Pay Off Student Loan Debt Faster

Pay Off Your Student Loan Debt Faster

Americans currently owe $1.1 trillion in student loan debt, and this number is second only to mortgages in terms of household debt.

The average balance is now $28,400, with 1 in 8 student loan borrowers owing more than $50,000. While many people think of student loan debt as a burden of the young, people over 60 still owe an estimated $36 billion.

It’s easy to get overwhelmed by student loans, and the average college student takes a whopping 15 years to pay off educational loans.

The worst possible thing you can do is let these loans go into default, as this will make you ineligible for educational loans in the future, hurt your chances of getting a good job and do major damage to your credit rating.

Taking action as soon as possible to tackle this debt is the best approach to keep your credit intact and give yourself the best possible chances of a bright future.

Note: In addition to this guide, there is an enormous of information available on our forum to help you tackle student loan debt. Most of our guides are written by KK, a member who managed to pay off over $25,000 in student loan debt in just two years.

Student Loans and Your Credit

Student loans can go a long way toward helping your credit, assuming you pay them on time. It seems even loans that are in deferment, forbearance or being paid through an income-based repayment (IBR) plan are not reported negatively by many credit scoring borrowers.

Even if you make your payments on time, lenders will still consider your debt ratio in addition to your credit score to make sure you can handle payments on a new loan in addition to your educational loans. It’s not uncommon for individuals with school loans to have trouble buying a car or a home.

While student loans are considered “good” debt, student loan default rates are still skyrocketing as many people who take out these loans do not graduate, or find themselves with a job that doesn’t let them repay the loan.

Older students may have Social Security checks seized to pay back the loans, while anyone may be sued or face aggressive debt collectors over past-due student debt. It’s also incredibly difficult to get this debt discharged in bankruptcy.

Tackling Student Loan Debt

Digging yourself out of student loan debt can be a major undertaking, although it helps to begin at the beginning. Here are two things to do before you start your repayment plan.

What Do You Owe?

The first step is determining how much you owe, and to whom. A good place to start is the federal National Student Loan Data System (NSLDS), which includes most federal loans. You’ll need to know if your loans are backed privately or by the government. This system, from the U.S. Department of Education, lists federally backed loans, which offer a wide variety of help, unlike private loans.

Loan Forgiveness Programs

Next, you can find out if you qualify for loan forgiveness programs. This is a good starting point, although these programs are incredibly limited and, even if you do qualify, you may only get some of the debt discharged. Here are some resources to check:

  1. Public Service Loan Forgiveness (PSLF) Program
    Under this program, borrowers who enter and continue to work full-time in public service jobs may qualify for forgiveness of the remaining balance of their Direct Loans after 120 qualifying payments.
  2. Teacher Loan Forgiveness
    There are two loan forgiveness programs for teachers: Teacher Cancellation for Federal Perkins Loans and Teacher Loan Forgiveness for other loans.
  3. Total and Permanent Disability Discharge
    Some physical and mental disabilities can qualify you for a discharge of your federal student loans and/or TEACH Grant service obligation.

If you don’t qualify for a loan forgiveness program, you have a few options, outlined below with their advantages, disadvantages and how they work.

Option #1: Federal Student Loan Repayment Plans

Repayment plans are available if you have federal student loans, although the type of repayment plan you qualify for depends on your loan type. Don’t enter into a repayment plan, lightly, however; typically, you will enter into an agreement to reduce your payments over 10-25 years, with the amount remaining afterward forgiven.

The downside? This forgiven balance at the end is currently treated as income, so you’ll need to pay taxes in the end.

With Stafford, Perkins, PLUS and Direct Consolidation loans (which make up 85% of education debt), there are 5 repayment plans. Don’t assume the option with the smallest monthly payment is best, as it may cause you to pay thousands more in interest over the life of the loan.

Following are the repayment plans currently available:

1. Standard Repayment Plan

Eligible loans include: Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans and all PLUS loans.

