Janice Lozano
Paying off student loans can be a daunting task, especially with the fear of defaulting on payments. The first step is to understand the difference between federal and private student loans. Federal loans offer income-driven repayment plans, loan forgiveness programs, and consolidation options, while private lenders may be willing to negotiate a deal or reduce payments. To get started, reach out to your servicer, keep good records, and consider using a student loan payoff calculator to understand extra payment strategies.
| Characteristics | Values |
|---|---|
| Fastest way to pay off student loans | Pay more than the minimum each month |
| How to save on interest | Use a student loan payoff calculator, sign up for autopay, or refinance |
| Federal loan benefits | Variety of income-driven repayment (IDR) plans, loan forgiveness programs, and payment relief |
| Private loan consequences | Loss of IDR plans, loan forgiveness, and payment relief; loans may be reported delinquent as early as 30 days without a payment |
| Getting out of default | Contact your servicer, ask about options, and consider rehabilitation, consolidation, or negotiation with private lenders |
| Free assistance | Avoid using credit cards or home equity to pay off loans; military, government, and nonprofit employees may qualify for loan forgiveness |
| Record-keeping | Keep all mail and notes from phone calls with servicers, and maintain good records for multiple loan types and servicers |
| Tax benefits | Claim student loan interest on your tax return |
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What You'll Learn
Make extra payments
Making extra payments is one of the fastest ways to pay off student loans. The more you pay toward your loans, the less interest you’ll owe, and the quicker the balance will disappear. Here are some tips to help you make extra payments:
- Refinance your loans: You can save on interest by refinancing your private loans. However, once you refinance, your student loans permanently become private, and you'll lose access to federal benefits such as IDR plans, loan forgiveness programs, and payment relief.
- Use a payoff calculator: A student loan payoff calculator can help you understand how fast you can get rid of your loans with extra payments and how much money you'll save in interest.
- Sign up for autopay: Many private lenders offer an auto-pay deduction, which can lower your interest rate so that more of your money goes toward your principal balance.
- Allocate windfalls to your loans: If you get a raise, a student loan refinance bonus, or another financial windfall, try to put at least a portion of it toward your student loans.
- Take on a side hustle: Consider increasing your income by starting a side hustle, and put this extra income toward paying off your loans faster.
- Ask your employer: Find out if your employer offers a student loan repayment program as an employee benefit and ask how to enroll.
- Stay in touch with your servicer: Keep your servicer informed of your current contact details and open their mail to ensure you find out about any problems quickly. Also, inform your servicer if you expect to be incarcerated for at least 10 years.
- Make a plan: If you're struggling to afford your loan payments, reach out to your servicer immediately to ask about your options. Reliable lenders will want to work with you to help you get out of default.
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Refinance to save on interest
Refinancing private student loans can be a good way to save on interest and lower your monthly payments. Here's how it works: when you refinance, a private lender pays off your existing loans and replaces them with a single new loan that has a lower interest rate and a repayment schedule. This can reduce your monthly payments and the overall amount you repay.
For example, consider a $35,000 private loan with a 12% interest rate and a 10-year repayment term. Your monthly payments would be around $502, and you'd repay a total of $60,240, including interest. By refinancing at a 7% interest rate and keeping the same repayment term, your monthly payments would drop to about $406, and your total repayment would be $48,766—saving you nearly $11,500.
It's important to note that refinancing federal loans to private loans means giving up federal protections and benefits like income-driven repayment plans, loan forgiveness, and borrower protections. Therefore, it's recommended to maintain your federal loans to preserve these benefits.
To qualify for refinancing, you typically need a good credit score (at least in the high 600s) and a stable income. If you meet these requirements, refinancing can be a great way to reduce your interest rates and save money on your private student loans.
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Negotiate with private lenders
Negotiating with private lenders can be a way to pay down your private student loans. Private student loans are easier to settle than federal loans because they are negotiated directly with the lenders without the involvement of any federal government agencies. However, lenders rarely publish their settlement guidelines, and not all student loan lenders are willing to entertain settlement offers. The amount of debt that can be forgiven varies according to the lender and your financial situation. Private student loans commonly settle for a lump sum payment of between 40% and 60% of your balance.
