Student debt has become one of the biggest burdens on younger consumers over the last two decades, with more than 43 million borrowers owing upwards of $1.4 trillion in private and federal student loans. In 2016, the average student graduated from college with an outstanding balance of more than $37,000, but a staggering 2 million borrowers owe more than $100,000 in student loan debt. While there have been shifts in the realm of higher education in recent years giving student loan borrowers more access to affordable repayment plans after graduating, the responsibility to repay student loans falls heavy on their shoulders each and every month.
Student loan repayment is an obligation that cannot be avoided, regardless of the other financial goals a borrower wants or needs to achieve. On a standard 10-year repayment plan, the monthly payment for the average student loan balance is almost $400 per month. This makes it hard for graduates entering a slow job market with stagnant wages to contribute toward other goals, including saving for retirement or setting aside money for a down payment on a home. Even so, repaying student debt is a necessary part of a borrower’s financial plan.
Over time, repaying student debt has a positive impact on borrower’s credit score and history, so long as the bill is paid on time each month. Additionally, when the debt is paid in full or paid down to a manageable level, borrowers have the opportunity to boost their savings in other aspects of their financial lives. Many have the motivation to pay off student loan debt sooner rather than later, and this guide is meant to provide direction on how to do that. First, though, it is important to understand the various types of student loans available, how they work, and the available repayment options.
Step One: Understanding Student Loans in General
Student loans come in two broad types: federal and private loans. Each student loan type has distinct attributes, including interest rates, loan amounts, and borrower eligibility, making it important to understand how they differ from one another before considering expedited repayment plans. Let’s start with a breakdown of federal student loans.
Federal Student Loans
For many, earning a college degree simply isn’t feasible without the help of student loans. Federal student loans were initially designed to empower students, giving them the opportunity to reap the rewards of higher education without having to worry about paying for it up-front and out-of-pocket. Federal student loans are made available to borrowers directly from the federal government, and the type of loans student borrowers can receive is dependent on information included in their Free Application for Federal Student Aid, or the FAFSA.
All student loans lent directly from the federal government carry a fixed interest rate which is determined at the time the loan is dispersed. For loans taken out between July 2017 and July 2018 for instance, the interest rate is fixed at 4.45% for direct subsidized and unsubsidized loans, 6% for graduate or professional loans, and 7% for direct PLUS loans. Students can borrow up to an amount between $5,500 and $12,500 per year based on how far along they are in an undergraduate degree program; graduate students may borrow up to $20,500 each year in direct unsubsidized loans. Anyone who completes the FAFSA may be eligible for federal student loans, regardless of credit history, income, or co-signer. The type of federal student loan offered is dependent on the details of the FAFSA. The following options may be available to students in need of loans to fund their education under the federal student loan program:
The most widely used federal student loans are Stafford loans through the Direct Loan Program. Stafford loans come in two forms: direct subsidized and direct unsubsidized. Student borrowers with direct subsidized loans are able to show a financial need at the time of application, and up to $5,500 per year is made available to eligible borrowers. During at least half-time attendance at an accredited college or university, direct subsidized student loan borrowers are not charged interest. The interest rate for direct subsidized loans is currently fixed at 3.76%.
Direct unsubsidized student loans are available to undergraduate, graduate, and professional degree students, and showing financial need is not a requirement for approval. Unlike subsidized loans, unsubsidized loans accrue interest while they are in deferment, meaning while payments are not being made, which could increase the total cost of borrowing. Up to $20,500 is available to students who qualify for direct unsubsidized loans. The interest rate for a direct unsubsidized loan is currently fixed at 3.76% for undergraduate students and 5.31% for graduate and professional degree students.
Undergraduate, graduate, and professional degree students may also qualify for federal Perkins loans. Instead of the federal government acting as the lender, borrowers make payments directly to the school that made the loan. Eligibility depends on the student’s ability to show significant financial need and participation by the college or university. Up to $5,500 is available for undergraduate students, while graduate and professional degree students may be eligible for up to $8,000 per year. The interest rate on a Perkins loan is currently fixed at 5%.
