How to pay back student loans: 7 tips to help you reach your debt payoff goals faster
- To pay off your student loan faster, you'll want to create a written repayment plan that lists all of your debts and places them in order of importance using methods like the
debtavalanche or debt snowball. Then pay extra towards your highest-priority loans whenever you can.
- Next, look for "free" money in the form of federal forgiveness programs like PSLF or private student loan repayment programs related to your job or profession.
- Student loan borrowers with an above-average debt load or a lot of private
student loansmay want to try lowering their interest rate by applying for student loan refinancing.
More than two-thirds of bachelor's degree grads from the class of 2019 graduated with student loans. The average debt load for these graduates was $29,900.
And the student loan situation is even more dire for graduate and professional students. The average student debt total for master's degree grads was $44,900 in 2019. And PhD grads finished school with an average of $107,500 in student loans.
The longer these loans hang around, the more you'll typically pay in interest charges. Plus, it can be difficult to start working towards other financial goals, like buying a home or saving for retirement, while you're still saddled with student debt.
How to pay back student loans fast
If you're looking for ideas for how to knock out your student loans sooner and save on interest charges, you've come to the right place. Here are seven tips that can help you kick student loans out of your life faster than you thought was possible.
1. Think through your repayment plan
The first step towards paying off your student loans is to create your "order of operations." If you can pay extra towards any of your student loans, which student loans should get that extra money first?
If you have both private and federal student loans, you'll almost certainly want to focus on paying off the private loans first. Not only is there a strong chance that your private loans will have a higher interest rate than your federal loans, but they also come with fewer borrower protections.
With federal student loans, you can join an Income-Driven Repayment (IDR) plan if you suffer a pay cut. And if you lose your job altogether or decide to go back to school, federal loans also come with generous forbearance and deferment options.
Your private loans won't typically be able to match these benefits. So it's usually best to knock them out as fast as you can.
Once you've separated all your loans into the "private" and "federal" category, you have two options to order your loans even further.
- The first option is to order your loans by outstanding balance — from smallest balances to the largest. This is often referred to as the "debt snowball method."
- The second option is to focus on the highest interest rate loans first and work your way down to your loan with the lowest rate. This is often called the "debt avalanche" method.
The debt avalanche method will save you the most money mathematically. But the debt snowball method might be easier to get excited about since you'll experience your first paid off loan sooner.
Many borrowers have had great success with both methods. So just choose whichever one you think will be the best fit for your personality.
2. Make extra payments towards your principal
Paying even just a little extra each month above the minimum on your student loans can make a big difference in how much you pay overall.
For example, let's imagine that you graduated with $50,000 in student loans, with an average interest rate on your loans of 5%. On the 10-Year Standard Repayment Plan, your monthly payment would be $530 and you'd pay $63,339 overall. That means you'd pay over $13,000 in interest charges.
But if you paid an extra $100 per month, your total cost would drop to $60,826. That's a savings of over $2,500 in interest.
And if you were able to pay an extra $500 per month, your total cost would drop to $55,976, saving you over $7,000 in interest. Plus you'd pay your loans off in four years instead of 10.
Not everyone can afford to make extra payments towards a principal balance. But if you can, just a small monthly increase could really save you a significant amount of time and money. Check out a student loan calculator like the ones offered by Bankrate or Credible to see how much you could save by paying a little extra each month.
3. Pursue Public Service Loan Forgiveness (PSLF).
If you're employed by a government agency or a nonprofit organization and have federal student loans, you may qualify for the Public Service Loan Forgiveness (PSLF) program. And if you do, you should certainly consider applying for it.
Unlike the forgiveness that's offered on Income-Driven Repayment (IDR) plans, you don't have to wait 20 to 25 years to qualify for PSLF forgiveness. Instead, you can earn forgiveness in as little as 10 years (120 qualifying payments).
During those 10 years, you'd be making payments on an income-based plan like PAYE, REPAYE, or IBR. So you get to improve your cash flow today while hopefully qualifying for student loan forgiveness down the road.
