How to Manage Student Loan Debt
Student loan debt is bogging down our generation. Most accept it as a fact of life — something that can’t be escaped if you want to earn a decent salary in this country. They make those payments on their degree every month but have no plans on escaping the grip of those monthly payments anytime soon.
There are ways to chip away at your student loan balances, paying them off at a quicker pace or even having big chunks of your balance discharged or forgiven.
First, note if your student loans are private, federal or a mix of both. Then, read on to learn how to get rid of or reduce that debt that’s been holding you back.
What’s the Best Way to Pay Off My Student Loan Debt?
There are a couple of different strategies that can help you pay off your student loans, and to pay them off quickly.
One is going to involve simply applying more money to the principal, and the other takes refinancing under consideration.
Make Larger or More Frequent Payments
Paying more than the minimum required can help you not only pay off your student loan sooner, but also save money in interest over the life of your loan. Let’s say your monthly payment on your $10,000 student loan is roughly $111 because you are charged 6% APR over the course of 10 years.
If you double the amount you’re paying to $222/month, your 10-year loan would be paid off in less than five years, and you’d save nearly $2,000 in interest over the life of your loan.
If you decide making larger payments is the path you’d like to take, be sure to have your student loan servicer walk you through making your payment. You want to be sure the extra $111 is applied to your principal and not simply applied to the next month’s payment.
Alternatively, you could split your minimum monthly payment in two and then pay biweekly. Because of the way the calendar falls, there should be two months out of the year that will require three biweekly payments rather than the two you’d normally encounter. This means that you would be making two extra half-payments per year.
In our example, you’d cut the $111 monthly payment down to roughly $56. You would then make $56 payments every two weeks, for a total of 24 payments over the course of a year. This adds up to the equivalent of about one full extra payment per year.
In this scenario, you would pay off your loan just over a year early, and save yourself just over $350 in student loan interest over the life of your loan.
Refinance Your Student Loans
Another way to potentially pay your student loans back faster and with less interest is by refinancing. This method is likely best for those who have a high education level, high income-earning potential and the ability to secure a low interest-rate with online-only marketplace lenders.
For everyone else, refinancing your student loans can be risky. If you have federal student loans, you almost never want to refinance them on the private market. This is because you’ll lose access to some advantaged, federal repayment programs which we’ll discuss further in a minute.
If you have private student loans and good credit, refinancing on the private market may make sense if you’re currently paying high-interest rates on your debt. For example, those who attended college leading up to and during the Great Recession may have higher interest rates than those offered today. Refinancing could potentially lower those rates.
However, you have to be careful. When you refinance, your loan term will restart. That means that even if you’ve secured a lower interest rate, you’ll technically have more time to pay it. This can add up to a larger dollar-value interest total despite the lower rate since you’re paying it over a longer period of time.
To effectively use this method, you would want to ensure you repay your refinanced loan in the same amount of time you had to pay off the original loan. This way, you’re not only paying a lower interest rate, but you’ll also get the principal down to zero at a much quicker rate.
Find Extra Money to Pay Off Your Student Loan Debt
You may want to throw extra money at your loan’s principal every month, but how realistic is that?
You might be surprised. When you look around you, there may be some ways to quickly drum up cash to make that extra payment. You can start your search in one of these places:
Tax Refunds: Rather than spending your tax refund on an all-inclusive vacation or the downpayment for a new car, consider applying it to your student loan principal.
Raises: When you get a raise, set up an automatic transfer for the newly “found” money to go straight towards paying down your student loan debt.
Unclaimed Funds: An untraditional place to look is with your state’s treasury office. Here you’ll find undeliverable insurance payouts, uncashed paychecks and other monies from companies who might owe you but didn’t know how to find you.
Cut Your Budget: If you haven’t already, make sure you’ve established a firm budget. When you know where your money is going every month, it’s easier to reallocate it from less noble pursuits, like fast food, to more noble pursuits, like early student loan payoff.
Side Hustles: Whether you’re donating plasma, walking dogs or driving for Uber, a side hustle can help you round up that extra money you need to increase your monthly payments.
If you’re worried about a side hustle affecting your work/life balance, simply hustle until you’ve reached your payment amount each month and then give yourself a reprieve before going back at it again the next month. Paying off debt is a marathon; it’s okay if you need rests in between.
Employer Loan Assistance Programs: Some employers will offer to pay back a portion of their employees’ student loans. Ask about this benefit further into the interview process, and make sure you understand any caveats of the program.
For example, if you leave the company within a certain amount of years, will you have to repay them for what they invested in your educational debt?
Get Your Federal Student Loans Erased
If you have federal student loans, there are three different ways you can essentially erase your debt:
- Student Loan Forgiveness
- Student Loan Cancellation
- Student Loan Discharge
How Do You Get Your Student Loans Forgiven?
There are two different ways to earn student loan forgiveness.
The first is to pay on an income-driven repayment plan for 10- to 25-years, at which point the remainder of your balance will be forgiven.
Federal Student Loan Forgiveness Programs
- Pay as You Earn (PAYE)
- Max Monthly Payment: 10% of your discretionary income, but never more than what your payment would be on a Standard Plan.
- Number of Years You Must Pay: 20
- Requirements: Must have taken out your loans on or after October 1, 2007 and taken at least one disbursement on or after October 1, 2011. Must have a high debt-to-income ratio.
- Revised Pay as You Earn (RePAYE)
- Max Monthly Payment: 10% of your discretionary income. Could exceed what your payment would be on a Standard Plan.
