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.
How to Create a Strategy to Pay off Your Student Loans
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:
- Direct Subsidized Loans: These loans were created to help undergraduates with proven financial need to afford college. The U.S. Department of Education pays for interest accrued during school and if you apply for a qualifying deferment after school. Only people who received loans disbursed between July 1, 2012, and July 1, 2014, are responsible for paying interest during their grace period.
- Direct Unsubsidized Loans: These loans are available to undergraduate students, regardless of their financial need eligibility. Your school puts your financial aid package together and determines how much you are eligible to borrow based on the cost of tuition and with consideration to other financial aid for which you qualify. Borrowers are responsible for interest accrued for these loans during school, any grace periods in effect and forbearance or deferment.
- Direct PLUS Loans: These loans are for parents of undergraduates and graduate students. Borrowers must meet a credit threshold, and requirements are higher for borrowers with weaker credit histories must meet additional conditions.
- Direct Consolidation Loans: These student loans have been consolidated to ensure borrowers deal with only one servicer.
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.
- Debt avalanche: This method targets debt that has the highest interest. List your debts according to interest rate, and concentrate on paying off the debts with the highest interest rate first while making the minimum payments on debts with a lower interest rate.
- Debt snowball: This method focuses on paying the smallest debts first. List your debts by amount owed and concentrate on the smallest balances. Once you pay off the smallest balance, you can pay off the next smallest debt, and so on.
Which method is best for you?
What is it?
A repayment method focused on debts with the highest interest rates.
How does it work?
Make a list of your student loans and focus on the ones with higher interest. Budget 10% of your monthly income to the debt with the highest interest rate. Once you finish paying off that balance, concentrate on the balance with the second-highest interest and continue spending the same amount of money.
You save money on interest over time, which saves you more money in the long run.
How to choose which one is right for you
Take an inventory of all your debts and consider your interest rates. The avalanche method helps you save money in the long run, but you must consider the balance of other outstanding loans.
What is it?
A repayment method focused on rates in order of balance from smallest to largest.
How does it work?
List your debts and focus on the ones with the lowest balances. Pay above the minimum monthly payment on the smallest loan while making minimum payments on all other debts until you finish paying off the loan with the smallest balance. Then focus on the next highest balance using the same method.
This method can help you pay off some smaller balances quickly.
How to choose which one is right for you
Remember to look at interest rates in addition to considering your debt total. Though it can be gratifying to knock off smaller balances, you may pay for more interest in the long run.
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:
- You won't have to worry about making late payments, as you give your lender permission to deduct a given amount of money every month.
- Some lenders, such as FedLoan, give you a discount just for signing up.
- Federal servicers don't charge to set up your monthly deductions.
- Most lenders will allow you to sign up online.
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.
- Create a budget. Itemize all of your living expenses, including money spent on entertainment, leisure and debt payments. Include utilities, caregiving, groceries and transportation costs as well. See if there are areas where you can cut expenses and reroute this money toward your student loan debt.
- Find a part-time job. Seasonal and retail jobs, and even babysitting, can help you meet your student loan debt obligations much faster.
- Sell items you no longer use. Over the years, we accumulate books, appliances, clothing and other items we don't need. Look through your belongings and see if there's anything in good condition you can sell online or pawn. You may not earn back everything you spent, but every extra dollar will help you bring your balance down.
- Capitalize on existing skills by starting a side hustle. You may have a valuable talent that can help you create a small business to bring in extra income. The money can help you make larger payments and set you on the road toward financial independence. Use extra windfalls. Tax refunds, gift money and other unexpected sources of cash can help put a serious dent in your balance. Even if windfalls are inconsistent, they still add up.
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.
What if You Can’t Afford Your Student Loans?
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.
- Standard repayment: Payments must be made within 10 years at predetermined amounts, though they can be made within 10–30 years for consolidated loans.
