Student Loan Repayment Series – Part III – Married Soldier with Student Loans

June 28, 2013

Service members with student loans owe an average of $25,600. And with many lower ranked service members earning just $17,000-$26,000 this burden may easily become unmanageable. Assuming 6.8% interest on a 10 year standard repayment plan, the monthly payment amount would be $295. For this repayment strategy discussion, we’ll look at a married E-3 with three years of service, one small child, a stay-at-home spouse and average student loans.

With monthly take home pay of a little less than $1,600, we’ve assumed rent and utilities will be covered by basic allowance for housing (BAH). Additional expenses include cable and cell phone bills for soldier and spouse, a modest car loan, auto and renters insurance, roughly $63 in weekly gas/vehicle costs, child expenses of $100 monthly for diapers, baby play classes and clothing, less than $100 per week for groceries and home supplies, credit card payments of $100 each month and entertainment, clothing and other miscellaneous expenses of $37.50 per week. This leaves disposable income of just $62 per month!

No way is nearly $300 in monthly student loan payments going to be affordable unless the family goes without necessities. Military service is not your typical 9-5 job. There can be long hours and difficult job assignments that can make life stressful. With pay enough to live on – but barely – student loan payments and the financial worries that come with them will only make this situation worse.

So what’s a soldier to do about their student loan debt? Here’s a few strategies to consider:

#1 Servicemembers Civil Relief Act (SCRA) Protection

The SCRA allows military members to have their interest rates lowered to 6% on all student loans taken out prior to active duty military service. For purposes of this discussion, we’ll assume this is the case. To get this relief, you must write to your loan servicer and request the rate relief. The JAG office can help you write the request to ensure it is in compliance. You may have to fight for this – lenders have been known to be uncooperative, but it’s worth pursuing – particularly if your loans are at interest rates higher than 6.8%. This covers both federal and private student loans.

#2 Income Based Repayment

Based on the government’s Income Based Repayment calculator, earning military pay at this level with a non-working spouse and one dependent child, you would qualify for IBR with $0 payment per month! If your loans are subsidized loans, the government will cover the interest for the first three years in IBR so there’s no messy interest capitalization and the principal from the start of IBR until the end of three years should be the same. If you don’t have subsidized loans, interest will begin capitalizing each month that a payment is not made to cover it. There is a scenario that this doesn’t matter and others where it does – see below!

#3 Public Service Loan Forgiveness (PSLF)

In this scenario, our soldier has three years of service already and we’re assuming he’s managed to defer, get forbearance or make his student loan payments somehow so he’s not in delinquency. This is important. Public service loan forgiveness allows soldiers to have their federal student loan balances forgiven after 10 years of service and 120 months of “qualifying payments.” If you are under IBR and have been assigned a $0 per month payment amount, this still counts as a qualifying payment. Do not take extended repayments – these do not count for PSLF.

If you’re planning on making a career of the military, the 10 year threshold should be a no brainer as long as you continue to make qualifying payments each month on your loan balance. Payments made prior to joining the service will not count. At the end of 10 years, no matter how large your balance has grown, you can have your entire balance forgiven – and the best part it, it’s tax free! That’s a huge benefit.

#4 IBR with Debt Avalanche

If you’re not planning on sticking around for a decade of service to take advantage of PSLF, then still take advantage of #1 and #2 above to lower your interest rate and payment amount. But here is where the interest capitalization becomes important – as mentioned in #2 above. The interest on a 10 year loan of this amount is $128 per month. Even if your IBR payments are set at $0, the interest will accrue from the get-go if your loans are unsubsidized and after year three if they are subsidized.

The target would be to pay at least $128 per month, but more whenever possible to defeat the student loan if you’ve decided PSLF is not the path for you. Paying only $128 per month will not lower the balance, but will keep your loan balance from increasing. With this income scenario, there is not a lot of room to get ahead of the interest, but we have some solutions. In our debt plan, there’s $62 per month in disposable income. That means we need to find $66 in the budget to tackle the interest. Perhaps the spouse could babysit a couple of weekends a month for pay or find a way to cut $17 per week from the family budget. Doing that, you keep the balance static. But wait, there’s more!

At this income level for a family of three, you should have an income tax refund of at least $2,000 (and likely more) each year. If you invest this $2,000 payment each year and keep up the $128 interest payments, you’ll be loan free in a little more than 9 years! It may be tempting to want to use your tax refund to vacation or indulge, but by investing in your financial future, you’ll be far better off in the long run.

If you look at the debt avalanche scenario above, you’ll see that if you apply your tax refunds to your principal balance each year and pay the loans off in nine years, there are significant savings compared to sticking to IBR and letting the balance build up until you get the 25 year forgiveness. There is a significant income tax impact to letting the forgiven balance soar. If you opt not to make the $128 interest covering payments each month, the tax impact will be even more. You’ll end up saving $9,000 in tax and interest savings!

What to do if your lenders are not treating you fairly?

Consumer Financial Protection Bureau (CFPB) only recently began accepting complaints about student loans a little more than a year ago. Since then, servicemembers’ issues with student loans have accounted for 3%-7% of all complaints – many of these SCRA compliance issues. If your lenders are not complying with SCRA guidelines or are not treating you fairly or legally, notify the CFPB to make a complaint.

Be sure to check out our first two installments in this repayment series as well as other related blogs on military, student loans and repayment strategies:

Student Loan Repayment Series – Part I – Married with Kids and Student Loans

Student Loan Repayment Series – Part II – Single with High Debt and Low Income

On Memorial Day We Ask – Are Lenders Waging War on Our Soldiers?

Ten Hut! Tuition Assistance for Active Duty Soldiers Reinstated

Taking Aim at Tuition: Act Proposes In-State Rates for Soldiers