Parent PLUS Loans
Through the direct loan program, parents of college students may also borrow to help pay for higher education expenses. A parent PLUS loan is available to parents of dependent undergraduate students to cover costs not paid through other financial aid options. Parent PLUS loans require a strong credit history, and the maximum amount allowed is equal to the cost of attendance determined by the school, less other financial assistance received. The interest rate for a parent PLUS loan is currently fixed at 7%.
Grad PLUS Loans
Like parent PLUS loans, graduate and professional degree students may also apply for and receive a PLUS loan through the federal government. Credit history must be strong to qualify, and the maximum amount allowed is based on the total cost of attendance verified by the school selected. The interest rate for a grad PLUS loan is currently fixed at 7%.
Private Student Loans
In some cases, federal student loans are not sufficient to cover the total cost of an undergraduate, graduate, or professional degree program. Private student loans are available in these cases, but they differ significantly from federal student loans.
Private Student Loan Lenders
Private student loans are made available to qualified borrowers from a variety of private lenders, including banks, credit unions, and online lending platforms. Each private student loan lender has a set of criteria that must be met in order to qualify for a new private student loan, and the terms of each loan vary depending on the credit history of the borrower and co-signer. Private student loans are typically capped at the total cost of attendance verified by the student’s selected school, and they are available to undergraduate, graduate, and professional degree students.
Notable Differences From Federal Student Loans
Private student loans are lent to borrowers directly from a private lender, which means there are notable differences compared to federal student loans. First, the interest rates applied to private student loans are set by the lender, not the federal government, and may be either fixed or variable. In some cases, private student loans carry higher interest rates than federal student loans, which increases the total cost of borrowing for an education. Additionally, some private student loan lenders give students the option to repay student loans while they are still attending school.
Private student loan lenders also require an application to prove income sources, credit history, and credit score. When these credit factors are not strong, a private student loan lender may require a co-signer to help offset the risk of default in the future. Finally, private student loan lenders require student borrowers to select the repayment term of a new loan at the time funds are received, whereas federal student loan borrowers may wait until they have entered repayment to select the most beneficial repayment term.
Step Two: Understanding Student Loan Repayment
Once borrowers have an understanding of the type of federal or private student loans they owe, it is necessary to recognize the different repayment plans available. Federal student loans offer a variety of repayment programs to help borrowers afford the cost of their education long after graduation. Here are the federal student loan repayment plans currently available:
Student borrowers with direct subsidized or unsubsidized loans, individuals with parent or grad PLUS loans, and all consolidation loans are eligible for the standard repayment plan through the federal government. Under this plan, payments are set at a fixed amount with a fixed interest rate, and the repayment term is 10 years. Consolidated federal student loans may have a standard repayment plan term of up to 30 years depending on the amount of the loan.
All student loans under the federal loan program may qualify for a graduated repayment plan. Under this program, payments begin at a lower amount, which is ideal for borrowers with a lower income upon graduation or leaving school. Every two years the payments increase so that the total amount of the loan plus interest is repaid in 10 years. Consolidated loans may be extended up to 30 years on a graduated repayment plan.
Student loans under any federal loan program are eligible for an extended repayment plan as well. Payments in an extended repayment plan may be fixed or graduated, and the term may be extended up to 25 years based on the amount owed. Monthly payments are lower than under the 10-year standard repayment plan which may increase the total interest cost of the loan over time.
There are several income-driven repayment plan options available to federal student loan borrowers, including:
- Revised Pay As You Earn (REPAYE) – all federal student loans except for parent PLUS loans may be eligible for REPAYE. Under this option, monthly payments are calculated as 10% of discretionary income, revised each year based on updated income and family size. The repayment term may extend for up to 20 or 25 years, depending on the total amount owed. At the end of the term, any outstanding balance not repaid is forgiven. Borrowers may be responsible for paying taxes on any forgiven amount.
