Janice Lozano
Paying off student loans quickly with a low income is challenging but not impossible. The fastest way to pay off federal loans is to stick with the standard repayment plan, which splits your total debt (plus interest) into 120 monthly instalments over 10 years. However, if your income is low, you may be eligible for an income-driven repayment (IDR) plan, which can lower your monthly payment. To speed up repayment, you could also consider refinancing to a single private loan with a lower interest rate and a shorter term. Additionally, making extra payments towards your loan principal and starting a side hustle to increase your income can help you pay off your student loans faster.
| Characteristics | Values |
|---|---|
| Refinancing | Choose a new loan term that's less than what's left on your current loans. Refinancing can save you thousands or lower your monthly payment. |
| Lump-sum payoff | You miss out on the 1-2% interest you could have earned with that money. |
| Interest rates | If interest rates on high-yield savings accounts drop below 4.6%, it's worth paying off your loan in full. |
| Federal loans | The government automatically puts borrowers on a 10-year standard repayment plan. The fastest way to pay off federal loans is to stay on this plan. |
| Income-driven repayment (IDR) plans | Can lower your monthly payment based on your income. However, IDR plans can extend the payoff timeline up to 20-25 years. |
| Loan forgiveness | The federal government offers loan forgiveness after 20-25 years, depending on your loan type. |
| Extra payments | Making extra payments on the principal can help pay off loans faster. |
| Highest interest rate | Make your normal minimum payment on the total loan package, but then make extra payments on the loan with the highest interest rate. |
| Side hustle | Increase your income through a side hustle or freelance work to pay off loans faster. |
| Payment plans | Seek an income-driven repayment plan rather than a pause on payments if your payment is too high. |
| Retirement savings | Contributing to a tax-deferred retirement account can decrease your adjusted gross income (AGI) and your IDR payment. |
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What You'll Learn
Choose a shorter loan term
If you're looking to pay off your student loans quickly, one strategy is to choose a shorter loan term. This means you'll be opting for a loan term that is less than what's left on your current loans. While this approach may increase your monthly payments, it can help you become debt-free faster and save you money on interest.
For example, let's consider refinancing a $50,000 student loan. If you have an 8.5% interest rate and a 10-year term, you could refinance to a 6% interest rate on a seven-year term. This would save you approximately $13,000 in interest over the life of the loan. However, your monthly payments would increase by about $110.
It's important to note that shorter-term loans may not be suitable for everyone, especially those with low incomes. The higher monthly payments associated with shorter-term loans can put a strain on your budget. Before choosing this option, carefully consider your financial situation and ensure that you can comfortably afford the increased monthly payments.
Additionally, your eligibility for refinancing to a shorter-term loan depends on various factors. Lenders typically look for borrowers with private loans, a credit score in the high 600s, a steady and high income, and a debt-to-income ratio below 50%. If you meet these criteria, refinancing to a shorter-term loan can be a great way to accelerate your debt repayment journey.
To summarize, choosing a shorter loan term can be an effective strategy to pay off your student loans faster and save on interest costs. However, carefully assess your financial situation and eligibility before making any decisions, as the increased monthly payments may impact your budget.
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Start a side hustle
Starting a side hustle is a great way to increase your income and pay off student loans faster. Here are some tips to help you get started:
Pick the right side hustle for you
Consider your skills, interests, and schedule when choosing a side hustle. Freelancing, tutoring, babysitting, pet-sitting, and driving for a ride-sharing app are all flexible and lucrative options. You can also sell items online, rent out your belongings, or use your skills to offer freelance services. Choose something that excites you and aligns with your passions and connections.
Be strategic and intentional
Make a plan for your side hustle income. Decide how much of your extra income will go towards debt repayment and how much you'll spend on other things. This will help you stay focused and avoid spending your extra income on non-essential items.
Create a budget and track your finances
Budgeting is crucial to ensuring you don't take on more debt. Create a budget that includes your side hustle income and specific goals, such as saving or debt repayment. Track your income and expenses carefully, especially for tax purposes. Consider using budgeting software or seeking help from a financial professional.
Be mindful of your time and energy
A side hustle should fit around your current work schedule and routine without overwhelming you. Avoid taking on too much, as this can lead to burnout.
Explore your options and do your research
Research different side hustles and talk to people with experience to understand the pros and cons of each option. Consider any upfront costs, supplies, certifications, or skills you may need, and factor them into your budget.
Remember, a side hustle is a great way to boost your income and pay off student loans faster, but it's important to be strategic and intentional about how you use your extra income.
