Financial advisor Jeff Rose of Good Financial Cents just started the debt movement to help people reach financial independence. Over the next four months, bloggers and readers will commit to paying off a collective [Dr. Evil voice] 10 million dollars(!) in personal debt.
Jeff’s a veteran, so when he starts a financial movement then I try to blog about the military aspect of the subject. I’ve also been sitting on a draft post about student loans hitting a balance of a trillion dollars, so let’s start there. When you’re facing a mountain of student debt and you don’t even have a job lined up after graduation, the military can seem like a pretty attractive option.
So should you join the military to pay off your student loans? Maybe.
This is a confusing subject– let me clarify the programs that I’m going to discuss. This post is for people who are going to graduate from college with student debt. You’re already at college, you’re looking for debt solutions, and the military seems like a pretty attractive option– especially if they’ll pay off your student loans.
Before you start college
If you just started college (or if you’re still in high school) then there are plenty of other ways to get a college degree from the military without student debt. One way is attending a service academy, although that’s not necessarily the best option. (My spouse and I are service academy alumni, but you may be able to do better.) In every state the Reserve Officers’ Training Corps runs a great program on high school and college campuses that offers students up to four years of tuition & fees along with a monthly stipend, and ROTC’s first year is totally free of obligation. If you’re even mildly curious about military service (and avoiding student debt) then this is a great way to try before you buy. If you’re already in college then you may still be able to persuade ROTC to pay for the last year or two of your education– go find your campus unit and talk to their staff.
If you’re “not quite ready for college” but you think you’re ready for the military*, then once you’ve completed recruit training you can start exploring your college options. The military will help pay for your college classes with tuition assistance, although you’ll be doing this on your own time and with a number of restrictions. It may be cheap but you have to be motivated. If you just can’t make it work while you’re on active duty, then the GI Bill will pay for your college degree after the military. This is a great program, too, but why wait until after the military?
Now let’s get back to the main subject: paying off your student loans.
The right type of student loan
Before you sign up for a student loan, I hope you’re able to choose the right kind of debt. The military is interested in paying off student loans that are offered by (or guaranteed by) the government. Your loan also has to be in good standing: being paid off or at least in deferment/forbearance. If you’ve fallen behind in your student loan payments then get caught up now– before you default. If your student loan is in default then you’re out of luck– the military can’t help you. Heck, the military might not even let you join because default makes you a security risk.
Make sure you understand the source of the funding for your loan, and not just the company that services it. You may have a government loan (or a government guarantee on that loan) even if the loan is serviced by a private corporation. You can verify your loan type through the National Student Loan Data System to see whether it’s government-funded or government-guaranteed. If your student loan is privately funded (a commercial loan without a government guarantee) then you may be out of luck with the military’s repayment. However you may still be able to gain eligibility by consolidating your student loans through the Special Direct Consolidation Loan program. This program is tricky and even the federal Department of Education is still working out the kinks, so make sure you know your loan type before you talk to a military recruiter. If you have any flexibility in your loan options, then it may be better for you to completely avoid privately-funded loans.
Sheesh. 900 words later and I still haven’t explained how the military will pay your student debt.
How the military can help pay your student loans
Let’s assume you read the last few paragraphs and verified that your loans are eligible for the military to help you pay them back.
Before you read on, download this 12-page PDF military report from the Consumer Financial Protection Bureau. It’s written by CFPB’s Officer of Servicemember Affairs, and a handy chart on the third page summarizes the options described below.
Your first option, the day you report for recruit training, is deferment. The loan payments are postponed for the duration of your active duty, and perhaps for an additional 180 days afterward. You can invoke this provision at any time on active duty, but training is hard enough without having to struggle to make student loan payments. Consider deferring your loan from the date you start active duty and give yourself the breathing room while you consider the other options below. Interest may continue to accrue (depending on the type of your loan), so this is a short-term option. You can cancel a deferment at any time and resume making payments.
Your second option is the Servicemembers Civil Relief Act. This applies to both federal and private loans while you’re in the military, and the SCRA generally reduces the loan’s interest rate to 6%. This program is more frequently used for private loans, so skip down a few paragraphs to read about the SCRA in the next section. If you have a federal loan then you’re probably going to use deferment or one of the following two programs.
Your next option is Income-Based Repayment. If your loan payments are 15% or more of your disposable income then you can apply to have them reduced (based on your pay & allowances as well as your family size). The loan term is extended out to as long as 25 years, but the remaining balance may be forgiven if you continue IBR payments for 20-25 years. (As you can tell from the weasel wording of these last two sentences, there are plenty of caveats and restrictions to the program.) You should explore your IBR options as soon as you finish your entry-level training so that you can start your payment clock while your income is low enough for you to qualify.
The next goal is Public Service Loan Forgiveness. This is a federal program, not a military one. It applies to employment with any federal, state, or local government agency, or any 501(c)(3) non-profit organization. Some private employers might qualify– especially for emergency management, public safety, law enforcement, or public education. It can be any type of employment with a qualifying organization. Even if you’re cleaning toilets at your old high school, you may be eligible. There are plenty of options for PSLF, so don’t feel obligated to join the military for this program. Here’s how it works: if you make 120 monthly payments under PSLF then the remaining balance of your loan is forgiven. Every year you fill out a form certifying your eligible employment. When you reach a total of 120 months of eligibility (which may take longer than 10 years) then your remaining loan balance is canceled.
