- BI launched our Master your Money series in January with an overview of the financial headwinds that millennials endure by Hillary Hoffower and a guide to options for tackling student-loan debt by Tanza Loudenback.
- The Master your Money team has convened a group we call the Money Council, which comprises experts and leaders from across the financial spectrum who understand the difficulties millennials face.
- This council is led by Tanza Loudenback, personal finance correspondent at Business Insider and a candidate for certification as a financial planner.
- For our first forum, select Money Council members offered their advice and insights on the topic of managing student-loan debt — a burden that’s left many millennials reeling with stress.
- Visit Business Insider’s homepage for more stories.
- Aditi Shekar, founder and CEO, Zeta
- Alison Hutchinson, senior vice president, Brown Brothers Harriman
- Carmen Perez, blogger/influencer, Make Real Cents
- Cynthia Loh, vice president of digital advice, Charles Schwab
- Kathy Cummings, senior vice president of homeownership solutions and strategic relationships, Bank of America
- Kathy Pickering, chief tax officer, H&R Block
- Kristi Rodriguez, vice president of thought leadership, Nationwide Financial
Following is an edited transcript of their conversation.
Tanza Loudenback: Our recent BI and Business Insider Intelligence “Master Your Money: Learn and Plan” survey found that more than half of respondents who are still paying student loans were extremely or very stressed about making their payments.
What would you tell someone who feels completely overwhelmed by their student loans?
Carmen Perez, Make Real Cents: When it comes to being overwhelmed — because I’ve definitely been in that position — I had a private student loan of $30,000. I’ve been in every student’s shoes, stressing about how to tackle your student-loan debt once you get out of school.
The biggest advice is to get organized around your student loans. Write them all down, and see what you have to tackle.
It always seems like a bigger task at first than it really is. And once you get organized, you can kind of see the big picture a lot clearer, so you know who your loans are with, are they subsidized, are they unsubsidized, are they private loans, are they federal loans, and getting an understanding around that. And then just going and looking at your options. What can you afford? Are there any programs that, through your student-loan lender, who can maybe take that route of going as far as paying back your student loans in a manageable way that matches up with your current income.
“It’s not so much having the debt that is the real stressor alone; it’s actually the hiding of that debt.”
Loudenback: Many millennials are finding themselves in a relationship with someone who also has a significant student-loan debt. What’s your advice for helping couples tackle student-loan debt together?
Aditi Shekar, Zeta: What we’ve seen is that debt — especially student-loan and credit-card debt — can be hidden from each other because the person with the debt might be very embarrassed.
So, fascinatingly, as couples hide some of these details from each other, we end up finding that not disclosing that information can cause a lot of tension or stress in a relationship.
One of the biggest things that we see come up is when couples are first getting together and figuring out whether they want to spend their lives together, one of the questions that come up is, “What does each of us do, or either of us do, with debts that we’re bringing into the relationship?”
Irrespective of whether you decide to take on your partner’s debt or not, that debt is going to affect your relationship. Because it will either limit your partner’s ability to do certain things or it’ll limit your ability as a team to be able to go out and do future things together.
So what I recommend to couples is to tackle debt as a team, even if you’re not taking over that person’s debt, or paying, or contributing to the payment of that debt. The best part about being in a relationship is you have a partner to help you navigate all that.
And what we find is that, in a relationship, there’s typically one person who’s really smart — or a little bit smarter about money — and so that person could be your partner and actually help you end up doing that work, so you’re not alone.
Loudenback: According to our survey, 32% of millennials who had taken out student loans said that they delayed buying a home because of those debts. What are the options for someone who wants to buy a home but is dealing with big monthly student loan payments?
Kathy Cummings, Bank of America: Part of the issue is the preconceived notion that you have to have perfect credit, a 20% down payment, and no student-loan debt. And people are self-selecting out of homeownership to their own detriment.
So the No. 1 thing I advise people to do is make sure that you get the facts. There are HUD-approved housing-counseling agencies across the country who can help you do this. A lending officer would be happy to help you with that as well.
It’s really mapping out your financial plan. What are your current obligations, what are your financial aspirations, and where does homeownership fit within that picture?
