Ultimate Guide to Paying Down Student Loan Debt

The following article was originally posted on moneygeek.com and features commentary from Theresa Lowder, Director of Student Financial Aid at Berea College.

By: Ingrid Cruz
Collectively, Americans owe nearly $1.51 trillion in outstanding student loans. Owing over a trillion dollars can affect millennials and, most recently, Generation Z. In addition, people over the age of 60 are also struggling with student loan debt, according to a 2020 report by the Federal Reserve Bank of New York.
The average student loan borrower can expect payments from $200 to $300 per month. The coronavirus relief bill allowed for student loan repayment suspensions until September 30, but this was extended until December 31, 2020.
Understandably, people may be wondering what to do about repayment, particularly during uncertain economic times. The financial advice and expert insight in this guide have been compiled to help you formulate a plan to pay off your student loan debt.

To create a payoff strategy for your student loans, you’ll need to start tracking your balance and interest rates and keeping a record of your communications with your loan servicer. Having a strategy in place will help you communicate hardships and issues that make it difficult to pay your loans and learn about available relief programs that might benefit you. Once you’ve decided to put work into getting rid of student loan debt, follow these steps to help get you there.

Step 1: Get to Know Your Student Loans

Higher education loans come from federal and private sources. If you have federally backed loans, you can check your accounts in your Federal Student Aid profile. This is the account you first created when you entered college and first took out loans. The total amount you owe will be listed there, along with the type of loan taken out and information on your current servicer.
These are the types of loans you will see when you log in to Federal Student Aid:

Students who have borrowed nonfederal (private) loans don’t have the same benefits and protections as those who take out government-backed loans. Recently, students with federally-backed loans benefitted from a payment pause and 0% interest rate because of coronavirus relief act provisions. Private lenders were not accountable to these provisions, and borrowers had to navigate hardships with their loan servicers, many of whom crafted different responses.
Knowing who is servicing your student loans enables you to monitor your balance, communicate any issues, and directly contact the servicer if you experience hardships, unemployment, or discrepancies in your statements.

Step 2: Choose a Payoff Method

Once you know which types of loans you have, who services them, and what interest rates you are responsible for, it’s time to choose a strategy that helps you meet your student loan repayment obligations. Thankfully, some tried and true debt resolution options can help you manage your student loan debt obligations.

Which method is best for you?

Debt Avalanche

Debt Snowball

Step 3: Set up Automatic Payments

Automatic payments allow you to enter your checking or savings account information into your lender's system so you can automatically make your payment on the day of the month that you designate. Setting up automatic payments can help you in the following ways:

Other advantages to putting your loans on autopay include paying more than the minimum monthly balance or even paying more often than once per month. This enables you to save on potential interest over the life of your balance.

Step 4: Prioritize Making Extra Payments

If you can afford it, making extra payments can set you up for success by decreasing the amount of interest you pay. Increasing your payments by even $50 per month can ensure that more money goes into the principal, and it can have a significant impact on your balance.

As shown in the chart above, if you have a $15,000 loan and you make a minimum monthly payment of $100 for 10 years (or 120 months) with a 4.3% interest rate, you would pay an average total of $12,000 toward your loan, but you may pay an average of $5,000 in interest out of your total contribution.
Taking that same scenario, you decide to make that extra payment and increase your payment to $150 per month. After 10 years, you would pay an average total of $18,000, and of that $18,000, you may pay an average of $3,000 in interest.
At the 10-year mark, you may still owe about $8,081 if you pay $100 per month, compared to owing about $600 if you pay $150 per month.
Compound interest and the knowledge that you will be expected to pay loans off for years can make repaying your loans seem intimidating. Thankfully, student loan borrowers have an array of debt reduction strategies they can use to make payments faster.

Should I Pay Off Student Loan Debt or Invest?

Investing can be a great source of extra income if you know how to navigate the stock market and choose your assets wisely. Before deciding whether or not to invest, itemize your loans and look up your interest rates. Additionally, look up the rate of return for stocks in which you want to invest. According to experts, if the return rate is less than the interest rates on your loans, it's better to pay off your debts.

Even the best plans don't guarantee that you can pay your student loan debt off early. Unexpected hardships, job loss, or life changes can strain your budget. If you can't afford your student loan payments, communicate with your student loan servicer to discuss options that can help you.