- Pay As You Earn (PAYE) – all federal student loans except for parent PLUS loans may qualify for the PAYE program, which works similarly to REPAYE. Monthly payments are calculated as 10% of discretionary income and recalculated each year based on updated income and family size. Loan repayment is extended up to 20 years, and any amount left outstanding is forgiven after the term is complete.
- Income-based Repayment (IBR) – all federal student loans except for parent PLUS loans qualify for income-based repayment plans. Monthly payments are fixed and calculated based on 10% or 15% of discretionary income. Each year, the monthly payment is recalculated based on updated income and family size. After 20 years of consecutive on-time payments, any outstanding balance remaining is forgiven.
- Income-contingent Repayment (ICR) – all federal student loans except for parent PLUS loans are eligible for income-contingent repayment plans. Under this plan, monthly payments are the lesser of 20% of discretionary income or the amount a borrower would pay on a repayment plan with a fixed payment over 12 years, adjusted for income. Each year, monthly payments are recalculated based on updated income and family size. Any remaining loan balance after 25 years of consecutive on-time payments is forgiven.
- Income-sensitive Repayment – all federal student loans may qualify for an income-sensitive repayment plan. Monthly payments are fixed and calculated based on annual income of the borrower. Repayment is extended up to 15 years, with no option for forgiveness.
Private Student Loan Repayment
There are fewer options for student borrowers who have private student loans when it comes to repayment. The most common repayment plans include deferred, interest-only, and minimum in-school payment. Here’s how each private student loan repayment plan works.
- Deferred repayment – private student loan borrowers who select a deferred repayment plan at the time a loan is funded do not owe any payments while they maintain at least half-time status in an accredited college or university. Upon graduation or leaving school, and after a six-month grace period, borrowers must repay private student loans over their selected term. The most common repayment terms are 5, 7, 10, and 15 years. Payments are fixed throughout and include principal and interest. While payments are deferred, interest accrues.
- Interest-only Repayment – the interest-only repayment plan available through some private student loan lenders requires that borrowers pay the accrued interest on loans as soon as the funds are received. Once a student leaves at least half-time status with the college or university, full principal and interest payments are due until the loan balance is paid off. This repayment plan may reduce the total cost of borrowing and the time it takes to repay.
- Minimum Payment Plan – similar to the interest only repayment plan, some private student loan lenders may offer a minimum payment plan that requires a certain monthly payment of while a borrower is attending school. Once the student graduates or leaves at least half-time status, full principal and interest payments are due for the duration of the loan repayment term.
Differences Between Federal and Private Repayment
In addition to the greater number of repayment plan options available to federal student loan borrowers, no private student loans offer income-based repayment programs or the option for forgiveness at the end of the repayment term. Also, few private student loan borrowers provide an option to extend repayment to more than 15 years, regardless of the total amount owed. Borrowers who have private student loans do not have the option to change their selected repayment plan after the loans have been dispersed, while federal student loan borrowers may request a change to their repayment program should their financial circumstances or needs change over time. Overall, there is far more flexibility with federal student loan repayment than with private student loan lenders.
Step Three: Understanding Secondary Repayment Options
Both federal and private student loan borrowers have options when it comes to secondary repayment options, although the methods and advantages to doing so differ between the two categories of lenders.
Federal Direct Consolidation
Consolidating student loans is the process of paying off all smaller federal student loans with a large, single federal student loan. The most significant benefit of consolidating is the ability to streamline repayment; instead of paying for multiple loans each month, borrowers have a single monthly fixed payment, based on the repayment plan selected. While federal student loan consolidation simplifies the repayment process, it does not offer a reduction in aggregate interest rate, nor does it lower the total cost of borrowing. Instead, the interest rate for a consolidated federal student loan is the weighted average of all the federal student loans included in the consolidation.