Monthly payment and term: Payments will be fixed monthly payments of at least $50 every month. The term is up to 10 years.

Notes: You’ll usually pay less interest over the life of the loan using this plan rather than other repayment plans.

2. Graduated Repayment Plan

Eligible loans include: Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans and all PLUS loans.

Monthly payment and term: Payments start off lower but gradually increase every 2 years. The term is up to 10 years.

Notes: You’ll end up paying more in interest over the life of your loan under the standard 10-year plan.

3. Extended Repayment Plan

Eligible loans include: Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans and all PLUS loans.

Monthly payment and term: Payments may be graduated or fixed, with a term up to 25 years.

Notes: You’ll notice your monthly payments are lower than using than 10-year standard plan. If you have a Direct Loan, you’ll need to have more than $30,000 outstanding to be eligible. If you’re a FFEL borrower, you must have over $30,000 outstanding.

4. Income-Based Repayment (IBR) Plan

Eligible loans include: Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans, all PLUS loans and consolidation loans (Direct or FFEL) that don’t include these loans made to parents.

Monthly payment and term: Your maximum monthly payments are 15% of your discretionary income (the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state). Payments will adjust as your income changes, and the term is up to 25 years.

Notes: You must have at least a partial financial hardship to qualify, and your monthly payments will be lower than payments using the standard 10-year plan. You’ll pay more in interest over the life of your loan, and if your loan isn’t repaid in full after making the equivalent of 25 years of qualifying payments, any remaining outstanding balance is forgiven. You may have to pay taxes on any forgiven balance, however.

5. Pay As You Earn Repayment Plan

Eligible loans include: Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans and consolidation loans (Direct or FFEL) that don’t include these loans made to parents.

Monthly payment and term: Monthly payments are 10% of your discretionary income, and your payments change as your income changes. The term is up to 20 years.

Notes: You must be a new borrower after October 1, 2006, and you must have received a disbursement of a Direct Loan after October 1, 2011. You must also have a partial financial hardship to qualify. Monthly payments will be lower than the standard 10-year plan, but you’ll pay more in interest over the life of the loan. Any amount remaining after you make the equivalent of 20 years of monthly payments, any remaining balance is forgiven, but taxes may be paid.

6. Income-Contingent Repayment Plan

Eligible loans include: Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and Direct consolidation loans.

Monthly payment and term: Your payments are calculated based on your adjusted gross income, total amount of Direct Loans and family size, and this payment will change as your income changes. The term is up to 25 years.

Notes:You’ll end up paying more in interest over the life of your loan, and any amount remaining after making the equivalent of 25 years of payments will be forgiven, with possible taxes due.

7. Income-Sensitive Repayment Plan

Eligible loans include: Subsidized and unsubsidized federal Stafford loans, FFEL PLUS loans and FFEL consolidation loans.

Monthly payment and term: Your monthly payments will be based on your annual income, and subject to change as your income changes. The term is up to 10 years.

Notes: You’ll end up paying more with this option than using the standard 10-year plan, and each lender’s formula for determining your monthly payment is different.

If you have a private loan, contact your lender about repayment options available. Private loans generally have less flexibility, but they may be willing to work with you if you’re having financial problems.

Option #2: Consolidate Your Loans

This option will make numerous federal student loans more manageable with a single monthly payment, as well as a lower interest rate than the average of your existing loans.

If you have a federal student loan, you can learn about consolidation options by calling the Direct Loan Origination Center’s Consolidation Department at 1-800-557-7392.

A Direct Consolidation Loan will basically combine multiple federal student loans into a single loan, and there is no application fee. Never sign up for service from anyone who offers to consolidate these loans for a fee!

There are many advantages to consolidating your loans, although this move may increase the length of your repayment period, which means more payments and more interest charges.

You may, on the other hand, get access to alternative repayment plans listed above that aren’t available with your current loans, as well as the ability to switch from a variable interest rate to a fixed interest rate.