So that’s the first thing — we know how to get started. Now, also bear in mind, even if you took on student-loan debt, if you have your degree, you have the earning potential to more than likely be able to absorb the student-loan debt in addition to the mortgage payment.
There are programs across the country that are offered by local nonprofits and housing-finance agencies that can help you with that down payment — and closing costs in many cases.
Make sure you get all the information and see what resources are available to you before you decide that homeownership isn’t right for you.
A lot of parents of millennials have a lot of feelings of guilt for not being able to provide this type of education for their children loan-free.
Loudenback: What about parents considering taking on parent loans, or cosigning on their children’s loans? What effect can that have on their financial future?
Kristi Rodriguez, Nationwide Financial: There was a report The Wall Street Journal published last year about how Americans over the age of 60 have now amassed over $86 billion — that’s “billion” with a “B” — in student-loan debt. As you can imagine, a lot of that is taking out loans for their children. The second-biggest reason was going back to school when the economy took a downturn.
It’s just a reminder that student-loan debt is an American problem across generations and across families, and one that we can probably try to combat a couple of different ways. I think it won’t be too long before millennials are caring for those parents.
Millennials are going to be in a unique position to educate their parents on the cost of student-loan debt and provide tax guidance to them.
Alison Hutchinson, Brown Brothers Harriman: Millennials taking out student loans to pay for their own education may want to talk to their parents about money and about student loans. If they have the conversation, we usually see it going one of two ways.
One, there is a little bit of guilt about maybe not being able to pay for as much of the child’s education as they were hoping.
But on the flip side, sometimes parents say, “Look, this was a conscious decision that we made.” There’s research that shows that children who have an investment in their own education tend to do a little bit better in school. So the idea of taking out a loan, beginning to build credit, learn the importance of paying bills on time, prioritizing paying back student loans over maybe other goals.
I think a lot of great conversations can be had between parents and children around student loans, students-loan debt, paying back the loans, why the loan exists in the first place that may not have been had at all if they were fortunate enough to be able to just pay for college in cash.
Cummings, Bank of America: In the mortgage industry, we’ve seen a lot of parents go into severe debt trying to pay for their children’s education.
They’re taking equity out of their homes that was earmarked for their retirement, pushing retirement ages later in life — and in some cases making the children responsible financially for aging parents because their parents no longer had that safety net they were expecting to have.
Loudenback: What are tax implications to consider during borrowing and repayment?
Kathy Pickering, Chief Tax Officer, H&R Block: There are a couple of tax credits that can be useful. This is often more applicable for the parents if they’re paying for the education of the student, but a lot of people are self-funding their own education, so it’s important to understand the credits rules and who gets to claim them. Both credits have income limitations [the following has been edited from the original discussion for clarity and accuracy].
- For example, the American Opportunity Credit is a really rich credit, and there are a lot of requirements around it so you want to get it right. It’s a credit of up to @2,500 per student per year for the cost of the first four years of higher education tuition. Up to $1,000 of the credit is refundable, meaning you’d get the credit even if it’s more than the taxes you owe.
- There’s another credit called the Lifetime Learning Credit that can be utilized after that. It’s a credit of up to $2,000 per tax return, also for the cost of higher education. Students who are not attending full-time or who have already completed their first four years may be able to claim this credit.
- The tuition and fees deduction is a deduction of up to $4,000 for the cost of higher education. Deductions reduce taxable income. This deduction had expired after December 31st, 2017. But because of our rapidly changing tax code, it just got extended retroactively to 2018 through 2020. So if your income is too high to take advantage of the credits, you may be able to take the tuition and fees deduction.
- There’s also the student loan interest deduction, so for those that are now paying their student loans, they’re able to deduct up to $2,500 of interest paid. This is an “above the line” deduction which means you don’t have to itemize deductions to claim it.
- There is the opportunity for people to take IRA distributions, and avoid that 10% early withdrawal penalty, if the money is being used for educational expenses. So parents who maybe haven’t yet reached retirement age could consider taking money out of their IRAs without incurring that penalty.
- Of course, there’s a lot more to it than that. Nothing is ever that simple. That money that you take out of a traditional IRA is still considered taxable. But, you can at least avoid the penalty.
