Savanna Hoffman
Paying off a student loan can be a daunting task, but with a good strategy, it is possible to become debt-free. There are several ways to approach this, such as making extra payments, consolidating multiple loans, or even applying for loan forgiveness. It is important to be aware of the interest accruing on your loan and to manage costs effectively. With careful planning and perhaps some lifestyle adjustments, you can develop a repayment strategy that works for you.
| Characteristics | Values |
|---|---|
| Loan repayment plan | Have a plan in place to manage costs and find out about loan forgiveness |
| Loan forgiveness | Eligibility depends on the field of work or financial/health-related issues |
| Loan consolidation | Combine multiple federal student loans into one loan with a lower interest rate |
| Extra payments | Pay more than the minimum each month to reduce interest and speed up repayment |
| Interest accrual | Interest accrues during school, grace periods, and periods of deferment/forbearance |
| Interest-only payments | Consider interest-only payments during school, grace periods, or forbearance to avoid capitalization |
| Lump-sum interest | Pay a lump sum before the grace period ends to reduce the principal balance |
| Refinancing | Refinance private loans to save on interest |
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What You'll Learn
Loan forgiveness plans
Income-driven repayment (IDR) plans are a common method to manage student loan debt. IDR plans base your monthly payment on your income and family size, with payments potentially being as low as $0 per month. Depending on the IDR plan, the remaining balance on your loans may be forgiven after 20 or 25 years of repayment.
Public Service Loan Forgiveness (PSLF) is another option. PSLF is available to government and qualifying nonprofit employees with federal student loans. Eligible borrowers can have their remaining loan balance forgiven tax-free after making 120 qualifying loan payments on an IDR plan and 10 years of full-time public service work. Qualifying public service employers include federal, state, local, or tribal government, the U.S. military, and certain non-profit organizations. Teachers employed full-time in low-income public schools may be eligible for Teacher Loan Forgiveness after working for five consecutive years, with up to $17,500 in federal direct or Stafford loans forgiven.
If you have a disability that severely limits your ability to work, you may qualify for a Total and Permanent Disability (TPD) discharge, which forgives your federal student loan debt. In most cases, you will have to provide specific kinds of proof of your disability and may be subject to a post-discharge monitoring period. However, some people get an automatic discharge if they are identified as eligible by the Social Security Administration or Veterans Affairs.
The U.S. Department of Education and Department of Defense also have special benefits for military service members with federal student loans.
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Making extra payments
Firstly, ensure that any extra payments are applied to your highest-interest loan first. If you have multiple loans with different interest rates, focus on paying off the higher-interest ones first. This will save you the most money in the long run. You can instruct your servicer to apply overpayments to your principal balance, which will reduce the total amount you pay over time.
Secondly, consider making extra payments whenever your budget allows. You can make a one-time payment online, by phone, or by mail. Making extra payments will reduce the Current Amount Due on your next billing statement. Even if there is no required amount due, continuing to make payments will lower your Total Loan Cost.
Thirdly, be mindful of the timing of your extra payments. Advancing a student loan due date won't necessarily help you pay off the loan faster, as your extra payment will first go towards any late fees and accrued interest. Instead, instruct your servicer to keep the next month's due date as planned. Making an extra payment at any point in the month or as a lump sum on the due date can both be effective strategies.
Finally, if you can, avoid refinancing or consolidating your student loans. While this may reduce your monthly payments, it will also extend the repayment timeline, meaning you'll be in debt for longer. If you can stick to the standard repayment plan and make extra payments where possible, you'll be debt-free sooner.
By following these strategies and making extra payments, you can significantly reduce the time and cost of paying off your student loans.
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Interest-only payments
If you are still in school, you can make interest-only payments to save hundreds or thousands of dollars. This is because interest accrues while you are in school, and if you don't pay it, your student loan servicer will capitalize the interest once you graduate and your grace period is over. To make interest-only payments while in school, you can set them up directly with your lender or servicer. You can find out who your servicer is by visiting studentaid.gov.
If you have federal student loans, there is no specific interest-only plan you can choose while you're in school. However, you can contact your servicer to find out how much interest is accruing and set up automatic payments. If you are on a deferment or forbearance plan, you may be given the option to make interest-only payments during that time.
With private student loans, interest-only payments might be required while you are in school, or they may be a payment plan option if you meet certain qualifications. Some private lenders will reduce your interest rate if you set up auto-pay.
While it can be a good idea to make interest-only payments on your student loans, there are some downsides to consider. If you are still in school, making these payments could add financial stress, especially if you have taken out large loans. Additionally, choosing an interest-only payment plan when you are not in school or a grace period only delays the inevitable. You will still have to pay back the debt eventually, or risk defaulting on the loan.
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Combining multiple loans
Combining multiple student loans can be a good option if you are struggling to keep up with multiple loan bills. This process is known as refinancing or consolidation. It replaces your multiple student loans with one loan, which may carry a lower interest rate or a shorter repayment term.
Before consolidating your loans, it is important to understand the details of your current loans and the potential new loan. You should also get a clear picture of your monthly income and expenses to determine a realistic monthly loan payment amount. This can be done by creating a student loan spreadsheet, which includes the name of each loan, its balance, interest rate, and your minimum monthly payment.
Consolidation is particularly relevant for parents who have taken out Direct PLUS loans for their children and are also paying off their own student loans. The Direct Consolidation Loan program allows parents to combine multiple Direct PLUS loans into one income-contingent repayment plan. This plan calculates monthly payments based on the borrower's income, family size, and the total amount of the consolidated loan. However, it is important to note that consolidating federal loans through the government could result in a comparatively higher interest rate than private loans.
Another method to consider when combining multiple loans is the debt avalanche method, which focuses on first paying off the loan with the highest interest rate while also paying the minimum amount on other loans. Alternatively, the debt snowball method involves paying off the loan with the smallest balance first and then gradually paying off the loans with larger balances.
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Refinancing
To refinance your student loans, you'll need to find a private lender, such as a bank or credit union, that can offer you a better interest rate. Most lenders look for a credit score of 650 or higher, although some may require a score of 670 or even the mid-700s. If your credit score is lower, you may still be able to qualify by applying with a creditworthy cosigner, such as a parent. In addition to your credit score, lenders will also consider your income, savings, debt-to-income ratio, and repayment term. It's important to shop around and compare rates from multiple lenders before submitting a formal application. You can also prequalify with lenders to get an idea of the rates and terms they can offer without affecting your credit score.
Once you've decided on a lender and submitted your application, the lender will likely run a hard credit inquiry and review your finances and documentation about your current loans. You'll typically hear back about your approval within a few business days. If approved, your new lender will pay off your existing loans, and you'll begin making monthly payments to them according to the new loan's terms.
It's important to note that refinancing federal student loans to a private loan means losing access to certain benefits, such as income-driven repayment plans and loan forgiveness programs. Therefore, it's essential to carefully consider the pros and cons of refinancing and ensure that you won't need any of the federal student loan programs you may lose access to.
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Frequently asked questions
Making extra payments isn't the only way to get ahead of your student debt. You can also:
- Pay more than the minimum each month.
- Make monthly interest-only loan payments while you're in school or during your grace period to avoid capitalization.
- Combine multiple federal student loans into one loan at a lower interest rate.
- Refinance to save on interest on private loans.
Before making student loan payments for the first time, it's important to have a plan in place. Learn about keeping costs manageable and find out about student loan forgiveness. You may be eligible for forgiveness if you work in a specific field or are experiencing financial or health-related issues.
You can use a biweekly student loan payment calculator to see how much time and money you can save. This will help you make your payments on time while keeping the cost manageable.
