Student loan debt won’t disappear on its own. Loan servicers with a court order can actually take money from your paycheck if you don’t make payments or fail to ask for hardship consideration. Garnished wages could start eating into your budget and you could lose your tax return, too.
The Class of 2014 owes an average of $33,000 per student, according to college loan experts Edvisors, and more than 40 million Americans shoulder the weight of student debt. You may have your degree, but the work is often not finished.
Graduating with loans comes with tremendous responsibility and the potential for serious repercussions—especially if you ignore repayment notices, leaving the balance to grow and accumulate interest.
Turning to an alternative cash source, like an annuity investment, can allow you to get a handle on your student loan debt and move one step closer to financial freedom.
Annuity Owners and Student Debt
Annuities are insurance products that are purchased, inherited or awarded following serious lawsuits. Owning an annuity provides recipients with a stream of payments that may be scheduled for payout immediately or years down the road.
Depending on when payments are due and other options available for handling retirement costs, annuities provide a solution for people struggling to pay off student debt.
You can access the cash stored in an annuity through a few options. If your annuity payments and loan bills follow similar schedules with monthly distributions and balances, then you won’t have to make any changes to your annuity. Simply take annuity income and reserve it for your loans. Make loan repayment a priority and stick to it.
However, if your annuity contract stipulates you won’t receive payments for five or ten years, you will have to sacrifice some of the value of payments to get the income now. You can surrender payments through the annuity issuing company or sell payments to a third party annuity buyer. Consider any fees involved and the competitive rates provided by both companies.
Weighing Pros and Cons for Using Your Annuity
Depending on your financial situation, paying off student loans with annuity cash could be a solution for you. This route involves various benefits and disadvantages:
Pros for Using Annuity Cash
- Eliminating student loan debt early saves you from accumulating interest payments. This means you pay less for the loan overall. Federal and private student loan interest rates range from 3 percent to as high as 12 percent. Along with the reducing the total you pay, you can decrease length of time making payments. Avoid spending decades chipping away at loans, wondering if the balance will ever be eliminated. Taking a lump sum from an annuity expedites the repayment process, keeping you from carrying an “I-owe-you” into retirement.
- Avoiding more late payment fees is another major advantage of using an annuity to address student loan debt. Taking years and years for repayment leaves you vulnerable to developing a lax attitude toward loan bills and forgetting to make monthly payments here and there.
Cons of Using Annuity Cash
- Spending annuity savings to pay student loan debt decreases the amount of money you have preserved for retirement. This means you will need to manage your future well-being by turning to other financial tools and income sources. Estimate your Social Security payments and explore employer-match options to make sure the golden years are sufficiently provided for.
- When you sell or surrender payments, rather than waiting for the scheduled distributions, you lose some of the annuity’s original worth. Facing added fees and discounted payment value is a sacrifice. Weigh this loss against other repayment options before committing to dipping into retirement savings.
- People often turn to annuities for the tax benefits, as the structure allows owners to delay tax liability until later in life. Unfortunately, accepting a lump sum early on makes recipients immediately responsible for income tax. Speak with a tax professional to evaluate how this will impact your tax situation.
Worst Solution: Ignoring Student Debt
Choosing not to touch annuity savings can be the right choice for some graduates. It’s a huge investment-changing decision and should be carefully considered before making the commitment.
However, the biggest mistake you can make when deciding if you should use an annuity is to not make any plan for repayment. Doing nothing and ignoring the student loan bills will eventually take its toll – especially if loan servicers use federal laws to garnish your wages and even intercept your tax return.
You can prevent this by addressing your student loan debt right away—even if it means making a long-term plan and slowly working to eliminate the balance. Take action. Get creative. Find a way to increase your income, sell items you already have or consider dipping into other retirement accounts.
Graduating with a degree is a significant accomplishment. Paying off the debt you accrued in earning that degree is an even bigger victory.
Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.