Your life quite literally depends on paying off student loan debt as rapidly as possible. Being able to afford a house and start a family are so much easier if student debt is handled. Student loan debt is estimated at over $1.2 trillion and is growing by over $3,000 each second. With an estimated 40 million Americans saddled with student loans, only about 37% of borrowers are making any effort to pay off their student loan debt.
Who Struggles With Student Debt?
Lisa Frankenberger, Student Loan Counselor at Consumer Credit Counseling Service of Buffalo, New York, says the clients she helps to pay down student debt are a good mix between new graduates and people in their 20s, 30s, 40s and beyond. They might owe anywhere from $8,000 to $200,000 or more.
“It’s usually less than $100,000,” says Frankenberger. “We definitely get those folks that owe more, but most folks if they just went through four years, have a bachelor’s, even if they went to a private institution, they’re still typically looking at under $100,000 of total debt.”
If you’re struggling to pay down student debt, you’ll find a group of excellent ideas in our list below of 8 ways to pay down student debt.
1. If Your Finances Are Solid, Pay Extra and Pay the Loan With the Highest Interest Rate First
Student debt is situational. It depends heavily on the individual’s income level, specific debt amount, interest rate, future earning potential, future plans and more. People trying to pay down student debt should think about where they are financially now and also where they want to be in the future. An honest assessment of your situation can help you figure out the best way to tackle your debt.
“So for example,” Frankenberger says, “if you have some student loan debt but you’re doing okay financially, you’re affording your payments and you just want to get this gone as quickly as possible, then you may want to consider, can I make additional payments? Can I look at the interest rates on my loans and try to pay more on my highest interest rate loan first? Can I put all my extra money there and sort of snowball my payments?”
If Your Finances Aren’t Solid, Check Out These Options
Unfortunately, nowadays the majority of people aren’t in a great financial position that would allow them to make extra payments. Credit counselors see a lot of people looking at affordability issues. They’re saying, my student loan payments are due, they’re asking for $800 a month and there’s no way I can afford that. Or maybe they can afford it but they have to prolong starting a family or buying a home because they have so much going out to their student loans that they can’t really afford anything else.
For those people, a different payment plan can present an option that can take a lot of the pressure off paying down their student debt. Federal student loans particularly offer lots of different repayment options such as income based repayment plans, deferment or forbearance time, extended repayment plans, or student loan debt consolidation.
- The Standard Repayment plan generally requires all student debt to be paid within a ten year period, with payments of at least $50 per month. This plan results in higher monthly payments but less interest paid in overall.
- Income Based Repayment plans tie monthly payments to the debtor’s income in some way, for example as a fixed percentage of their income. They result in lower monthly payments but usually more money paid in over the life of the loan.
- Pay as You Earn Repayment plans are Income Based Repayment plans, but with payments tied to a lower percentage of income. The plans are only available to those with student loan debt who have a partial financial hardship.
- Income Contingent Repayment plans are Income Based Repayment plans that also take family size into account to help create lower monthly payments.
- Income Sensitive Repayment plans are Income Based Repayment plans, but they give lenders a bit more leeway in determining the borrower’s monthly payment.
- Graduated Repayment plans start with low payments and then increase over time. They last up to ten years and allow payments to match a rising level of personal income.
- Extended Repayment plans offer lower monthly payments by extending the student loan debt repayment period out to as much as 25 years. They result in a higher dollar amount paid in overall.
- Consolidation lets borrowers group several student loans together to create a single monthly payment. They take a lot of the confusion out of paying down student loan debt, but they can result in a higher overall interest rate in some cases.
- Deferment or Forbearance time gives students a grace period when they don’t have to make any payments at all. During this time however, interest on the student loan debt continues to accrue.
- Public Service Loan Forgiveness erases student loan debt for qualifying borrowers who work for qualified employers in the public sector.
“So there’s a lot of different programs with federal student loans that you can look at for different ways to go,” says Frankenberger.
2. Consider an Income Based Repayment Plan
Several student loan debt repayment plans exist that allow borrowers to tie their monthly payments to their income. The plans include Income Based Repayment plans, Pay as You Earn plans, Income Contingent Repayment plans, Income Sensitive Repayment plans and Graduated Repayment plans. They all have subtle differences but they all give people lower monthly payments in exchange for making more total payments over a longer period of time.
“Often, people just need a way to have a livable payment right now, so they use an Income Based Repayment plan for the time being,” says Frankenberger. “Ideally, everybody would get to the point where down the line they could start making extra payments or higher payments to pay down their student loan debt more quickly.”
