This post is sponsored by Credible, a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders in real time, without affecting their credit scores.
Your college years were filled with lecture after lecture, term papers galore and enough all-night cram sessions to last a lifetime. At the end, what you got was a degree you could be proud of—and probably a decent amount of college debt, too.
Unfortunately, what you likely didn’t learn about amidst all that studying was the different ways you could pay down your student loans, apart from just cutting a check each month for the minimum amount due. That lack of info can come at a hefty price—you might end up paying much more in interest over the life of your loan, getting stuck with a payment you can barely afford or finding your debt burden so great that it prevents you from reaching other financial goals.
So we pulled together a list of different strategies that could help make your remaining balances more manageable, in the hopes you’ll find one that works for your situation. Consider it the Student Loan Repayment 101 class you didn’t get in college.
Paying More Than the Minimum Due
It’s probably the most obvious way to tackle your debt: 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.
The catch? If you don’t specify that you want that extra money to go toward paying down the principal, your servicer may end up simply treating 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.
If you can’t make that indication online, put these instructions for your loan servicer 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. While it may be tempting to just get rid of the lower balances up front, paying down the high interest rate loans first will ultimately help you get out of the red faster while saving the most money in the long haul.
And here’s one more tip: 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.
Refinancing Into a Loan 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. You can use Credible to compare different lenders and find the best rate and payment for you. It’s free to compare.)
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. So, for example, “Ask yourself if it’s the right thing for your situation to have your payments triple or quadruple over five years, versus having a little bit more flexibility with your cash flow over 20 years,” says Clarisa Hernandez, CFP®, a financial advisor with North Star Resource Group in Denver. “That’s going to be really situation-specific.”
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 heftier 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. (And remember that, in either scenario, a key goal is nabbing a lower interest rate than what you’re currently paying. Compare all your options in 90 seconds on Credible.)
Another thing to keep in mind is that 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. (Many of the private lenders on Credible have begun offering similar safeguards as the federal government, but not all.)
Finally, it’s important not to 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%.
Opting for an Income-Based Repayment Option
If making your current monthly payment is eating up more of your take-home pay than feels 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 shell out more in interest, but that shouldn’t necessarily cross this strategy off your list. “You can always pay more than what’s due,” she adds.
Income-based repayment could also be a good option for those who are unsure how steady their income will be in the future and thus are hesitant to lock in a monthly payment amount. “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.”
Seeing If You Qualify for Loan-Forgiveness Programs
Depending on your job, you might be able to score an assist on your balance sheet: 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 here’s the rub: 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.”
To request personalized rates and see how much you could save by refinancing your student loan debt, visit Credible.com, a multi-lender marketplace that lets you compare loans from vetted lenders in real time, without affecting your credit score. Credible reports that the average savings is $18,668 by refinancing through Credible.
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