Before negotiating, confirm your default status with your loan servicer. Lenders are more likely to negotiate if you are experiencing financial hardship, so gather proof of your situation to show why you can't repay the full amount. If you are hoping to reduce the amount you owe, make sure the money is available. Do not negotiate without the cash in hand, as you may end up agreeing to terms you cannot afford.
You can negotiate directly with your lender or hire an attorney to help you. If you negotiate alone, explain your situation and ask open-ended questions such as "What are my options at this point?" or "How can we settle this debt?". Allowing the lender to make the first offer gives you an advantage as you know the starting point for negotiations.
If you cannot settle your debt in full, you could ask your lender for a loan modification. This changes your loan repayment terms to make it easier for you to pay off, usually by lowering your interest rate or reducing your loan fees. Get any agreements in writing and watch out for debt relief scams.
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Use auto-pay deductions
Auto-pay deductions are a convenient way to make your student loan payments automatically each month. This method ensures timely payments and saves you from the hassle of mailing cheques or logging into your online account manually. By signing up for auto-pay, you can also benefit from a lower interest rate, helping you save money.
Most federal and private student loan lenders offer auto-debit as an option. This feature allows your monthly loan payments to be automatically withdrawn from your designated bank account. The automatic deduction ensures that you never miss a payment, which can help improve your credit score. It is important to ensure that your bank account has sufficient funds to handle the withdrawal amount to avoid any issues.
When you enrol in auto-pay, you typically receive an interest rate discount of 0.25 percentage points. While this may seem insignificant, it can make a noticeable difference over time, especially for larger loan balances. For example, a borrower with a $20,000 loan over ten years at a 5% interest rate would pay a monthly amount of $212 without auto-pay. With the interest rate reduction from auto-pay, the monthly payment decreases to $210, saving $2 per month or $24 per year. Over the ten-year loan term, this amounts to a total savings of $240.
Additionally, some private lenders may offer even larger discounts for auto-pay. For instance, PNC Bank currently provides a 0.50% rate discount for borrowers who enrol in automated payments. These enhanced discounts further increase your savings and help pay off your loan faster.
To enrol in auto-pay, access your online account with your student loan lender. During the enrolment process, you can configure the amount you wish to pay towards specific loans. You may also need to provide your bank account details to designate the account from which payments will be automatically withdrawn. Remember to keep your lender informed about any changes to your bank account to avoid missed payments.
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Explore loan forgiveness programs
Private student loan forgiveness is rare, and most private lenders do not offer it. Forgiveness is typically only granted if the borrower dies or becomes permanently disabled. However, some private lenders may offer forgiveness at their discretion, and there are other options for relief.
Licensed teachers, nurses, doctors, and lawyers in certain states may be able to take advantage of state programs to assist with repaying debt. For example, Mississippi's Winter-Reed Teacher Loan Repayment Program will pay up to $6,000 per year on undergraduate educational loans to teachers with a specific teaching license for each year of teaching full time in a particular geographical or subject area. Contact your state’s higher education department to find out if you qualify for a program and check with your professional associations.
You can also apply for repayment assistance. Your state government may provide relief in the form of loan repayment assistance programs.
Another option is to refinance your loan. This involves taking out a new private loan to pay off your original debt. Reasons to refinance may include the ability to lock in a lower interest rate or extend your term to reduce your monthly payments. However, the best refinancing products are usually only available to borrowers with high incomes and excellent credit.
Finally, while it is not the same as forgiveness, many private lenders offer forbearance, which allows you to temporarily pause payments under certain circumstances.
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Frequently asked questions
Contact your lender or servicer to discuss your options. You may be able to set up a payment plan. If you have a co-signer, let them know about the default. You can also ask your lender to reduce your payment.
Make extra payments, refinance to save on interest, or increase your income with a side hustle. You can also use a student loan payoff calculator to see how much faster you can get rid of your loans with extra payments.
Ask your lender for relief and show them what you can pay. Organize your evidence, including bank statements and other bills. Reach out to your servicer to ask about your options. Reliable lenders will want to work with you to help you get out of default.
If you're in the military or work for a government or nonprofit organization, you may qualify for public service loan forgiveness.
Stay in touch with your servicer and provide them with your current contact information. Keep good records by saving all mail from your servicer and taking notes during phone calls.