- Number of Years You Must Pay: 20 for undergraduate borrowers. 25 for graduate borrowers.
- Requirements: Must count your spouse’s income and student loan debt when applying — even if you filed taxes separately.
- Income Based Repayment
- Max Monthly Payment: 10% of your discretionary income if you were a new borrower on or after July 1, 2014. 15% of your discretionary income if you were a new borrower prior to July 1, 2014. You will never have to pay more than you would under a Standard Plan.
- Number of Years You Must Pay: 20 if you were a new borrower on or after July 1, 2014. 25 if you were a new borrower prior to July 1, 2014.
- Requirements: You must have a high debt-to-income ratio.
- Income Contingent Repayment
- Max Monthly Payment:20% of your discretionary income, but never more than what you would pay on a fixed, 12-year repayment plan.
- Number of Years You Must Pay: 25 years.
- Requirements: You will probably pay more over the course of this repayment plan than on a Standard Plan.
The second is to qualify for one of several special programs:
Special Student Loan Forgiveness Programs:
- Public Service Loan Forgiveness (PSLF). Get set up on an income-driven repayment plan, and make 120 payments while you’re working for the government or a nonprofit. The remainder of your student loan balance will be forgiven. Must have Direct Loans to qualify.
- Teacher Loan Forgiveness. After you’ve stopped taking on student loan debt, you may qualify for up to $17,500 in student loan forgiveness if you work in a low-income school or at an educational agency that serves low-income students for five years.
- Borrower Defense Forgiveness. If your school lied about your program or violated state law when administering your federal student loans, you may apply to have your student loans forgiven.
However you go about pursuing forgiveness, it’s important to know that you will be held responsible for paying taxes on any amount forgiven come the following April.
Are Student Loans Forgiven After 20 Years?
The amount of time it will take to get your federal student loan balance forgiven depends on which kind of income-driven repayment plan you are on.
PAYE borrowers, Income-Based Repayment borrowers whose loans were first issued on or after July 1, 2014, and RePAYE undergraduate borrowers will have their balances forgiven after 20 years.
Those on Income-Contingent Repayment Plans, those who are repaying via an Income-Based Repayment Plan and initiated their loans after July 1, 2014, and those who borrowed for graduate school enrolled in a RePAYE plan will have to wait 25 years.
Of course, PSLF borrowers, those enrolled in the Teacher-Student Loan Forgiveness Program and those pursuing Borrower Defense can have their student loans forgiven in 10 years, 5 years or immediately respectively.
How to Get Student Loan Cancellation
If you borrowed in the past, you may have been eligible for a Federal Perkins Loan. While this type of loan is no longer available, a cancellation program for this type of loan does exist for teachers.
In order to qualify, you must work as a full-time employee in a low-income district, with disabled children or in a high-need subject area as determined by each state.
In the first two years you participate, 15% of your loan will be forgiven each year. In the third and fourth years in which you participate, 20% of your loan will be forgiven each year. In the fifth year of your participation, the remaining 30% will be forgiven, giving you a possible cumulative total of 100% cancellation.
How to Get Your Student Loans Discharged
There are several programs offering student loan discharge on federal student loans.
- Total and Permanent Disability. If you can prove you have a disability through your physician, the Social Security Administration or the VA, you can get 100% of your student loans discharged. The TEACH grant — which requires four years of service else it is turned into a student loan — can have the service requirement nullified and the “loan” discharged under this program, as well.
- Closed School Discharge. If your school closes while you’re attending, on an approved leave of absence or 120 days after you withdraw, you can have your student loans discharged.
- Discharge through Bankruptcy. It is extremely difficult, though not impossible, for those holding student debt to have said debt discharged in bankruptcy. In order to do so, you must prove “undue hardship.” The standard of undue hardship, though, will be subjective based on your judge.
- False Certification Discharge. If your school lied about your eligibility for student loans and disbursed them anyways, you may be eligible for false certification discharge.
- Unpaid Refund Discharge. If you withdrew from school but your financial aid office did not issue the Department of Education a refund for your student loan, this loan amount can be discharged for eligible borrowers.
- Discharge Due to Death. If you pass away, your loved ones can have your student loan debt discharged from your estate by providing legal documentation of your passing.
Can You Negotiate a Payoff on a Student Loan?
You can negotiate a payoff on a federal student loan, but it’s not easy. First of all, the government can easily garnish your wages and other sources of income. But before you let it get that far, check out the income-driven repayment programs above.
Because control over your own bank account isn’t something you can use at the negotiating table, you’re likely only to end up in this situation if you’re in dire straights. At that point, you can attempt negotiations with your assigned collection agency. However, there are limited negotiation packages they can offer you per federal law.
If you have private student loans, however, your lender may be more willing to negotiate with you. In order to garnish your wages, they would have to take on the expense of taking you to court.
It’s still going to be difficult to get them to budge much, though, because they also know that if your student loans cause you to go bankrupt, you are likely to have an extremely hard time getting them discharged.
How Quickly Can You Pay off Student Loan Debt?
The best option for you will vary based on your circumstances. Those with older private student loans may want to look to refinancing — especially if they look attractive to creditors based on their education, income potential and/or credit score. This is likely not a good method for median-income Americans, though — especially not those who have federal student loans.
Instead, this demographic should look to income-driven repayment plans. If you are ineligible for these plans or would not benefit from them due to your income level, look to side hustles and found money to help you make larger-than-the-minimum payments on your debt.
You’ll likely be surprised how quickly things can move when you chip away at that principal bit by bit.