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Student debt: How to plan for loan payments to resume

Student loan payments are set to resume in the fall. That may be months away, but it's not too early to start planning for them. Wealthstream Advisors Financial Advisor Katharine George tells Yahoo Finance Live how Americans can start planning now for those loan payments to restart.

Video Transcript

- Katharine, I do first want to start off with talking about student debt, sort of planning for it regardless of what the supreme court does.

KATHARINE GEORGE: Yeah, it's a big change. It's been three years since we've all had these student loan payments. And even if this change that the supreme court is weighing in on this week. Even if that goes through, many americans still have student loans above and beyond that amount that's going to be forgiven. So how do we get back on track?

There are plenty of apps to figure out what your expenses are so you can really start to know how we can cut back to start to plan for those student loan payments that are going to come back in. That's really the first step. Understanding where you're spending will help you guide kind of that that next step.

The second is if you can't cut your expenses, then you really should find a way to add some additional income on the side. Side jobs or some entrepreneur options just to get your your income at a place where you can start to pay those loans. And really it's starting now. Coming up with a plan so that you're ready when payments resume, that's going to be the most important thing so that there's no chaos when that time really comes.

- And as we mentioned, I mean, this does only apply to federal loans. If you have private student debt, you're still on the hook for it regardless of what happens with the supreme court today. But I want to talk about this idea of some people are wondering about supplementing their income with a side gig versus trying to get into investing. How should they approach it if perhaps, they just don't have the bandwidth to take on another job?

KATHARINE GEORGE: So it's really about looking at what you can earn versus what you're paying in interest. And if we just focus on the debt, the first place to look when we have private, federal, or even credit card debt is to see what is the highest interest rate that I'm paying on this debt? And that is what you should target first.

So really paying down the credit cards first, those interest rates are really high. And then the private typically has higher interest rates, and federal is last. Really federal student loans also have a bit more leniency in terms of paying back that debt. So that really trumps there.

But in terms of investments, investments are long-term. So you don't want to be investing for the next year and knowing that you're going to have to make these payments. But if you have a big extra cushion that you can dedicate some of that on the side to long-term investments, we would hope that a stock portfolio would outperform the interest rate that we're seeing on those federal student loans.

So that that is a good option in terms of a way to get some extra income, and making your money work for you. The second, I would say, is that right now, cash is a really great option to earn something. High yield savings accounts offer really attractive rates right now just to sit-in cash. They're also treasury bills, treasury money market funds. Any other type of money market fund is a really great option to earn a little bit on cash and help you supplement those payments.

- And for those of us who either have kids or are planning to have kids, and you don't want your kids saddled with student debt, what could we be doing at this point to better prepare sort of lay the groundwork so that our kids aren't saddled with $1,000,000,000,000 worth of educational debt?

KATHARINE GEORGE: So it's a tough question because everyone's goals are very different. And when I speak with sometimes a client or a prospect, maybe they have their own debt, but they want to help support their kids. So what's a priority? And sometimes, I have to tell my clients that you're the priority. You really need to focus on your debt and your savings before you could focus on your kids.

But for those of us that have a little bit of extra leeway and maybe our cash flows, 529 plans are a really great place to start. In some states, you get a tax deduction. So there's some benefits there. But it all grows tax free as long as you use it for education expenses. There are also some new rules that allow you to do some planning in the future, even if you don't use it for education expenses. But that could be a whole nother topic. But 529 is a really great option.

- And when you're trying to get to what your retirement number is, when you factor in what you're going to be paying, what's the best way to really calculate if you're actually doing doing as well as you should be doing in terms of your savings, goals, and managing your debt?

KATHARINE GEORGE: So there are all sorts of rules of thumb out there. And I don't like any of them. It's really hard because everyone's personal situation is very different. What your risk profile is, what your stock to bond mix is, what types of expenses you have. Those of us that have health care expenses. Those grow at a much higher rate than are just general living expenses.

So really working with a professional who has the knowledge base as to how to grow your assets, how to think about inflation, and how you're going to supplement your lifestyle even from a tax standpoint. You know, money in a retirement account is very different than money in a taxable account from from taxes.

So working with a professional that is going to look at your trajectory, see how much you need to spend, and see how long your assets will last you. Really as we live longer and longer, longevity is a really big concern. So making sure that you can have those liquid assets throughout your lifetime and working with a professional on that.

- And what would you say is the biggest mistake people make when they're planning for retirement, and perhaps, you know, maybe they've left it too late? Or some people are like, look, I want to start early. What do you think is the biggest mistake you tend to see people make?

KATHARINE GEORGE: So every client that I have which is that they started earlier. Compounding. So that means starting very early and having your money grow, that is the most powerful tool. So starting really young. Even if you're putting $20 a paycheck into some sort of investment or something like a Roth IRA can be really powerful over that 30 to 40-year period once you hit your retirement.

But really the best time to plan is 5 to 10 years before you retire. That allows for flexibility. If if a professional comes to you and says, you actually need to save a lot more than you're saving, at least you have the income and the knowledge and information to make those changes. It's people that hit retirement or are already in retirement that have to make really tough decisions like downsizing their home or reducing expenses that maybe they wish that they had started a bit earlier to plan for.

So really thinking about having a plan before you hit that retirement age, or even a transition process of working less or working later.

- Certainly makes sense. No one wants to have to make difficult financial decisions when they're already in panic mode. We do appreciate you joining us this morning. Thank you well through advisors. Financial advisor, Katherine George. Thank you so much.