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One thing you might not have learned in college is that when it comes to student loan debt, there are several ways to pay it down, apart from just cutting a check each month for the minimum amount due.
But some simple knowledge can save you tons in interest over time and the stress of being in big-time debt.
Here are four strategies for your making your balances more manageable.
1. Paying More Than the Minimum Due
Try not to settle for just paying the minimum your lender bills to you each month so you can make a faster dent in your principal balance, and thus pay less in interest overall. You can do this either by overpaying what's due each month or squeezing in extra payments throughout the year, for instance, paying 13 times a year instead of 12.
You have to specify that you want that extra money to go toward paying down the principal, so your servicer doesn't treat it as an early payment toward your next installment. "[Borrowers] would just want to indicate where to apply that additional payment to ensure that they're maximizing its benefit," says Sarah Hamilton, a student loan supervisor at Take Charge America, a nonprofit credit counseling agency.
Make that indication online, or put the instructions in a cover letter with your loan ID number, clearly stating that any extra amount you pay should go toward your principal. If you're scheduling an extra payment, time it so the payment arrives the day after your last official due date, when your accrued interest is at its lowest point. This means more of the payment will go toward tackling the principal.
If you have multiple student loans, consider overpaying the ones with the highest interest rates to start. And think about enrolling in auto-pay — some services may give you a small discount for doing so, for instance, reducing the interest rate by 0.25%, says Hamilton.
2. Refinancing With a Lower Interest Rate
Refinancing your loans — that is, getting a new private loan that pays off your existing federal or private student loans — can bring your college debt under one umbrella with a potentially better interest rate. Just be aware that the lower the interest rate offer, the shorter the loan lifetime may be. (Most lenders will typically offer repayment terms between five and 20 years.)
The less time you have to pay back your loan, the higher your monthly payment will be — but the less interest you'll pay overall. By contrast, a longer loan term will mean a smaller monthly payment, but you'll pay more in interest over the life of the loan.
In other words, if your income and budget allow you to make larger payments and you can stay on track to eliminate your loans within that time frame, consider going with a shorter loan term. But if making those larger payments comes at the expense of other financial goals like building up your emergency fund or saving for retirement, you may opt for a longer loan term. (In either scenario, you want a lower interest rate than what you’re currently paying.)
Refinancing federal loans into a new private one may strip you of some benefits that federal loans carry. "Federal student loans have uniquely strong consumer protections, such as death discharge, disability discharge, income-driven repayment options and deferments and forbearances, which give people the opportunity to postpone payments under certain circumstances," says Heather Jarvis, a North Carolina–based attorney who specializes in student loan education.
And don't confuse refinancing with the federal government’s direct consolidation loan program, which bundles multiple federal loans (and only federal loans) into one new loan. Rather than lower your interest rate, your new fixed rate would be based on the weighted average of your old loans, rounded up to the nearest one-eighth of 1%.
3. Opting for an Income-Based Repayment Option
If making your current monthly payment doesn't feel manageable, you might be interested in income-driven repayment plans, offered by the government for your federal loans. These cap your minimum monthly payment to a percentage of your income, while extending your loan terms from the standard 10 years to as long as 20 or 25 years, depending on the type of plan you qualify for.
"For most of us, it's going to provide the lowest required monthly payment," says Jarvis. That means you'll ultimately pay more interest, but you can always pay more than what's due, she says.
Income-based repayment could also be a good option for those who are unsure how steady their income will be in the future. "You can commit to yourself to pay as much as you want but commit the least to the bank," Hernandez says. "Plus, if you fall on hard times, you're still only required to pay the minimum."
4. Loan-Forgiveness Programs
Government employees and those who work for not-for-profit organizations might be eligible for the Public Service Loan Forgiveness Program.
If you fall into this camp, your remaining federal student loan balance will be forgiven after making 120 monthly payments under a qualifying repayment plan and if you work full time. "The catch here is that you cannot refinance your loans, which would make you ineligible," says Hernandez. "This might make your payments a little higher, but then again, you're done after 10 years."
Also, if you opt for an income-driven repayment plan and haven’t paid off your federal loans after your 20- or 25-year repayment period is up, your remaining balance will be forgiven. But you may have to pay income tax on the amount that is forgiven, unlike with the Public Service Loan Forgiveness Program.
If your profession is outside of public service or you don’t qualify for income-driven repayment, check in with your employer to see if the company has any loan-forgiveness programs in the works. "Just double check if that money is being taxed," says Hernandez. “You don't want to be surprised at the end of the year if you get a tax bill for money you didn't realize was being considered compensation."
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.