Lana Oconnell
Student loans can be a burden, but there are ways to pay them off faster and save money. Strategies include making extra payments, refinancing to a lower interest rate, and consolidating multiple loans into one. Federal student loan borrowers are automatically enrolled in a 10-year standard repayment plan, but there are also income-driven repayment plans that can lower monthly payments and the possibility of loan forgiveness. Private lenders may offer auto-pay deductions, and biweekly payments can help save money on interest costs.
| Characteristics | Values |
|---|---|
| Ways to pay off student loans faster | Make extra payments, refinance to save on interest, or consolidate student loans |
| Federal student loan servicers offer | A quarter-point interest rate discount if you let them automatically deduct payments from your bank account |
| How to pay off federal loans faster | Stay on the 10-year standard repayment plan |
| Federal government income-driven repayment plans | Can lower monthly payments, but may extend the payoff timeline |
| How to lower federal student loan payments | Enroll in an income-driven repayment plan, or consolidate federal loans into the Direct Loan Program |
| Student loan refinancing | Taking out a new private loan to pay off existing loans, which may qualify for a lower rate or new term |
| Student loan consolidation | Combining multiple federal loans into a Direct Consolidation Loan through the federal government, retaining benefits but without interest savings |
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What You'll Learn
Student loan refinancing
When refinancing student loans, you can choose between a fixed or variable interest rate. Fixed rates start as low as 4.49% APR, while variable rates can be as low as 4.35% APR. You may qualify for a lower rate if market rates have dropped or your credit score has improved. However, if you refinance federal loans, you will lose access to federal repayment programs and protections, such as income-driven repayment plans, economic hardship deferment, and public service loan forgiveness.
To qualify for refinancing, you must meet certain eligibility requirements, such as having student loans totaling at least $5,000 that you used to fund tuition at an eligible Title IV-accredited school. You may also choose to apply with a cosigner to improve your chances of approval or secure better terms. Refinancing may slightly reduce your credit score temporarily due to the hard credit check, but building a history of on-time payments on your new loan can improve your credit over time.
It's important to compare lenders when considering refinancing. Look at interest rates, repayment terms, and monthly payments to find the best option for your financial goals. While refinancing can help you secure a better deal, it may not be the best choice for everyone, so be sure to consider your financial situation and goals.
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Loan forgiveness
To benefit from PSLF, careful attention to detail is required. The PSLF Help Tool, provided by the U.S. Department of Education, is a free resource that can help you determine your next steps and ensure you receive credit for your monthly payments. Only federal Direct Loans can be forgiven through PSLF.
Income-driven repayment (IDR) plans are another option for loan forgiveness. These plans cap monthly payments based on income and family size, and in some cases, the payment could be as low as $0 per month. The remaining balance on loans may be forgiven after 20 or 25 years of repayment, depending on the specific IDR plan. It's important to note that only federal student loans managed by the Department of Education (ED) qualify for the one-time IDR adjustment. Borrowers with ED-held loans that have accumulated at least 20 or 25 years of repayment will be eligible for automatic forgiveness, even if they are not currently on an IDR plan.
Additionally, consolidating student loans can extend the repayment period to a maximum of 30 years. While this option prolongs the time to become debt-free, it can help reduce monthly payments to a more manageable level.
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Income-driven repayment plans
The US federal government offers income-driven repayment (IDR) plans for student loan borrowers. IDR plans are designed to provide insurance against unaffordable payments when a borrower's income is low. Under these plans, payments are set as a fraction of discretionary income, rather than a fixed payment for ten years. IDR plans can lower monthly payments, but they may also extend the repayment timeline up to 20 or 25 years, after which any remaining debt may be forgiven.
Most IDR plans are currently in legal limbo due to litigation against the newest IDR plan developed by the Biden administration. The House has passed a bill that includes major changes to the student loan program, including IDR. Under the House bill, existing IDR plans would be closed to new borrowers and replaced with a new program called the Repayment Assistance Plan (RAP). The Senate version of the bill includes similar loan repayment provisions.
RAP differs from existing IDR plans in several ways. One key difference is that RAP requires a minimum monthly payment of $10, regardless of a borrower's income. In contrast, under existing IDR plans, borrowers whose income is below a "protected income threshold" have a "$0 payment". The protected income threshold ranges from 100-225% of the federal poverty line, depending on the plan.
Proponents of RAP argue that requiring nonzero payments will encourage responsible borrowing and timely repayment, establish accountability for students, and keep borrowers engaged with the repayment system. On the other hand, critics argue that even a $10 monthly payment can be a real hardship for some borrowers, increasing hassle costs and potentially not even covering the cost of collecting the payment.
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Loan consolidation
Debt consolidation is a way to combine multiple high-interest loans or credit card balances into a single loan with a lower interest rate. This can help you save money on interest and make paying off your debt faster.
There are a few different ways to consolidate your debt. One way is to take out a personal loan from a bank or online lender and use it to pay off your other loans or credit card balances. Another way is to transfer your credit card balances to a single credit card with a low or 0% introductory APR. This is called a balance transfer.
When consolidating your debt, you can choose a repayment term that works for you, typically ranging from 24 to 84 months. A longer-term loan will lower your monthly payments but will result in paying more interest over time. On the other hand, a shorter-term loan will have higher monthly payments but will save you money in interest.
It's important to note that getting a debt consolidation loan can be challenging if you have bad credit. Some lenders may require a minimum credit score of 580 or even 700 to qualify for their best rates. However, there are lenders like Upstart that cater to borrowers with bad credit, although this may come with higher fees and a maximum APR.
Consolidating your student loans can be a great way to simplify your finances and accelerate your debt repayment journey.
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Lowering monthly payments
The federal government offers income-driven repayment (IDR) plans that can lower your monthly payments based on your income. Contributing to a tax-deferred retirement account, such as a 401(k) or 403(b), lowers your adjusted gross income (AGI) and, in turn, your IDR payment. If your income decreases or your household size increases, you can renew your IDR income recertification early to have your monthly payment recalculated.
Federal student loan servicers offer a quarter-point interest rate discount if they can automatically deduct payments from your bank account. While the savings from this discount will likely be minimal, it can still help lower your monthly payments. For example, dropping a $10,000 loan's interest rate from 4.50% to 4.25% would save you about $144 overall on a 10-year repayment plan.
You can also consider refinancing your student loans to potentially lower your interest rate and monthly payments. Refinancing replaces multiple federal or private student loans with a single private loan, ideally at a lower interest rate. Choosing a new loan term that is shorter than what's left on your current loans may increase your monthly payment but could help you pay off the debt faster and save money on interest.
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Frequently asked questions
The fastest way to pay off federal loans is to stick to the 10-year standard repayment plan. This plan splits your total debt (plus interest) into 120 monthly instalments spread over 10 years.
There are several strategies to pay off student loans faster:
- Make extra payments
- Refinance to save on interest on private loans
- Enroll in an income-driven repayment (IDR) plan
- Take advantage of autopay discounts
- Make biweekly payments
Student loan refinancing is when you take out a new private loan to pay off your existing loans, ideally at a lower interest rate. Refinancing allows you to combine multiple loans into one, making repayment easier to manage.
