Lana Oconnell
Paying off student loans can be a daunting task, but with careful planning and a good strategy, it is achievable. The average student graduates with roughly $31,000 in debt, and understanding the unique traits of student loans can help borrowers make informed financial decisions. Student loan interest accrues daily, often starting the day the loans are disbursed, and borrowers can expect to pay more than the original amount borrowed. To get ahead of the debt, it is advisable to pay more than the minimum monthly payment, make bi-weekly payments, or even pay the interest while still in school. Additionally, exploring repayment plans, loan forgiveness programs, and refinancing options can help ease the burden of student loan repayment.
| Characteristics | Values |
|---|---|
| Average student debt after graduation | $31,000 |
| Interest accrual | Daily, starting the day the loan is disbursed |
| Subsidized federal loan interest coverage | During enrolment, grace period, deferment due to economic hardship, unemployment, cancer treatment, or military deployment |
| Delinquency for private student loans | 30 days without payment |
| Delinquency for Federal Family Education Loans | 60 days |
| Delinquency for Federal Direct and FFEL loans | 90 days |
| Default for federal loans | 270 days, reported at 360 days |
| Default consequences | Negative impact on credit score, potential lawsuit, loss of eligibility for federal student aid, garnishment of federal tax returns, wages, and Social Security payments |
| Repayment plans | Standard, graduated, extended, income-driven |
| Fastest repayment strategies | Paying more than the minimum, autopay, bi-weekly payments, extra payments towards principal, refinancing for lower interest rates |
| Student loan refinancing | Trading multiple student loans for one private loan with better terms |
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What You'll Learn
Loan forgiveness and repayment programs
Income-Driven Repayment (IDR) Plans
IDR plans base your monthly loan repayment amount on your income and family size. If you consistently repay your loans under an IDR plan, the remaining balance may be forgiven after a certain number of payments over 20 to 25 years. The specific terms depend on the IDR plan you're eligible for.
Public Service Loan Forgiveness (PSLF)
If you're employed full-time in a government or not-for-profit organization, you may qualify for PSLF. This program offers forgiveness for the entire remaining balance of your Direct Loans after a certain number of qualifying payments. The PSLF Help Tool can guide you through the application process.
Teacher Loan Forgiveness (TLF)
The TLF program provides forgiveness of up to $17,500 for teachers who work full-time for five consecutive academic years in certain elementary or secondary schools serving low-income families. To qualify, teachers must meet specific requirements and may need to complete a Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligation.
Total and Permanent Disability (TPD) Discharge
If you have a physical or mental disability that severely limits your ability to work now and in the future, you may be eligible for a TPD discharge. This means you won't have to repay your federal student loans and may be released from certain grant obligations. Automatic discharges are available for individuals identified as eligible by the Social Security Administration or Veterans Affairs.
AmeriCorps Service
Completing a term of national service with AmeriCorps can make you eligible for the Segal AmeriCorps Education Award. This award can be used to repay qualified student loans. Additionally, your AmeriCorps service can count toward PSLF, providing a dual benefit for loan repayment.
It's important to explore these options and understand the specific requirements and eligibility criteria for each program. By taking advantage of loan forgiveness and repayment programs, you can make your student loan debt more manageable and potentially reduce the overall financial burden.
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Understanding interest accrual
Understanding how interest accrues on your student loan is key to paying off your loans quickly. Interest is the cost of borrowing money, depicted as a percentage. Interest rates can be fixed, staying the same for the life of the loan, or variable, which may go up or down due to an increase or decrease in the loan's index.
Interest on your student loan begins to accrue on the day the funds are sent to you or your school, and it continues to accrue until you have paid off your loan. Interest accrues daily, and it is typically added to your loan balance monthly. The promissory note for your loan will state whether interest accrues daily or monthly, and it will also detail when accrued interest is capitalized (added to) your principal balance.
Interest accrual can be calculated using the following formula: (Current Principal Balance x Interest Rate) ÷ 365.25 = Daily Interest. This formula calculates the daily interest accrual, or how much interest you would pay for one day. You can multiply this number by a specific number of days to calculate your interest accrual over a certain amount of time. For example, to calculate the 30-day interest accrual on a principal balance of $20,000 with a 4.5% interest rate: [(20,000 x .045) ÷ 365.25] x 30 = $73.92.
At certain points in time, such as the end of a grace period or deferment, any unpaid interest may be capitalized, meaning it is added to your loan's principal balance. This can increase your total loan cost, as interest will now be calculated based on this new, higher amount. To avoid this, you can make payments during any period when they are not due.