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Pay off the highest-interest loans first
If you have multiple student loans, it's a good idea to focus on paying off the ones with the highest interest rates first. Here's how you can do this while on a low income:
First, log into your loan servicer account and identify the loans with the highest interest rates. Make the minimum payment on the total loan package, but then make extra payments on the loan with the highest interest rate. Ensure that you do not advance your payment date, as this will only push out the next payment due date. By keeping the date the same, you can ensure that your extra payments are applied to the principal of the loan with the highest interest rate, helping you to pay it off faster and save money.
If you can afford to make extra payments, this is a great way to get out of debt faster and reduce the amount of interest you pay overall. However, if your income is low, you may want to consider enrolling in an income-driven repayment (IDR) plan. These plans base your monthly payments on your income and can lower your payments to as low as $0. The federal government offers IDR plans, and you can use ED's Loan Simulator to choose the right one for you. Keep in mind that IDR plans can extend the payoff timeline up to 20 or 25 years, and your remaining debt may be forgiven after this period.
While paying off your student loans, it's important to stay in touch with your loan servicer and keep them updated with any changes to your mailing address, phone number, and email address. Additionally, consider claiming your student loan interest on your tax return. Depending on your income and tax filing status, you may be able to claim up to $2,500 of the student loan interest you paid in a given year.
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Claim your student loan interest on your tax return
If you're looking to pay off your student loans quickly on a low income, one strategy is to claim your student loan interest on your tax return. This strategy can help you save money on interest and reduce your taxable income. Here's how you can do it:
First, determine if your student loan interest qualifies for a deduction. The IRS allows you to deduct the interest you paid on your student loans from your taxable income, which can lower your tax liability. To qualify, you must have paid at least $600 in interest during the tax year, and your modified adjusted gross income (MAGI) must be below certain thresholds. For tax year 2024, if you're filing as Married Filing Jointly, your MAGI must be $165,000 or less to claim the full deduction. If your MAGI is between $165,000 and $195,000, your deduction will be gradually reduced, and you cannot claim the deduction if your MAGI is $195,000 or more. For Single, Head of Household, or Qualified Surviving Spouse filers, the threshold is an MAGI of $80,000 or less to claim the full deduction.
Next, gather the necessary forms and information. You should receive a Form 1098-E, Student Loan Interest Statement, from your loan servicer if you paid $600 or more in interest during the year. This form will also be sent to the IRS. If you paid less than $600 in interest, you may need to contact your loan servicer to obtain the exact amount of interest paid. Additionally, refer to IRS publications such as "Tax Benefits for Education" and the instructions for Form 1040 to determine if your expenses qualify.
Finally, claim the deduction on your tax return. The deduction is considered an above-the-line adjustment, which means you don't need to itemize your deductions. You can subtract up to $2,500 of interest paid from your gross income when calculating your Adjusted Gross Income (AGI). This reduction in taxable income may result in a lower tax bill or a larger refund.
Keep in mind that if your income level works for you, you could also consider investing your money or paying off your loans faster by making extra payments toward the principal, in addition to claiming the student loan interest deduction.
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Seek income-driven repayment
The federal government offers income-driven repayment (IDR) plans, which can lower your monthly payment based on your income. The US Department of Education's Office of Federal Student Aid (FSA) offers the Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR) plans. These plans can be applied for on StudentAid.gov/idr.
The IDR plans are designed to make your monthly payments more manageable, but they will also extend the payoff timeline up to 20 or 25 years, depending on your loan type. At the end of this period, any remaining debt may be forgiven. This means that while you will be paying off your loans for a longer period, the monthly payments will be smaller and more affordable on a low income.
It is important to note that the IDR plans were temporarily paused due to an injunction by the 8th Circuit Court of Appeals, which deemed parts of the plans illegal. The application has since been reopened with revisions to comply with the ruling.
While the IDR plans can be a good option for lowering your monthly payments, it is worth considering that the standard repayment plan will mean becoming debt-free faster, although with higher monthly payments.
Another option to consider is refinancing your student loans to a lower interest rate, which can lower your monthly payments and save you money.
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Frequently asked questions
There are several ways to pay off student loans faster, including:
- Making bi-weekly payments
- Using autopay
- Paying interest while in school
- Making extra payments towards the principal
- Refinancing to a lower interest rate
- Taking on a side hustle to increase your income
The fastest way to pay off federal loans is to stay on the standard repayment plan. The federal government offers income-driven repayment (IDR) plans, which can lower your monthly payment, but they also extend the payoff timeline.
You can lower your monthly payments by saving for retirement. Contributing to a tax-deferred retirement account, like a 401(k) or 403(b), decreases your adjusted gross income (AGI) and your IDR payment. You can also seek an income-driven repayment plan, which can reduce your monthly payment to as low as $0.
With a low income, you may be able to qualify for an income-driven repayment (IDR) plan, which can lower your monthly payments. You can also take on a side hustle to increase your income and pay off your loans faster.