Borrowers apply for federal student loan consolidation, where they are able to select the federal loans they wish to consolidate, the servicer of the new loan, and the repayment plan that best fits their financial needs. Federal consolidation loans are eligible for all of the repayment programs listed above.
Private Student Loan Refinancing
Student borrowers with either federal student loans or private student loans may go through the process of refinancing with the help of a private lender. Refinancing student debt is similar to federal student loan consolidation in that borrowers take on a large, single loan in replacement of several smaller loans. However, unlike federal student loan consolidation, refinancing is only available through a private lender and all student loans are eligible.
Private student loan lenders make refinancing available to well-qualified borrowers, which means there is a review of income, credit history and score, and other factors that show the borrower is a low risk to the lender. While refinancing federal or private student loan debt helps streamline the loan repayment process, borrowers are required to repay the loan based on the terms agreed upon at the time the funds are received. There is no option to change the repayment plan for refinanced student loans unless another refinance takes place. Borrowers also lose access to loan forgiveness available for federal student loans when they refinance with a private lender.
Deferment and Forbearance
All federal student loans and some private student loans have the benefit of deferment while the borrower is still attending school at least half-time. This means that no payments are due until a student leaves half-time status and after a grace period, typically six months, passes. Once the deferment period ends, principal and interest payments are due until the loan is paid off or the balance forgiven. Deferment may also be requested after repayment has begun, but interest may be due during the time the repayment is deferred. Applying for deferment is done directly through the loan servicer, and it may extend for up to one year.
Forbearance is similar to deferment in that it temporarily halts payments due on an outstanding federal student loan. However, borrowers are responsible for any interest that accrues on any federal student loan while it is in forbearance. Some private lenders may also offer a reprieve from payments but only when a borrower can show severe financial hardship. Once the forbearance period ends, full principal and interest payment resume. Neither forbearance nor deferment count as default on a student loan which is incredibly beneficial for borrowers who may experience unexpected unemployment or a significant decrease in income for a period of time. However, it is important for borrowers to understand that these temporary stops to monthly repayments will extend the life of the loan and increase the total cost of borrowing.
Filing for Bankruptcy
Individuals who face an overwhelming amount of consumer debt may have some recourse through bankruptcy protections made available through federal law. Bankruptcy essentially wipes the slate clean with one’s creditors and protects them from being contacted in the future about debts that were discharged through the bankruptcy process. Unfortunately, filing for bankruptcy leaves credit severely damaged for no less than seven years after the debts are discharged, making it difficult to secure new debt for a home, a vehicle, or a credit card in the future.
While student loan borrowers may think bankruptcy is an answer to getting out from under the weight of federal or private student loans, rarely is bankruptcy an option to discharge student loan balances. The only way for federal or private student loans to completely vanish through the bankruptcy process is for a borrower to prove undue hardship. In the eyes of the court, this means the following has to be shown:
- A borrower would not be able to maintain a basic standard of living if federal student loan repayments were required
- A borrower’s hardship would last for a large portion of the student loan repayment period
- A borrower made an attempt to repay the student loan balance before filing for bankruptcy
If these factors are true, the first step in filing for bankruptcy is finding an experienced lawyer. There are several online resources that make the search for a qualified lawyer easier, but it is important to work with someone who earns their fees. Once a lawyer is secured, student loan borrowers will select the type of bankruptcy they want or are eligible to pursue, and then follow the steps the lawyer outlines to go through the process. Bankruptcy is not an easy way out of student loan debt, but it is an option for those who can prove undue financial hardship made worse by student loans.
Tips for Paying Off Student Loans Quickly
Once borrowers understand the types of student loans available, the repayment plans they are eligible for, and the recourse they have when life’s circumstances make repayment a challenge, there are steps one can take to pay off student loans at a faster rate. Expediting student loan repayment starts with finding realistic methods to pay more toward the principal balance of the outstanding loans. This works to reduce the interest owed over the life of a student loan and speeds up the repayment timeline significantly, depending on the extent to which extra payments are being made. The challenging part of paying off student debt quickly typically revolves around finding the extra dollars each month to pay down the principal balance. Here are a few tips on how to accomplish that daunting task.
