Make Your Pesky Student Loans Disappear

Student loans are a drag. Many of us have no choice but to rely on student loans to help us get through school. We’re grateful for the bump in income that comes from higher education, but dealing with large student...

Student loans are a drag. Many of us have no choice but to rely on student loans to help us get through school. We’re grateful for the bump in income that comes from higher education, but dealing with large student loan payments can be tough when trying to raise a family, build a career, and save for the future.

Dealing with your student loans is important if you want to build wealth and create a lifestyle you love. Taking the steps to optimize your students loan payoff can save you a lot of money in the end. Consider these five ideas as you work to pay down your student loans:

Be Realistic

As you make decisions about what kind of lifestyle you lead, be realistic about exactly what you can afford. Living below your means for a few years to make progress on the loans will allow you to have more freedom in the future.

And as you come up with a debt repayment plan, realize that paying off student loans isn’t going to happen overnight. If you have a lot of student loan debt, it’s going to take some time to pay off the loans in full. Cutting expenses to the bare minimum isn’t sustainable for long periods of time, so try to find your happy balance between today and tomorrow.

Consolidate and Refinance Your Student Loans

Consolidating and refinancing your loans can help you pay less in interest. The less you pay in interest on your student loans, the more money you have to pay down the loan. If you consolidate, you combine multiple student loans into one larger loan. Refinancing is when you get a loan with a different interest rate.

Most federal loans can be consolidated through a Direct Consolidation Loan. This can simplify your loan repayment by reducing your student loan to one bill. The interest rate is the weighted average of your existing loans, so you won’t save any in interest if you already have fixed interest rates on the loans.

The most compelling reason to consolidate is if you have a loan with a variable interest rate. You’ll lock in a low, fixed interest rate. Consolidation can also lower the monthly payment by extending the repayment term of your loan, but if you are just looking to lower your monthly payment, you might be better off by changing your payment plan.

You can also consolidate and refinance student loans through private student loan companies. This is especially beneficial if you have a student loan with an extremely high interest rate. The difference in interest can go straight towards paying the principal off.

If you do consolidate and refinance your loans, try to keep your federal and private loans separate. If you mix the two, you’ll lose some of the extra benefits you get with federal student loans.

Change the Payment Plan

If you have federal student loans, there’s the chance to take advantage of payment plans to pay down your student loans faster. If you’re on a 10 year plan to pay off your student loans, you can switch to a 30 year term to get a lower monthly payment. By applying the extra money to your highest interest rate loan, you’ll pay less in interest and pay off the student loans even faster.

You can choose between several types of plans:

    • Standard Plan: Fixed payments for 10 years, or up to 30 years for consolidation loans.
    • Graduated Plan: Lower monthly payments that rise every two years. Payments are made up to 10 years for regular loans, and up to 30 years for consolidation loans.
    • Extended Plan: Fixed payments for up to 25 years.
    • Income-Driven Plan: Payments are based on the amount of discretionary income. This includes the income-based repayment plan, pay as you earn repayment plan, and the income-contingent repayment plan.
    • Income-Sensitive Plan: Payments increase or decrease based on income for a 10 year payment plan. This is for Federal Family Education Loans (FFEL).

Explore which plan will give you the lowest monthly payment so you can optimize your debt payoff.  

Have the Debt Forgiven or Canceled

As far as debt goes, federal student loans have a few big perks. One of the biggest advantages is that there a number of programs that will allow borrowers to have their debt forgiven or cancelled.

Both the income-based repayment plan and the pay as you earn repayment plan will forgive the balance of your federal student loans if you’ve made payments for 20 or 25 years. The balance is forgiven, but the forgiven amount is taxed as income.

If you have a high amount of debt from graduate school, this could be a good fit for you. You’ll also benefit if you have a low income as compared to your amount of debt.

If you work in a profession that contributes to the public good, it’s possible you’ll qualify for a number of programs that will forgive or cancel your debt. This includes positions in the government, at 501(c)(3) nonprofits, at AmeriCorps, in the Peace Corps, and in public service organizations. The largest of these programs is the Public Service Loan Forgiveness program, which will outright forgive your debt — tax-free — after making 120 payments on income based repayment.

Earn More

If you want to make fast progress towards paying off your debt, you need to put a lot of money towards your loans. And you can only cut expenses so far, so earning more is key to being able to pay down debts quickly.

One way to do this is to send every raise or bonus straight to debt repayment. But a side hustle can be a great way to earn more on your terms. Freelancing can be done after hours while you’re sitting on the couch in your pajamas. You can rent out a room on AirBnB, or offer up your car to other drivers. If you look for it, there are many ways to earn a little extra every month. These income sources add up.

The Bottom Line

Even if you have a pile of student loans, you have options. Small changes in how you deal with your student loans can have a big impact.