To learn more about PSLF and to see if your employer qualifies you for the program, check out this FAQ page from StudentAid.gov. Or if you're already sure that you work for a qualifying employer, you can apply for the PSLF program here.
4. Look for profession-specific loan repayment programs
Student loan borrowers who work in certain professions, like healthcare or law, could qualify for generous loan repayment programs. Below are a few examples of popular programs for doctors and nurses:
- The National Health Service Corps Loan Repayment Program (NHSC LRP): Can provide up to $50,000 of student loan assistance
- Nurse Corps Loan Repayment Program: Eligible nurses can have up to 85% of their student loans repaid through this program
- Indian Health Service Loan Repayment Program: Can provide up to $40,000 of student loan repayment assistance
- NIH Loan Repayment Programs: Can provide up to $35,000 of student loan repayment per year
- VA Education Debt Reduction Program: The VA can provide up to $200,000 of student loan repayment assistance over a five-year period for medical professionals who agree to work in difficult-to-recruit positions
Lawyers can receive up to $60,000 of student loan repayment if they gain acceptance to the Department of Justice Attorney Student Loan Repayment Program (ASLRP).
Attorneys can also apply for the John R. Justice Program or the Herbert S. Garten Loan Repayment Assistance Program.
Finally, if you decide to enlist in the military, you may qualify for up to up to $65,000 of student loan repayment assistance through the College Loan Repayment Program. These funds are provided by the federal government and each branch is free to decide how much loan repayment to offer to new enlistees, up to the $65,000 limit.
5. Work for an employer that offers student loan assistance
Employers are slowly becoming aware that student loan assistance is a valuable employee benefit that can help them attract top talent. So as you're searching for jobs after you graduate, it would be worth your while to see if any companies in your industry have an employee student loan repayment program.
If you already work for an employer that has an available student loan repayment program, there's never been a better time to take advantage of it.
Typically, these loan payments are considered taxable income to the employee. But the recently passed CARES Act gives employers the opportunity to make up to $5,250 of tax-free student loan payments for their workers through the end of 2020.
6. Lower your interest rate
If you have a strong credit score and steady income, you may be able to save a lot of money in interest by refinancing your student loans to a lower rate.
This option tends to be best suited for borrowers who graduated with higher-than-average debt loads and who have a lot of private loans or Grad PLUS loans (which have significantly higher interest rates than Direct Subsidized and Unsubsidized loans).
If you fit into this category, refinancing could be a smart move. For example, let's say you graduated with $100,000 of student loans with an average interest rate of 6.5%. By refinancing at 3.5%, you could save $17,594 over the life of your loans.
However, there are downsides to refinancing that you need to be aware of. Most importantly, if you refinance federal student loans, you lose all of their federal benefits, such as the ability to join an Income-Driven Repayment (IDR) plan or pursue PSLF.
Finally, it's important to point out that all federal student loans are currently charging 0% interest to provide relief during the COVID-19 crisis. So even if you have Grad PLUS loans, it wouldn't make any sense to refinance them until after the administrative forbearance concludes on September 30.
7. Claim the student loan interest tax deduction
Student loan borrowers can deduct up to $2,500 of the interest they pay on their student loans from their taxable income. This is an "above the line" deduction, which means that even taxpayers who take the standard deduction can take advantage of it.
To qualify for the student loan interest deduction, your modified adjusted gross income (MAGI) will need to fall below a certain threshold, which is published each year by the IRS. You also can't claim this deduction if you can be claimed as a dependent on someone else's return or your filing status is married filing separately.
With the Department of Education is pausing student loan interest for six months during 2020, fewer borrowers will be able to claim the maximum student loan interest deduction on their 2020 tax returns. However, this is still a deduction that you'll want to remember to claim in future years.
Also, if you're still in school, don't forget to see if you qualify for other higher education tax benefits, like the American Opportunity Tax Credit or the Lifetime Learning Credit.Read the original article on Business Insider
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