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
“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
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.
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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
The Downside of Income Based Repayment and Extended 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
“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.”
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4. Look Into Consolidation
“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.”
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6. See if You Qualify for Public Service Loan Forgiveness
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.
“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.”
Also see: Billionaire Warren Buffett: Debt is a Trap
8. Ways to Pay Down Private Student Loans
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
“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
“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.”
For tips on how to build your credit, see our articles, “How to Raise Your Credit Score,” “6 Surprising Ways to Hack Your Credit Score,” and “What Is a Good Credit Score?”
Sources
Watch America’s Student Loan Debt Grow $3,055 Every Second – MarketWatch.com