Understand Your Repayment Plan Options

Student loan repayment plans are calculated depending on the type of plan you choose. The payment plans below are for federally backed loans. Private lenders may not offer all of these options.

Adjusting Your Repayment Plan

As you pay down your debt, you may experience life changes that necessitate adjusting or changing your repayment plan. You can change your plans as needed, but you must meet each program’s requirements and still have time left in your payment terms to qualify for any adjustments. Be aware of the advantages and risks of changing your repayment plan.
Advantages:

Things to keep in mind:

FAQ: Refinance or Consolidate Your Loans

If you're considering refinancing or consolidating your loans, it’s important to remember that different regulations govern public and private loans. This will determine which options you have and whether or not they will help you save money. Let's examine both refinancing and consolidation.
What is loan refinance?
Once you graduate, your financial circumstances may improve. If you have a good credit score, you may be able to refinance your existing student loans. This means that a lender, bank or credit union will pay off your existing loans and give you a new loan at a lower interest rate.
What is loan consolidation?
Student loan consolidation allows you to take multiple loans and combine them to have a single payment.
How can I refinance or consolidate my loans?
You can apply to consolidate your loans by using the form available at Federal Student Aid. A consolidation servicer will communicate with you about any loans eligible for consolidation or let you know if additional action is required. You must continue to make payments on your loans throughout the process.
If you choose to refinance your loans through a private lender, be aware that you may lose the right to certain protections federal loans offer even though your interest rate may decrease.
When does it make sense to refinance or consolidate?
Refinancing may work for you if it reduces your interest, you have a stable job, and if you meet your lender's financial requirements. Some lenders are more strict about the types of borrowers who can refinance and may limit refinancing eligibility to people from certain states or by profession. Typically, lenders expect you to prove you have sufficient income and to have completed your degree. Keep in mind that you may sign away certain protections with refinancing, such as:

Consolidation may be a more favorable option for some borrowers. It extends the lifetime of the loan and doesn't change interest rates, but consolidation can work for people in circumstances such as:

How can I find the best interest rate?
Federal Student Aid updates interest rates online. Private lenders post rates on their website, and there are websites you can use to compare rates.
Do I need a cosigner to refinance or consolidate?
You can ask someone to cosign your refinance loan, which may help you get a more favorable rate. People with excellent credit scores may not necessarily need a cosigner to assist with refinancing.

Student Loan Forgiveness

Forgiveness is not the same as discharge or cancellation. Student loan forgiveness programs are available for people who go into certain professions or meet specific criteria through the following programs.

Student Loan Discharge and Cancellation

Unlike forgiveness, student loan discharge and cancellation can remove the burden of repaying student loan debt if you have a physical or mental condition that makes loan repayment challenging or if your school's financial aid didn't follow regulations in place. You may qualify for a discharge if you experience the following and meet specific eligibility requirements:

Student Loan Debt Relief

Unforeseen circumstances can make it difficult to repay student loans. However, servicers are willing to help you find options that will provide some forms of relief until things change. The following programs are available for federal loans.

Potential Future Relief

The economic fallout of the COVID-19 pandemic is still affecting student loan borrowers. There have been discussions about potential future bills that could ease the student loan debt burden. Remember to continue paying out your loans or using existing programs to ease your student loan debt burden, as nothing has been finalized. Some potential future bills or regulations include:

In the meantime, continue making a plan, communicating with your servicer often and asking them about any options they can provide you.

Theresa Lowder

Director of Student Financial Aid Services at Berea College
What are some major obstacles borrowers face when repaying their student loan debt?
Of course, right now, unemployment may be a big obstacle. In a normal year, it could be unemployment, or family situations, such as being a caretaker that can't work outside the home.
What's the best way for people to understand their student loans? How can borrowers stay on top of any changes in loan servicers?
It depends on where a student is borrowing from. Our students don't have to borrow from what we call alternative (non-federal) loans in places such as Sallie Mae. For students with federal loans, as long as you keep in contact, they really do work with you.

Staying on top of your student loan debt can be difficult on top of other obligations. We’ve compiled a list of resources you can use to keep up with forthcoming news, explainers, and changes to borrower rights and responsibilities.

About the Author
Ingrid Cruz is a writer for MoneyGeek and a freelance writer currently living in Mississippi. This year she hopes to learn as much as possible about financial literacy while also helping her community learn how to navigate it too.
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