This option isn’t best in every case, and you will also lose any borrower benefits that came with your original loan, such as an interest rate discount or principal rebate.

You can learn more about which types of loans can be consolidated, and when, by visiting the Federal Student Aid website.

Option #3: Deferment or Forbearance

In some cases, you may receive a forbearance or deferment that allows you to temporarily stop or reduce your payments on federal student loans to avoid default.

With deferment, depending on your loan type, the federal government may pay the interest on your loan during the time period.

This option is not recommended if you are trying to get out from under the debt, however, as it only delays the process.

If you’re finishing school later in life, it can make the debt impossible to pay off, while younger people may end up delaying retirement contributions when it’s most important. Only turn to this option if you’re having difficulty making your payments to avoid default.

Option #4: Make More Frequent or Larger Payments

While this option sounds obvious, it’s the best way to pay down your student loan debt as fast as possible. Your lender is required to accept your payments, regardless of how much extra you pay per month, or how frequently.

To decide how much you can afford to pay extra per month, take a good look at your spending over the last 6 months and look for ways to cut spending anywhere possible.

Ideas include replacing one meat-based meal a week with a vegetarian dish, reducing your cable TV package, selling some belongings you don’t need and skipping the morning coffee at Starbucks.

Decide what percentage of your monthly income you can comfortably afford to send to the loans, and keep in mind that most people begin with 5-10% of their income.

One option here is setting up bi-weekly payments, which means you make a half-month payment every two weeks, which ends up being 26 bi-monthly payments, or the equivalent of 12 monthly payments per year to slowly chip away at the debt.

You can also simply double your payments, or pay any extra you can afford.

Remember to let the luxuries wait until after you’ve paid off your loans. Budgeting and saving money is the key, so limit restaurant dining, movie theaters and unnecessary shopping trips until you’ve got the loans paid off. Once you’re done, you’ll be free of this huge burden and have more money every month to spend on the things you like.

Smart Tips to Reduce Your Student Loan Debt

In addition to choosing one of the options above to lower your interest rate and make the debt more manageable, here are some more tips that can help you finally pay off your educational loans once and for all.

    1. Pay off variable private loans first. While this may seem like a strange choice given that the interest rates on variable private loans from banks are lower than fixed rates on federal loans, keep in mind those interest rates can change at any time. Given the improving economy, it’s not unlikely that a rate hike is in the near future. Over the next four years, expect interest rates to climb up to 6%, which can make your monthly payments unmanageable. Get rid of these balances as soon as possible.
    2. Turn to your employer. Many people do not realize that it’s possible to get rid of student loan debt by appealing to their company for a compensation package. Many mid-sized companies that cannot afford high salaries will be more inclined to offer reduced wages in exchange for a one-time payout to eliminate your loans. This is most common in fields requiring a special degree, like nursing. You can mention this if you’ve just graduating and you’re doing salary negotiations, or mention it at an annual review if you’re a veteran employee.
    3. Look into auto-deductions. Did you know that all government lenders and some private lenders will give you a slightly reduced interest rate if you sign up for automatic monthly payments. This can reduce your repayment period by a full year or more on a 25 year loan.

Avoid Student Loan Assistance Scams!

Finally, there’s been a major spike in the last few years of companies who are selling supposed student loan assistance programs.

Do not provide your FAFSA PIN number or login information to these companies, and do not pay money to any company for something you can do yourself.

You can find solutions directly through the government, including the above mentioned discharge and forgiveness programs, consolidation or INR plans.

One example of such a company is Student Aid Institute (which we are obviously not going to link to), which charges a minimum $895 enrollment fee and a monthly maintenance fee of almost $40, in exchange for something you can do on your own for free.

Follow the steps listed here to find a solution that works best for you. Begin by looking at options to have the debt forgiven, then move on to repayment plans and options to pay down the debt as fast as possible.