- Graduated repayment: Payments start with low minimums that increase approximately every two years. This plan is designed to ensure loans are paid off within 10 years, or within 10–30 years for consolidated loans.
- Extended repayment: Borrowers with at least $30,000 in direct loan balances are eligible for a plan that allows them to pay their balance within 25 years.
- Revised Pay As You Earn (REPAYE) Plan: This plan considers your earnings, expenses and family size. Payments will never be more than 10% of what you earn each month. REPAYE plans are revised every year. Spouse income is considered for those who are married.
- Income-Based Repayment Plan (IBR): This plan was created for people whose balance puts a more severe strain on their income. Borrowers must communicate their earnings and family size on an annual basis. Payments are capped at 10% to 15% of income per month, depending on when loans were first disbursed. Balances owed are forgiven after 20 to 25 years of participating in the program.
Income-Contingent Repayment Plan (ICR): You will pay the smaller of these:
— 20% of any discretionary monthly income.
— A minimum that you would pay on a 12-year plan, with consideration to your income level.
— Monthly payments are updated annually and depend on your income, family size, and outstanding loan balance.
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.
- Standard repayment plans are created to ensure loans are paid off within 10 years, but this doesn’t work for everyone.
- Income-driven plans, such as IDR, ICR and REPAYE are tethered to your income levels, and debt owed after 20–25 years is forgiven.
Things to keep in mind:
- Income-driven repayment plans require you to certify your income levels annually. Not doing so on time could cause payments to go back to the standard loan rate.
- Any forgiven outstanding student loan balance left is considered taxable income, which means you must plan for a higher tax bill, an offer-in-compromise, or to set up a payment with the IRS, depending on your financial circumstances.
- Some plans may reset your terms. Make sure to ask your servicer about this when discussing any repayment adjustments.
- Nonfederal loans often do not qualify for these repayment plans. You must contact your lender/servicer about these directly.
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:
- The ability to participate in income-driven repayment plans.
- Right to forbearance and deferments.
- Access to certain forgiveness or discharge programs.
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:
- Those with multiple loans. Having one loan makes it easier to manage your debt.
- Borrowers who qualify for student loan forgiveness programs.
- Facing hardship or difficulty paying loans.
- Loans that are in default.
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.
- Income-Driven Repayment Plan (IDR): Known for helping borrowers reduce their payments to a more manageable amount, per their income, IDR allows for forgiveness if you make all payments within the agreed-upon time.
- Teacher Loan Forgiveness Program: This program forgives up to $17,500 in student loan debt if you teach at a low-income school full-time for five consecutive academic years. You must have borrowed qualifying loans, fulfill teaching requirements and not defaulted on your loan. You can apply using the teacher loan forgiveness form, and the chief administrative officer at your educational institution must certify it before it is sent to your servicer.
- Public Service Loan Forgiveness (PSLF): To qualify for PSLF, you must work for the federal, state, or local government, a tribal government, or a qualifying non-profit organization. Additionally, you must make 120 qualifying student loan payments so the remaining balance can be forgiven. Only qualifying federal loans can be forgiven. The Public Service Loan Forgiveness (PSLF) Help Tool allows you to search for a qualifying employer.
- Temporary Expanded Public Student Loan Forgiveness (TEPSLF): A 2018 provision allows people to temporarily apply for PSLF if all or some of their payments were made through a payment program that doesn't count toward PSLF. If your application was denied for PSLF, TEPSLF might help you get your loans forgiven. You must meet the program's requirements, have loans eligible for the program, and apply using the appropriate form.
- Military programs: Servicemembers have student loan benefits as well. They should ask about enrolling in IDR or PSLF to facilitate student loan debt forgiveness instead of deferring loans or putting them in forbearance. Some veterans may also qualify for loan discharge if they have a disability acquired during their service term.
- AmeriCorps: Participants of AmeriCorps may be eligible for the Segal AmeriCorps Education award if they meet program requirements. The award can be used to repay student loans, thus reducing your student loan balance.
