuance of my own situation.
When we're talking about financial planning, we say get someone, try to find someone that is a fee-only planner, that will charge you for the services rendered, that'll give you a customized plan for the services rendered if you need to do that.
But I would say with this, this is, honestly, this is way more complicated than financial planning in many regards because the programs are so niche and there's … You don't hear about them as much. There's very few that have taken the time to break it down and you have. You've done it through the lens of someone that is pursuing Financial Independence for themselves and someone that gets this, has this mindset.
So, here, I have a couple questions for you. The first one is you said you're approaching nearly $1 billion of people that have taken you up on your consulting services and executed a plan. I guess, what I'm curious about is that's $1 billion, that's an aggregate. What is the average amount that you find yourself saving an individual that comes in and gets a consult?
Travis: All right, so I just looked it up, it's $46,434.
Jonathan: Wow. So on average, this is clearly isn't every person, but on average, you save the people that get a consult with you $46,000.
Travis: Over the life of their loans, so that's not immediate, right? That's not day-one savings, but over the life of their loans, yes.
Jonathan: Awesome. I guess, I would say, is there anybody that comes and gets a consult that you can't help? Where do you find yourself really able to make a difference and who are the individuals that get the consult, and at the end of it, you're like, “You're already on the best path. You're already doing it.”
Travis: We really tried to screen that out ahead of time. We don't want anybody paying us for a consult that shouldn't have because then that makes our business not look as good, right? I mean, and it just doesn't help the person to pay money to get nothing.
Now, the thing is, is if somebody passes through those initial filters and we don't necessarily find anything better that they could be doing, we're going to frame their student loans and the context of Financial Independence. That's like a big upgrade we've made to our consults actually since the last time I was on the show is I figured out a way to break down all of the different paths to Financial Independence with student loans and figure out what is the fastest way to get there.
And so for some people, it's going to be doing your approach, just hating your loans, paying as much as you can, getting rid of it really fast. But the reason that works is because you're maintaining a high savings rate, right?
And so, the thing is, is if that money had … If it was more efficient for that money to have gone into investments, or retirement, or something like that, then if you treat your student loans like a tax, that might have gotten you to Financial Independence two to five years faster. That's a big difference if you're in a situation that's not ideal, that you're looking to make a change or doing something like that.
I mean, really, Financial Independence, what is it about? It's about living your best life, right? It's about having the freedom to do anything that you want. A lot of times, student loans are, yeah, they're like a prison. You can't make any positive life changes because you just feel so held back. That's just not the case at all. You know the loopholes is you can do so much.
So, I think that the reality is what we give people as peace of mind and the fastest, most efficient path to Financial Independence regardless of their student loan debt and the people that we can't help.
I'll give you just a couple of quick examples. People that are in default on their loans, that really need to talk to an attorney versus talk to us, we'll try to just send them to somebody that can help them. Somebody who is private loans and the only thing they can do is just refinance these private loans. We'll try to tell them that, not have them book with us. That's the last we want is somebody booking with us that can't save a lot of money, but 95% of the time, we're saving people the equivalent of, I guess, an entry-level Mercedes on their student loans for a few hundred bucks.
Jonathan: That Mercedes is a giant paperweight in the driveway right now. I hope someone put that money towards FI instead, so. All right, Travis, I tell you what, people listen to this and they're like, “You know what, this has been a big blind spot. I probably should do a consult and see if there's something that I'm missing here.” What should someone do next?
Travis: Go to studentloanplanner.com/choosefi, and if you book specifically through that link, we give people six months of questions like the email included in the consult because there are action steps that sometimes that need to be implemented.
Instead of six months, we're going to give ChooseFI listeners a year of email support questions specifically if you book through that link.
Jonathan: Awesome, studentloanplanner.com/choosefi. Travis, thank you so much for joining us on the show today.
Travis: Thank you. Just one last point, if you owe more than what you earn, you probably need to get this reviewed, okay? I mean, you might maybe say, “Don't do it. I'm just going to read my own stuff.” If you owe a $20,000, $30,000, that's fine. But if you owe more than what you earn, please get this reviewed or do the research on your own.
Jonathan: All right, my friends, take action on this, this week.
Let's look at every aspect of our financial life and let's not just put our head in the sand and hope it all works out. We do have control. We do have agency, and there's a way to improve each and every day. Stay with us as we continue to go down the road less traveled.