3. Check Out an Extended Repayment Plan
An extended student loan debt repayment plan is a plan that extends the repayment period to as much as 25 years. The upside of these plans is that they have lower monthly payments of standard 10 year plans. The downside is that you’ll pay more over time on your student debt than you would under a plan with a shorter term.
The Downside of Income Based Repayment and Extended Plans
Some of the Income Based Repayment plans extend your repayment period out to 20 or 25 years from the original 10 years under the Standard Repayment plan. That means you’ll pay more money over more time with those plans.
“So you would be paying more interest in the long run if you take the entire 20 to 25 years to repay that debt,” says Frankenberger. “That’s a long time. It’s comparable to a mortgage. It’s a long commitment, but again if you’re sitting there with $65,000 or $80,000 in debt, that might be the only thing that’s reasonable to you until you get into a higher paid position.”
Typically when you graduate and your federal loans go into repayment, you’re on a standard ten year repayment plan. That’s automatically what repayment plan you’re on unless you request something different. The standard ten year plan is the way to get your loans paid off at the fastest rate and with the least amount of interest because you’re getting them paid off in a shorter time frame.
Extended Repayment Plans Mean More Years of Debt
Carrying student loan debt for a longer period under these plans could impact things like buying a home. Lenders are going to look at your total debt load. If you have a significant amount of debt and an income that’s not enough to support both your student loan debt and the additional debt of a mortgage, that could impact your ability to get a house.
“That’s why I say you want to think about not only where you’re at now but where you want to be in the future,” says Frankenberger. “What path you’re thinking your career might take or what your earning potential is. There’s no way to know those things for sure because we all know life happens and things can change. But again these are long term plans, so we kind of want to think long term with them to make sure they’re going to make sense.”
4. Look Into Consolidation
Consolidation of federal student loan debt can make repayment a lot simpler. You have one payment to one servicer rather than potentially four separate payments to four different servicers. That’s nice, but you’re also taking away the ability to pay more on your higher interest loans first. That’s because when you consolidate, your student loans all going to have a single interest rate. But there are also benefits to consolidating. Apart from the added simplicity of a single monthly payment, consolidating creates a new block of potential forbearance and deferment time.
“Say you’ve been in repayment for a while and you’ve had to use up all of your deferment and forbearance time and you have none of that left,” says Frankenberger. “When you consolidate your federal loans, it’s a brand new loan, meaning you kind of restart the clock on your forbearance and deferment time. For somebody who’s maybe been going through some struggles or has hit a couple of rough patches in life, that could be a really good benefit to just know you have that safety net available to you. That if you ever needed to defer again you could.”
5. Consider Deferment or Forbearance
A forbearance is a reduction or stoppage in monthly payments on student loan debt that can last as long as 12 months.
Consumers should be careful with deferments and forbearances because with a forbearance, while you’re not required to make a payment, your interest is still accruing. So that loan balance is growing while you’re not making payments. When you defer, the interest is being covered on the subsidized portion of your loans, but on the unsubsidized portion it still is accruing.
“In some cases,” says Frankenberger, “you’re kind of just prolonging the inevitable, so you really want to look at those deferments and forbearances as really, really when you absolutely need to use them. When you really can’t make a payment. I think sometimes people look at it as, I just kind of want to put this off for a while, but there might really come a time in life where you truly need that time and you’ve run out of it.”
Also see: John Oliver Takes on Student Debt
6. See if You Qualify for Public Service Loan Forgiveness
There’s a largely overlooked program for paying off federal student loans that’s called Public Service Loan Forgiveness. Public Service Loan Forgiveness can wipe out student loan debt entirely after a set period of time.
To be eligible for Public Service Loan Forgiveness, you must:
- Be in a direct loan program. If your loans are older and you’re not in a direct loan program, you can consolidate to get them into the direct loan program.
- You also must have made 120 qualifying payments under an income based repayment plan.
- You must work full time for a qualifying employer.
For anyone who meets the above criteria, their remaining loan balance can be forgiven.
Public Service Loan Forgiveness is geared toward the nonprofit world. Jobs that qualify for forgiveness include jobs with any employer that’s tax exempt, positions at true nonprofit organizations, government jobs and also jobs with other agencies that are considered qualifying public service. This can include jobs at public schools or in the public health care industry and law enforcement. Jobs with the Peace Corps and Americorps can also qualify for student loan forgiveness.