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Choosing a repayment plan
There are four types of federal student loan repayment plans. The best option for you will depend on your financial goals and situation. Here is a detailed look at some of the options available to help you choose a repayment plan:
Standard Repayment Plan
The standard repayment plan is a good option if you can afford the monthly payments. This plan lasts for 10 years, during which you make equal monthly payments. By choosing this plan, you will pay less in interest over time compared to other federal repayment plans. You are automatically placed on the standard plan when you enter repayment, but you can change to another plan if you wish.
Income-Driven Repayment (IDR) Plan
The income-driven repayment plan is a good option if you are having difficulty making your monthly payments and need a more manageable plan. IDR plans tie the amount you pay to a portion of your income, which can be helpful if your income is high but you want lower payments. There are four types of IDR plans, and they generally extend the length of time you are in repayment to 20 or 25 years. At the end of the term, you may be eligible for income-driven loan forgiveness for any remaining debt.
Graduated Repayment Plan
The graduated repayment plan is another option to consider, especially if your income is high compared to your debt. This plan starts with lower monthly payments, which may be as little as the interest accruing on your loan, and then increases the amount you pay every two years. Over the course of the 10-year plan, your initial payments could triple in size, so you need to be confident that you will be able to make the larger payments.
Extended Repayment Plan
The extended repayment plan is suitable if you want to lower your monthly payments by spreading them out over a longer period. This plan extends the repayment period to up to 25 years, and you must owe more than $30,000 in federal student loans to qualify. You can choose to pay the same amount each month or opt for graduated payments that increase over time.
Before changing your student loan repayment plan, it is recommended to use the Education Department's Loan Simulator to understand the financial implications of each option.
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Making extra payments
Start Early
If you can, start making payments while you're still in college. Any amount you can put towards your student loans will help reduce your debt. Federal unsubsidized loans and private loans accrue interest during college, which will be added to your total loan balance. By paying down this interest as soon as possible, you can lower your overall debt after graduation.
Pay More Than the Minimum
The more you can pay above the minimum monthly payment, the faster your loan will be repaid. Paying more than the minimum will reduce the interest you owe and help you become debt-free sooner. If you have multiple loans, focus on paying off the ones with the highest and variable interest rates first.
Dedicate Your Tax Refund
If you receive a tax refund, consider putting it towards your student loan debt. You may have received a refund because you get a tax deduction for paying student loan interest, so it makes sense to use that money to pay off more of the loan.
Refinance Your Loan
Student loan refinancing can help you save money. By trading in multiple student loans for one private student loan with better terms, you can reduce your interest rate and shorten the repayment term.
Use Autopay and Bi-Weekly Payments
Setting up automatic payments and paying twice a month can help you pay off your loan faster. By paying more frequently, you can reduce the principal amount and the interest accrued.
Remember to explore all your repayment options and choose a plan that aligns with your financial goals. Making extra payments is a great strategy, but it's important to balance it with your other financial commitments and goals.
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Loan refinancing
When you refinance your student loans, you can consolidate multiple loans into one single loan with one interest rate. This simplifies your payments, making it easier to manage your debt and track your progress. It can also help you save money by reducing the amount of interest you pay over the life of the loan. If you have good credit and a stable income, you are more likely to qualify for a lower interest rate.
However, it is important to note that refinancing federal student loans will cause you to lose access to federal loan benefits and forgiveness programs. Therefore, it is crucial to carefully consider your options and compare different lenders' rates and terms before deciding to refinance. Additionally, refinancing may cause a slight reduction in your credit score due to the hard credit check and closing of the old account.
You can refinance all your student loans or just a portion of them. For example, you might choose to refinance only your private loans while maintaining your federal loans to preserve benefits like income-driven repayment or forgiveness options. It is also possible to refinance student loans with bad credit, but you may need to apply with a creditworthy cosigner and pay higher interest rates.
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Frequently asked questions
Paying more than the minimum each month will help you pay off your student loans faster. The more you pay, the less interest you’ll owe.
Use a student loan repayment calculator to determine how much of your future salary will go toward loan payments. This will help you understand the type of repayment plan you need.
Federal and private student loan repayment typically begins six months after you graduate or leave school. However, you can start paying off your debt while you're still in college.
Defaulting on a federal student loan can cause you to lose eligibility for federal student aid. It can also affect your tax returns, wages, and Social Security payments. To avoid defaulting, make sure to pay at least the minimum amount each month.
Yes, you can use a loan to pay off student loans. Student loan refinancing could save you money. You can also dedicate your tax refund to paying off your student loan debt.