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:
- School Closure Cancellation: If your school shuts down permanently and you are unable to finish your program as a result of the closure, you should be able to have your loan canceled or discharged.
- False Certification (Discharge): If your school falsely certified your loan eligibility, you may be able to discharge your debt as long as you provide proof.
- Unauthorized Payment or Refund (Discharge): If a school official forged your signature on loan papers or your loan was never disbursed, you may be able to discharge your loans.
- Unpaid Refund (Discharge): Students who drop out of their school early in their term may qualify for a discharge if their school didn’t return the loan to their servicer, per legal requirements.
- Total and Permanent Disability: You may be able to discharge your federal loans if you suffer from a total and permanent disability.
- Discharge Due to Death: Federal loans can be canceled in the event of a borrower or student's death.
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.
- Forbearance: This program allows you to temporarily stop or decrease your student loan payments as long as you meet requirements and your loans are eligible. Interest may continue to accrue. When discussing this option, make sure to ask your servicer if you qualify for the income-driven repayment program as an alternative.
- Deferment: This program allows you to temporarily stop payment and ensure that interest does not accrue during the period under which you are in deferment.
- CARES Act: The Coronavirus Aid, Relief, and Economic Security (Cares) Act granted student loan borrowers payment and interest rate suspensions for federal loans. These suspensions were applied automatically but are set to expire on December 31, 2020. Collections, tax offsets, and wage garnishments were also suspended on loans currently in default. The grace period set forth by the CARES Act will still count toward forgiveness programs for borrowers who are participating in these.
- Income-Driven Repayment (IDR) Program: The IDR program allows people to reduce their payments while considering their earnings. People who earn less than 150% of the poverty line may qualify for a $0 payment. With different types of IDR programs, borrowers should always ask their servicer if their loans may be eligible. This will reduce or eliminate the need to apply for a forbearance that could cause interest to accrue.
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:
- Future White House forgiveness proposal. Currently, President-elect Joe Biden has drafted a proposal that would forgive up to $10,000 for every borrower and any remaining student loan debt for persons earning less than $125,000 annually if they attended a public university or a Historically Black College or University (HBCU).
- An extension of student loan payment suspensions. The CARES Act initially allowed for the suspension of student loan debt payments, as well as collections, wage garnishments, and tax refund seizures for persons who had defaulted on their federal student loans. This was supposed to expire on September 30, 2020, but was extended to December 31, 2020. Only the current administration can extend student loan debt suspensions.
In the meantime, continue making a plan, communicating with your servicer often and asking them about any options they can provide you.
Expert Insight on Student Loan Debt and Repayment
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.
Resources for Student Loan Borrowers
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.
- Consumer Financial Protection Bureau (CFPB): The CFPB is a consumer-focused organization that also helps borrowers understand their rights and repayment options. It’s a great place to seek guidance when dealing with private lenders.
- Federal Student Aid: This website is for federal student loan borrowers. Run by the U.S. Department of Education, this website educates students on their various college funding options, their repayment obligations, and their rights. The site includes the FAFSA, which is the form students use to apply for federal student aid, and it also contains forms needed to apply for various repayment or forgiveness programs.
- Pew Charitable Trusts Student Borrower Success Project: A research project by the Pew Charitable Trusts, the Student Borrower Success Project researches both borrowers and servicers by gathering data and recommending changes when necessary.
- Savi: This technological platform helps borrowers navigate through various student loan debt forgiveness and other programs to manage their debts. They currently work through employers and unions, though individuals can also request an invitation.
- Student Loan Borrower Assistance: A project by the National Consumer Law Center, Student Loan Borrower Assistance helps borrowers understand their rights and navigate federal and private loans.
- The Institute for College Access and Success (TICAS): TICAS consistently studies student loan debt and its effects on borrowers. The organization advocates for college accessibility and affordability. Currently, their state projects focus on California and Michigan, but they make policy recommendations at the federal level as well.
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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