Check With an Employer
Given the fact that financial stress bleeds into an employee’s daily work, causing less productivity and focus on the job, some employers have committed to helping their workforce ease financial stress through student loan repayment benefits. Companies may offer a matching program for student loan repayment, paying the same amount as an employee’s minimum monthly payment for a stated period of time. In some cases, employers will take on the lion’s share of the student loan payment in an effort to reduce the financial pressure placed on an employee’s shoulders. In either case, employees should look to their employers for student loan repayment benefits and take advantage of what is offered.
It is, however, important to read the fine print – some companies will expect a commitment to continue employment for a number of months or years after accepting a student loan repayment benefit. Payments made on behalf of an employee by an employer may also be taxable as income. Take time to understand these nuances before student loan repayment assistance is accepted.
Cut Living Expenses
One of the more challenging methods to speed up repayment of federal or private student loans is to evaluate monthly living expenses and reduce them when possible. Moving in with mom and dad may not seem all that appealing to most student loan borrowers, but having a reduced housing expense each month could make a substantial difference in how much extra is available to pay toward student debt. Reviewing desired expenses, such as dining out, entertainment, clothing, or travel, and minimizing how much is spent in each category also helps uncover the extra dollars that can be used toward paying down the principal balance on student debt.
A common pitfall that stands in the way of paying off federal or private student debt earlier is the accumulation of interest over time. When interest rates are high on student loans, paying only the minimum amount due may mean the principal balance is not moving down very quickly, if at all, with each monthly payment. Reducing the aggregate interest rate on student loan debt can help solve this problem.
Consolidating federal student loans does not provide a reduction in the interest rate applied to the new, larger loan because the weighted average interest rate of all consolidated loans is used to determine the final rate. However, refinancing federal or private student debt may offer an opportunity to reduce the interest rate, allowing more of the monthly payment to apply toward the principal balance. Each private lender offering student loan refinancing has varied interest rates, depending on the credit history and score of the borrower and co-signer, if applicable. Those with the best credit will qualify for the lowest possible interest rate. In some cases, borrowers may also be able to shorten their repayment period. While this results in a higher monthly payment, it will reduce the amount of time it takes to repay the loan.
Some borrowers may be lured by the variable interest rates offered by private lenders since they are often lower than the fixed interest rates available. It is important to recognize that variable interest rates may increase over time, creating a higher cost of borrowing. Refinancing federal or private student loans can be a smart method to reduce the cost of interest but only when these caveats are fully understood.
Generate More Income
In addition to cutting living expenses and refinancing for a shortened repayment period or lower interest rate, student loan borrowers can search for ways to earn extra income which can then be applied toward outstanding student debt balances. In today’s hyper-connected world, there are ample opportunities to put skills learned either on or off the job to good use, such as writing, graphic design, or data entry. Likewise, signing up to offer rideshares, picking up a part-time job two or three evenings a week, or offering to do paid tasks for neighbors, family, or friends can all generate an additional few hundred dollars each month. Taking those excess funds and putting them directly toward student debt can knock off months if not years of payments by reducing the principal balance and ultimately, the interest.
Student loans are not all that difficult to acquire, but navigating the multiple options for lenders and repayment programs can be a challenge for borrowers of all ages. Start by understanding the student loan options available, including federal and private student loans, and take the time to understand how each option fits your school funding needs. Follow up by learning about the various repayment programs available after leaving school, as well as the options for repayment reprieve if and when it is needed. Finally, know what it takes to expedite the repayment process by focusing on larger monthly contributions either through an employer’s help, reducing other monthly expenses, or bringing in additional income. Each of these steps will help student borrowers achieve the goal of paying off student debt sooner rather than later.