“A lot of people fall into this category,” says Frankenberger, “and just don’t realize that they might be able to get loan forgiveness after ten years if they get into a qualifying payment program.”
The Downside of Student Loan Debt Forgiveness
The biggest downside of student loan debt forgiveness is that it’s taxable as income. Someone who starts out with $100,000 in student loan debt and then gets $50,000 of that debt forgiven will owe taxes on that $50,000 as if they earned it as income. That could add up to a sizable tax bill.
7. Talk to a Credit Counselor
It’s important for anyone who wants to pay off their student loan debt to take an individualized look at their situation, because everybody’s situation is different. It’s not always cookie-cutter, which doesn’t make it easy, but it’s always good to have options. It feels good to be able to make an informed decision for yourself about your best path to paying off your student loan debt after you’ve explored everything and you really have a thorough understanding of it.
“I think that’s the biggest thing is that this stuff is confusing for people,” says Frankenberger. “I have a lot of people come in and say to me, I feel very overwhelmed. I have a hard time understanding this. I’m getting a ton of different bills. I really don’t know what to do. The information is out there. It sometimes can be difficult to look through and sort through and understand, but that’s why I think it’s important to do your research.”
Websites like the U.S. government’s StudentLoans.gov can help people get a grip on all their options for paying off student loan debt. Their FAQ page in particular provides a lot of great information on different repayment and counseling options.
“People can also always call their servicer,” Frankenberger adds. “You call whoever you’re making your loan payments to and ask them for information on it. The one thing with that though is that you’re pretty much just addressing the loan you have with them. If you have multiple loans sometimes that can be a little confusing.”
The services of a good nonprofit credit counselor can help. Frankenberger helps people pay off student loan debt through the Consumer Credit Counseling Service of Buffalo, NY. To find a nonprofit credit counselor near you, do a search at the National Foundation for Credit Counselors website by clicking here.
“Sometimes people would rather sit down with an expert,” says Frankenberger, “and have somebody assist them going through, and that’s what we do. We kind of help people figure out their options to make an informed decision on how they best want to tackle their debt.”
8. Ways to Pay Down Private Student Loans
Private student loans don’t have as many options as federal loans do. Federal loans have deferments and forgiveness and income based plans. Private loans typical model is that you borrowed this money at this interest rate, so you’re going to pay it. In some cases they’ll offer small forbearances here and there or some sort of assistance if you get behind, but they’re definitely not as flexible as federal loans are.
1. Refinance or Consolidate
The biggest thing you want to look at with your private student loans is the interest rate.
“I’m seeing an awful lot of folks coming in who borrowed a while ago and are at a high rate, “says Frankenberger. “A lot of times also student loan interest rates are variable, so they are going to change over time. I see a lot of folks coming in with interest rates of 8%, 9%, 10%, which can add up over time for sure.”
It is possible to refinance a private student loan. There are lenders out there that will refinance and even consolidate private student loan debt. So for example, someone with three or four private student loans might be able to consolidate just to one.
How to Refinance and Consolidate Private Student Loans
There are several major banks and financial institutions that offer refinancing and consolidation for private student loan debt. For a complete list, click here to visit FinAid.org’s private student loan page.
“We’re seeing some folks be able to get a 10% loan down to a 5% loan,” says Frankenberger, “and you can imagine, that can save a lot of money over time.”
There are also options to switch private student loans to a fixed interest rate rather than a variable interest rate.
2. Handle Your Credit Score
It’s very important when you have private loans to make absolutely sure your credit score is up to par and you’re managing your credit well. That’s because in order to refinance, you’re going to have to show that you can handle debt responsibly, and that means having a solid credit score.
“That’s the biggest thing I always tell folks is, if your credit is not so great right now, maybe that’s where you focus your efforts,” says Frankenberger.”
It’s a good idea to try to build your credit to a point where you can potentially refinance those private student loans to get yourself a better interest rate. You could also then potentially save money by extending your repayment just like you can with federal loans.
For instance, say right now you’re in a ten year plan with your private loans. You could refinance that into a 15 year repayment. Then you’re going to pay more interest in the long run, but that might be a way for you to get a more reasonable payment right now.
“I really haven’t seen any products that have a prepayment penalty,” says Frankenberger, “so it’s not like you couldn’t eventually start to pay more down the road to try to save yourself some money.”
Watch America’s Student Loan Debt Grow $3,055 Every Second – MarketWatch.com