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You’ve graduated from college and have your degree — maybe you’ve found your career job or your good-enough-for-now job and are ready to tackle your student loans. Though getting into student loan debt is pretty easy, getting out of student loan debt takes some work. Everyone’s situation is different, so here’s some guidance on student loan repayment and what you need to know to start paying off your debt.
Student Loan Repayment: When To Pay The Minimum, When To Refinance, & Everything Else You Need to Know
Student loan repayment can be overwhelming, exhausting and downright stressful. It’s often hard to understand where to start and how to start plowing through your potential mountain of student loans. Millionaire Mob paid off over $60,000 of student loans in less than 5 years. You can do it too if you have the right tools and personal financial plan.
Well, we are here to help with this definitive guide to student loan repayment where we will cover when to pay the minimum, when to refinance and all things about student loans.
Type of Loans
The first thing to look at is the type of student loans you have. You can have federal student loans, private student loans or a mix of both.
Federal student loans are offered through the U.S. Department of Education and have various repayment plans. It’s also possible under certain programs to get student loan forgiveness (more on that later).
Private student loans are issued by financial institutions and typically have less flexibility. They definitely don’t have student loan forgiveness options and have fewer repayment options for borrowers.
If you have both federal and private student loans, focus on ditching your private student loans first. Why? Some private student loan interest rates are variable and can change at any time.
Not only that, but there are no repayment options, like income-driven repayment if you’re in a financial bind.
As noted above, if you have federal student loans, you have more repayment options compared to private student loans. If you have federal student loans, you’re automatically signed up for the Standard Repayment Plan, which is spans 10 years.
This is the most cost-effective plan. You’ll pay the least in interest and have the shortest repayment term. Other payment plans, like income-driven repayment or graduated repayment, can mean paying more in interest charges.
If possible, stick to the Standard repayment plan, and even then, pay more if you can. Embrace minimalism early on, so you can focus on repaying all of your student loans faster.
Federal student loan borrowers have fixed interest rates that stay the same over the entire loan term. Private student loans can have variable interest rates which can change up or down but may have fixed interest rates.
Both interest rate types have pros and cons, but here’s something important to know about student loan interest: interest accrues daily.
That’s why using the debt avalanche method which involves paying your highest interest loan can help, compared to the debt snowball which focuses on the smallest loan balance. Attacking interest can help you pay less in the overall cost of the loan.
See Related: How to Pay Off Student Loans on a Teacher’s Salary
Based on your repayment term, you’ll have a specific monthly payment. But just because you have a specific monthly payment doesn’t mean that’s all you can pay. That’s just the minimum to stay in good standing with your repayment.
If you can afford to pay more than the minimum, you’re setting yourself up for less debt in the long run. But if you can’t afford even the minimum, don’t stop making payments.
Get in touch with your loan servicer ASAP. If you have federal student loans, you may be able to take advantage of an income-driven repayment plan to lower your monthly payments. You can look into deferment and forbearance as well.
Private student loan borrowers may have fewer options, but you should still reach out to your lender if you’re struggling.
If you don’t make payments on time and don’t communicate with your loan servicer, your credit could suffer. This can have a lasting impact on your financial situation and cost you significant sums of money down the road.
Track your payments with Personal Capital. This will help you completely free of charge, so you can monitor your net worth and bills.
Student Loan Forgiveness
If you’re struggling to make payments on your student loans, then you want to get in touch with your loan servicer. Federal student loan borrowers can opt for an income-driven repayment plan which caps monthly payments at a small portion of your discretionary income.
Have six-figure debt? You could get student loan forgiveness after 20 to 25 years of student loan repayment on an income-driven repayment plan. The downside? According to IRS rules, you’ll pay tax on that forgiven amount.
Another way to get student loan forgiveness is through the Public Service Loan Forgiveness program. Under this program, you’ll work 10 years in public service and make 120 qualifying payments.
After that, you’ll apply for student loan forgiveness. Except under this program, the forgiven amount isn’t taxed!
If you become disabled, unable to work and can’t repay your loans, you can get student loan forgiveness is through Total and Permanent Disability Discharge.
Technically, you can get your student loans discharged under bankruptcy too, though it’s very rare. Your best option is to do your own research around student loan forgiveness and reach out to your lender to see if you qualify.
Refinancing Student Loans
Going on an income-driven repayment plan is on way to help make student loan payments more affordable if you’re struggling. However, if you’re not exactly struggling, but want to save money on your student loans, you still have options.
Student loan refinancing is similar to refinancing your home in that you can get a better interest rate with a new private student loan.
Through student loan refinancing companies, your new lender pays off your original loan and initiates a new refinancing loan at a (hopefully) lower rate. The money saved on interest helps you reduce your principal balance and get out of debt even faster.
The downside? Get ready, because it’s a big one — you relinquish your federal loan protections. Income-driven repayment? No longer an option. Student loan forgiveness? Nope, not at all. If you have good credit and are financially secure enough to not lean on those protections, refinancing can make sense.
Saving even just one percent on your interest rate helps. You may even be able to earn more money through cash back refinancing bonuses. Also, you can refinance your student loans multiple times over the course of your loan term to potentially maximize your savings.
Fortunately, if you decide to refinance, you can compare rates with minimal effect on your credit score. Going through with a formal application can result in a hard pull on your credit, but will likely only result in a small drop to your credit score.
Ultimately, though, if you have good credit and aren’t gunning for student loan forgiveness, refinancing is one way to make your student loans more affordable.
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Pay Off Student Loans ASAP
If you’re ready to pay off your student loans ASAP, here are some tips:
- Pay off high-interest loans on first. Save money on interest, pay down principal. That’s my favorite and most proven way for debt reduction.
- Sign-up for auto-pay. You could qualify for a 0.25% interest rate deduction from your loan servicer.
- Refinance. Another way to lower your interest rate? Refinancing with a student loan refinance company like SoFi or Credible.
- Make bi-weekly payments. Instead of monthly payments, cut your payment into half and make it every two weeks. Remember, your student loan interest accrues daily. This tactic results in less interest to pay over time.
- Get a side hustle. Earn more on the side and pay more than the minimum! Get a side gig as a dog walker, Uber driver, tutor, graphic designer, rent a room on Airbnb, etc. You can turn your skills into more money.
- Slash your expenses. Cut your expenses down so you can afford more for your student loans. It’s not fun, but will get you out of debt faster.
- Stay Creative. You can pay off your student loans in a variety of ways. Some things that are important are staying on top of the various options for repayment. Here are some creative ways to pay off student loans.
It’s not easy to pay off your student loans, but taking the right steps can get you there sooner rather than later.
Have any questions about your student loans? Let us know!
Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He’s helped over 1,700 clients save over $80 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.