When I entered the financial services industry 15 years ago, my goal was to assist everyone. However, I quickly realized that numerous small, overlooked industry practices were leading people to financial missteps, cumulatively costing them $100,000s if not millions over their lifetimes.
I set out to solve these issues so people can be empowered to confidently manage their finances. We have done just that at FitBUX with our new financial planning technology that is cost effective and personalized to each person
Today, I’m going to share with you one of the many financial missteps that we’ve had to help our Members fix that would’ve cost them $100,000s over time. Specifically, errors when using an income-drive repayment (IDR) student loan repayment plan. Then I’m going to share with you how to make sure you don’t let these missteps cost you.
The Pitfalls of IDR Plans
These are were the most costly mistakes come in. First off, payments are often times not calculated correctly. Second, people do not save for the tax bomb correctly when it comes to their financial plan.
These are the two mistakes I’ll focus on below.
Wrong Monthly Payments
Monthly payments are miscalculated for two reasons. Either you the borrow make a mistake or the loan servicer makes a mistake. A majority of the time, it is the loan servicers mistake. However, we’ll start off by identifying what borrowers do wrong so you can avoid making any errors.
The Borrower’s Mistakes
The first mistake borrower’s make is exclusive to married couples. Monthly payments on income driven repayment plans when married are based on your incomes, how you file taxes, and your spouses’ Federal student loan debt. When its the borrowers “fault” for miscalculations, its because of the spouses’ student loan debt. On the IDR application, if you are married you must include your spouses’ loan information. Often times, borrowers forget to put this in causing there payments to be too high.
On average, we see this mistake increase monthly payment by $500 PER SPOUSE or $1,000 per month per household. That is $12,000 in one year if you don’t catch it…
The Second Borrower’s Mistake
Which leads to the second mistake borrowers make. They don’t know what their payment should be because they rely on the government’s calculators. These calculators sometimes have bugs in them but more often than not borrowers don’t put the right information in. Then they call the loan servicer and the call center customer service reps often times don’t have a clue what they are doing.
Thus, borrowers tend to just accept the payment thinking it must be right. This is why at FitBUX, we’ve included technology onto our financial platform that tracks your entire financial profile. Therefore, we know what your payment should be and for those tracking their financial plan, we notify you if its wrong.
However, sometimes loan servicers can’t link to FitBUX such as NelNet because their technology is always breaking. FitBUX still helps you because you can message our financial experts or call them and we can verify you have the right or wrong payment.
For example, one of our FitBUX members had a significant change in their personal situation. He used FitBUX’s technology so he knew what his payment should be. However, Mohela was telling him it was $600 higher than what is actually should be. HE CALLED MOHELA THREE TIMES AND WAS TOLD IT WAS CORRECT.
He scheduled a zoom meeting with me and found out Mohela was using a tax form from an authorization two years ago that they shouldn’t have been using. I helped him fix it and he submitted the new application. Guess what? His payment dropped $600 and he’s saving $7,200 this year. Invested over 30 years, that is $55,000! In addition, that is just a mistake this year. If they did that for all 20 years that he is on this plan, that would be over a half million dollars out of his pocket!
Loan Servicer Mistakes
As I mentioned earlier, most of the monthly payment mistakes are just plan miscalculations made by the loan servicers.
For example, we had a FitBUX member this morning who’s payment should’ve been approximately $400 a month. Instead, the loan servicer was telling her it was $1,100 a month!
She makes about $85,000 per year. The problem was for some unexplained reason, the loan servicer doubled her income to $170k per year!
Had this mistake not been caught, just this year alone she would’ve lost $8,400. Invested over 30 years that is approximately $85,000!
The Wrong Financial Plan
There are three ways we see new FitBUX members have the wrong financial plan when it comes to IDR student loan repayment plans:
- They are married and filing their taxes incorrectly.
- They do not know what the tax liability will be.
- They aren’t incorporating the way to save for the tax liability the right way.
In this article, I’m not going to discuss the married filing taxes incorrectly because we have an entire article dedicated to that.
Let’s dive into the other two topics right now.
What Is The Tax & How It Can Change
There are a number of items that can change how much you owe in taxes when your loans are forgiven. Unfortunately, most calculators on the internet either leave part of the information out or they are so complicated users input the data incorrectly. In other cases though, people do not even know there is a tax.
Therefore, the first step is calculating it. One of the cool features we’ve included into our technology is our tax estimator. All you have to do is complete your profile and the data auto-populates into.
But there in lies the problem with most calculators. You can do the calculation today but it will change over time.
For example, today in your financial plan you may have plans to get married, have children, by a house, etc… All these events will change your tax liability. A simple tax calculator doesn’t capture that. FitBUX’s financial planning technology does!
Also, tax laws change. Tax rates can go up, they can go down. Your income can change. Investment returns change… All these things change over time. Thus, your tax due will change over time as well.
Therefore, you can’t just calculate the amount owed and say great, I don’t have to think about this anymore. This is why the IDR tracking feature is so popular on the FitBUX platform. You just have to update your profile and we do the rest, i.e. we make the complicated really easy.
The Financial Plan Isn’t Correct
First things first, most people incorrectly build a financial plan by trying to do too much. Part of the FitBUX’s financial planning method is to focus on one short-term goal at a time.
Instead of trying to save for the IDR Tax, save for a house, pay off credit card debt, etc… You should pick one and focus on it. However, this doesn’t mean completely ignore the other. Instead it means do the minimum towards the others… I’ll explain below.
The FitBUX Financial Planning Method consists of three categories: Day-to-Day Money, Money For Future Self, and Risk Management. In this article we are focused on Money For Future Self.
This category consists of short-term/taxable savings, retirement savings, and debt payments.
You start by making a minimum contribution to your employer retirement so you can get your match, then a minimum $50 towards a Roth IRA, and required monthly payments towards your debts. From there, you’ll see how much money you have left over and you use all of it towards your short-term goal.
Here is were people make a mistake. For the tax, at FitBUX we have a term called the required minimum amount to save. This means you should add that amount as a minimum in your financial plan first before figuring out how much money you have left over. I.e. if on your FitBUX profile we inform you the required minimum to save is $200, that should be included in your plan.
Then from there the rest of your money goes to your top goal!
Setting up your financial plan this way will make the complex world of finances a lot easier leading to less stress and anxiety in your life.
Effective management of Income-Driven Repayment (IDR) plans is crucial for financial stability, particularly in avoiding costly miscalculations in monthly payments. These errors, often stemming from borrower oversights or loan servicer mistakes, can lead to significantly higher payments. Examples include married couples not accounting for their spouse’s loan information and servicers inaccurately reporting incomes. Such mistakes not only increase immediate financial burdens but also have long-term financial implications, potentially costing thousands over the lifespan of the loan.
The second critical aspect of managing IDR plans is developing an appropriate financial strategy. This involves understanding the tax liabilities associated with loan forgiveness and adapting savings strategies accordingly. Life changes such as marriage, having children, or buying a house, as well as changes in tax laws and personal income, must be factored into this strategy. Utilizing tools like FitBUX’s tax estimator and IDR tracking feature can help borrowers accurately assess their tax liabilities and ensure correct monthly payments, thus steering clear of expensive errors and securing financial well-being.