IBR and PSLF can save you tens of thousands of dollars on your student loans. Notice that the military doesn’t actually pay off those loans for you– the military qualifies you for programs that can reduce your payments and forgive the remaining balance. As long as you’re in the military, continue to make the minimum payments and report your eligibility toward PSLF.
PSLF cancels your loan balance only after you’ve made 120 payments while employed in an eligible organization, but you don’t have to stay in the military for that whole 10 years. You could leave the service for another eligible organization to complete your 120 months, and you can interrupt that with part-time employment or a job at another organization. Keep your documentation until you reach 120 payments (whether that takes 10 years or 20) and then apply for PSLF.
Finally, if you have a Perkins loan then you may be able to reduce its principal. You have to serve in an “area of hostility” for at least 365 consecutive days, so you’re not going to implement this option for a while. Focus on the other programs for now, and come back to Perkins principal reduction when you’re getting ready to deploy. Your Perkins loan can also be consolidated into other loans to be eligible for deferment, IBR, and PSLF, so principal reduction may not be your best option.
What if I don’t have the right type of loan after all?
If your loan isn’t funded by or guaranteed by the government, and if you weren’t able to consolidate your loans under a federal program, then you may still be in luck.
First, check your state laws for repayment programs– both the state where you’re currently a resident and the state where you’re attending college. One of those states may offer to help repay your non-federal student loans while you’re on active duty or a member of that state’s National Guard. (If your college’s state offers a program then it may be time to change your residency to that state.) Second, check your college’s financial aid office for alumni scholarships or military programs. If you’re carrying a military ID then you may be eligible for additional scholarships (especially from the university’s alumni who were military veterans) and for military-friendly loan assistance. Either one of those funding sources will let you accelerate repayment of your private student loan– even if it’s “just” $500.
The military protects its members while they’re on active duty through the Servicemember’s Civil Relief Act. One of its provisions is reducing all of your loans to an interest rate of 6%. Be very careful with the lender when you invoke SCRA, because they’re much more familiar with this program than we are and they may try to avoid its intent. Don’t be tricked into deferring loan payments (especially if the deferred interest will be added to the loan balance) and don’t pay any additional fees or charges for SCRA. Don’t let them make you jump through extra hoops, either– the lender is required to comply with the federal law without making you provide any additional documentation or verification. Above all, a lender is not allowed to use the SCRA to raise your interest rate to 6% or to accelerate its repayment terms. (Yes, some lenders have tried to do that.) The SCRA gives you additional protection against consumer debts, rental agreements, and contracts. Even if you’ve already completed your active duty, within six months you can invoke SCRA and have the loan payment/balance recomputed. Read the CFPB PDF for other dirty tricks that lenders have tried with the SCRA.
Whether or not you’re in the military, you may still be eligible for lender’s deferment, forbearance, or income-based repayment. Be careful with these keywords, however– they may mean something different to the lender than the dictionary definition. Unscrupulous lenders have tried to processing fees or other charges to the loan balance. While IBR may reduce your monthly payment to less than 10% of your income, it can also stretch the loan out to 25 years. If your loan is not eligible for the federal IBR program, the lender may have their own program.
If all else fails, check out Ready For Zero’s resource center down in the “Related links” section.
So… should you join the military?
When you took out these loans, you made a commitment to pay the lender. Should you join the military to ditch your student loans? Is it ethical to change the terms of your commitment with reduced payments or even forgiveness?
Consider what you’re doing to qualify for deferment, SCRA, IBR, and PSLF– you’re risking your life to serve your country. Sure, you’re getting a steady paycheck and good benefits, too, but you’re also volunteering for the original meaning of the term “survivor bias”. These programs look like a pretty sweet deal when you’re facing five or six figures of debt, and the military may seem like one of the easiest employers to sign up for.
While the military offers plenty of options for paying or eliminating your student loans, you have other options. You should have more reasons to join the military than “just” the student loan assistance. Join the military for the chance to:
- Realize your potential.
- Be part of something bigger than yourself.
- Lead incredible teams to reach amazing goals.
- Have more authority and responsibility in your 20s than your civilian counterparts will ever see.
- Learn skills that will last you for a lifetime.
- Test yourself beyond what you would ever believe you could handle.
But don’t join the military just to get rid of your student debts. Once you’ve signed up for the obligation, the debt may not be enough motivation to keep you going.
* [Sorry, nice try, but you may be deluding yourself. Thousands of people who join the military every year suddenly realize that college is a pretty good deal, and they regret their decision for the rest of their enlistment. Take another look at college before you sign the military paperwork.]
Join the military to retire early & get rich? The rest of the story
Introducing the Debt Movement
The Debt Movement: Taking Down $10 Million of Debt in 90 Days, Together
Protecting military servicemembers with the SCRA
Ready For Zero’s Student Loan Debt Resource Center
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