- Different rules apply to Roth IRA distributions used for education expenses. Depending on when you opened the Roth and other factors the money used for education may be completely or partly non-taxable and penalty-free.
- And then, lastly, one of the things that are really important for people to understand is student loan forgiveness.
- People don’t tend to understand that when a loan is forgiven, that the amount that’s forgiven is considered taxable income, and we saw this also with home foreclosures. It’s as if someone gave you money to pay off the loan and the money is potentially taxable.
- Under tax reform (TCJA) when a student loan is discharged due to disability or death, the forgiven loan is not taxable. Previously that was a little bit of an issue.
- Also, when the Department of Education forgives certain loans under the “Closed School” or “Defense to Repayment” programs, or when the loan is forgiven because of a legal settlement, the canceled debt is not taxable.
Loudenback: What are strategies for repayment of student loans?
Rodriquez: First is, understand your loan. So, making sure they take time to really understand, even before you take out the loan, how is it structured, what are the repayment guidelines. Each lender has different rules.
Then determine that payment amount. So, when you look at those guidelines, kind of make a decision around how are you going to pay this down. How much will go toward the principal? How much is going to be toward interest?
The next step is to really prioritize those higher interest rates. You may not want to pay down what you perceive is the largest balance. You really want to look at that interest rate.
And that’s a good opportunity to again reinforce the education around kind of the value spend of each loan in dollar amount.
Some millennials are taking advantage of the student-loan repayment grace period. So we’re saying, “Hey, if you start early paying down this debt, you may decrease the amount of interest that you owe.” If you can, pay that down as soon as you start working.
Loudenback: What about other strategies, like consolidation and refinancing? Are there other options if you are having trouble paying?
Perez: Consolidation is you putting all of your loans together, with federal loans or private loans, and there are nuances between the two.
The benefits around consolidation obviously are just it’s one payment; they might be a little bit lower when making your monthly payment. So, fewer things to keep track of.
An important thing to note is that you can really only do it one time with federal loans. In private consolidation, there are the nuances around that but a similar thought process that boils down to one payment — typically you’re looking to get a lower payment because of that, and that means the term might be stretched out.
As far as refinancing goes, you might get a shorter term and a better interest rate from refinancing your loans, but there are also some nuances around that.
So, those are just things I think that most millennials need to research, and we can have a whole conversation — we could spend hours and that — what’s going to be the best route.
Cynthia Loh, Charles Schwab: A simple few-step process to think about is how can you automate your payments so you don’t forget about them, so you don’t fall back. And I think in some situations, when you automate payments, you can actually qualify for reduced interest rates.
Also, so many employers are now jumping in and adding student-loan repayment as one of their benefits. It’s really important to figure out if you’re working for one of them.
Perez: Before you make the move on whether or not you wanted to consolidate or refinance, again, get organized with your student loans and figure out — do I really want to stretch this out?
Some people say, “Oh, you know, it’s a manageable interest rate.”
But really, once you get the affordable payment, I think a lot of people get locked into that and end up sticking with their student loans for 10, 20, 30 years instead of just trying to tackle them as soon as possible.
Pickering: For those struggling with repayment there’s a program to the Department of Education called Income-Driven Repayment Plan, and there are a couple of different variations on a theme there.
The gist is your monthly payment is based on what your current income is, and that might be something that’s worthwhile for somebody who’s really struggling.
Loudenback: Our survey found that 30% of those who had taken out student loans delayed or avoided saving for retirement because of that debt, and 22% had avoided or delayed investing altogether.
How do you prioritize between paying off student-loan debt as quickly as possible and saving for retirement? Where can millennials get advice?
Rodriquez: It’s not all or nothing. I think we heard it when we were talking through homeownership — the same would be true for retirement.
You can do both, and it’s probably to your advantage to do both.
Rodriquez gives an example of a millennial, eager to pay off student loans, paying $110 more than the minimum required.
But say you don’t take that extra $110, and you put that toward retirement savings, over a 10 year period where they’re amassing an investment of return of 6% — that would give them more value for their dollar.
We’re really encouraging individuals to work with a financial adviser. This is a good opportunity as you think about your full financial picture, to create a customized financial plan that would include their structured debts and savings for the future.
Loh: One thing that we talk a lot about is the prioritization of saving and investing. If your employer has a match for your 401(k), that’s something you should absolutely take advantage of so you don’t leave that money on the table.
On the second point of getting a financial adviser or leveraging a financial plan online, many companies offer tools. They’ve gotten much better in the last decade, where we’re offering low-fee ways to access digital planning tools as well as financial advisers.
And they’re much more accessible than they were previously. You no longer have to have that million-dollar minimum threshold to speak to a financial adviser. It’s just much more accessible than it has been in the past.
Cummings: I couldn’t agree with that more. I think a lot of employers have realized the benefit of having financially savvy employees, so many of them either, A, offer them for free, or, B, can partner you with community partners who could help you in that space as well.
And if your company doesn’t have that, that’s one of the things that you can also explore is how do you take the initiative to partner with a community partner that focuses on financial literacy to help build that business acumen, that financial acumen within your company.
Loudenback: To finish our discussion, what advice would you give those starting to consider student loans, or who are now struggling with them?
Rodriquez: I have a 17-year-old now who’s a graduating senior, and we’re having this dialogue, and what I’ve taken away, even more so, is prioritizing this conversation in advance.
I look at this conversation much like the health conversation, and when you’re thinking about a loved one, there’s no cost that’s ever too tremendous.
But when it comes to this, and understanding the residual impact, it really is about having a plan, and prioritizing. This begins not only what you have financially but your value system and having that dialogue with younger people about how they want to live, not just in the immediate future but ongoing.
Pickering: I lead a department of tax experts, most of whom are tax attorneys, and so I have so many people in my team just getting started.
They went to school and they got law degrees because they thought that having a law degree, being an attorney, was going to start out on day one at a really high-paying job.
I’m really grateful that they’ve gotten their credentials, and they’re all awesome. However, I know, based on our conversations, that many of them are struggling balancing home payments and raising children. It puts an incredible amount of stress on them personally, on their relationships, and it’s just an awful lot to have to deal with at such a critical stage in one’s early career.
And so a little bit of reality-orientation, of having an understanding of what’s the market value for your degree — and what does the hiring potential look like before you jump into a long-term program that you’re financing? — I think can really help direct people appropriately.
Hutchinson: To quote my grandmother, “Facts are stubborn things.” And so I think that the mistake that many people make is embarrassment, shame, bury their head in the sand.
The best thing that anyone with any kind of debt can do is build a personal balance sheet. It doesn’t have to be fancy. It can just be pencil to paper on a legal pad with your debts on one side, and your assets on another.
And human capital is an asset too. So, if you have a salary, if you have money coming in, certainly list that. But those facts are stubborn things, and you need to know exactly what you’re facing, what your payments are, and have an idea of how you’re going to approach it.
And a lot of the times what we hear is that when it’s down on paper and you have concrete examples of the actual numbers, it’s not as scary as you thought.
The mistake that many people make is embarrassment, shame, bury their head in the sand.
Loh: I think the point about thinking about your income and relation to your student debt is really important.
I’ve heard several rules of thumb, but it’s thinking about planning your career, in social work, for example, would justify a different type of student-loan balance than a doctor might.
So, having your eyes wide open about what your earning potential is, and what student debt that you are willing to take on in relation to that, is just good math to do in advance.
Perez: For millennials dealing with debt today, my biggest advice — and it’s not glamorous by any means, and a lot of people are very averse to it — but get a budget.
A lot of people run around like they’re chickens with their heads cut off because they don’t understand where their money is going, and how much money they have coming in. And once you have a plan in place, I think it empowers anyone to be able to tackle whatever they want to do.
Shekar: Most of the folks we work with hate thinking about their money, hate talking about it, hate getting into the details of it.
One of the biggest lessons for me as an entrepreneur building a company around finance has been that people are usually really afraid and get a lot of anxiety when talking about money.
So I think one of the things that I would really encourage folks to do is just find the person who can help you. And that person could be your partner, that person could be an adviser, that person, quite honestly, could be a friend who’s just really smart about how to manage student debt.
But find that person, put your trust in them, disclose the information to them, and then sit down and figure it out together.