I’m pleased to have Drew Cloud, founder of the Student Loan Report, help us with a guest post on student loan debt strategies after graduation. Enjoy!
Strategies to deal with post-graduation student debt are many and varied. It is no longer enough for most graduates to simply fall back upon the standard ten-year repayment plan – not when opportunities abound for a smart borrower to reduce their interest rate, their payment amount, or even the term of their loan. Plus, these days there are opportunities to have federal loans forgiven, sometimes after just a few years. Read on to learn about smart strategies to save you big money on your student loan debt.
Refinancing your Existing Debt
Both federal and private loans can be refinanced through private lenders, and the number one reason for doing so is to obtain a more favorable interest rate. Traditional brick-and-mortar banks offer student loan refinancing, but so do credit unions and non-traditional online lenders. Start-ups are emerging into the student loan refinance market and offer some of the most enticing interest rates on the market.
The length of time that you will repay the loan can be adjusted as well. Refinancing can save a smart borrower money over the long-term, but in return he or she will give up any federally offered programs that would otherwise be available on federal loans. This includes deferral during periods of disability or job loss, as well as if the borrower goes back to school. It also includes federal income-driven repayment plans and the ten-year public service loan forgiveness program.
Before you refinance federal loans, be sure that you wouldn’t rely on those programs in the future. If you suffer from a chronic illness or plan to work for a non-profit or the government, there is a lot of incentive to keep your federal loans with the government instead of refinancing with a private lender.
Consolidate your Federal Loans
A Direct Consolidation Loan is an option that combines several federal loans into one. The borrower will have just one monthly payment amount instead of several, although today a borrower will typically make their payments to just one servicer (note: see this warning about servicing companies) even if they are carrying multiple federal loans. The interest rate on a consolidated loan will be a weighted average of the original loans, which means that the amount of principal on each loan, as well as the interest rates, will be taken into consideration when determining the new interest rate of the consolidated loan.
Unfortunately, although a consolidated loan simplifies making payments, it doesn’t really save borrowers any money. There is one situation where a consolidation loan really helps, though, and that’s when the borrower is in default. A consolidation will get federal loans out of default faster than rehabilitating the loans. The downside is that while rehabilitation will remove derogatory marks from the borrower’s credit report, a consolidation loan will not. However, in situations where a borrower is anxious to get out of default quickly, consolidating does the trick.
Utilize the Public Service Loan Forgiveness Program
The Public Service Loan Forgiveness Program (PSLF) is a federal program that forgives federal student loan debt after the borrower makes 120 qualifying monthly payments. A qualifying payment is one made while the borrower works for a qualifying entity. All government entities are qualifying entities, and many private entities – such as 501(c)3 non-profits – are as well.
One of the best things about PSLF is that the payments don’t have to be made consecutively. If a borrower works for a qualifying entity for three years, then a non-qualifying entity for two years, then another qualifying entity for seven years, then after that total of twelve years the borrower can still have the remainder of the loan balance forgiven.
In addition, PSLF can be combined with income-based repayment plans. If a borrower’s monthly payment on one of these plans is $100, or $10, or even $0 a month, they can still qualify for PSLF forgiveness after 120 months of payments – even if that payment is technically $0 a month. The combination of these two federal programs offers amazing savings to borrowers that qualify for them both. However, the limitations are that only certain employing entities qualify, and that PSLF is definitely not available for private student loans.
Apply for Income-Based Repayment Plans
The federal government offers four types of income-driven repayment plans. These are Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn Repayment (PAYE), and Revised Pay As You Earn Repayment (REPAYE). The programs differ slightly and some borrowers will not be eligible for certain plans while other borrowers will be eligible for any of them.
Most federal borrowers will find that they are eligible for one or more plans and that their payments will be lower if they apply for a plan – sometimes drastically. In fact, if a borrower’s income is low enough, their monthly payment could drop to nothing at all.
The best way to determine whether a borrower qualifies for any of the offered plans is to contact their student loan servicer, who should be able to tell them immediately whether income-based repayment is an available option. If it is, the application typically takes around 30 minutes to complete with the servicer and the lower payment might go into effect as soon as the next billing cycle. Like most student loan payments that decrease monthly payments, the disadvantage is that borrowers typically pay more interest over the life of the loan.
Another catch to watch for is that monthly payments might dramatically increase from year to year if the borrower’s income rises, such as with a job change, a significant raise at work, or an influx of money from another source such as investments.
Make Extra payments Toward your Principal Balance
A strategy as simple as it is smart, making extra payments is a surefire way to pay off student loan debt sooner. This can be achieved either through making larger than necessary monthly payments or by making extra payments one or more times a year, which will go directly toward the principal balance. There is no real disadvantage to making extra payments. It won’t affect the borrower’s interest rate or term, and federal loans never have prepayment penalties.
There is only one situation in which it might not make sense to pay down the principal balance of a loan faster, and that is when the borrower is on a combination of an income-based repayment plan and a track toward public service loan forgiveness. In that case, the borrower is making reduced monthly payments and can have the remaining principal balance forgiven after 120 qualifying months. However, virtually every other situation will benefit from making principal reducing payments.
Pay off Interest While in School or in the Grace Period
The last strategy is to pay off interest as it accrues, either while the borrower is in school or during the immediate post-graduation grace period. Interest on student loans accrues and capitalizes, so a borrower that starts paying off the interest early will find themselves already ahead when that first payment becomes due. Some federal loans have interest that is subsidized by the government, so those loans won’t accrue payable interest while the borrower is in school or during the grace period. However, many are not subsidized, and private loans are never subsidized. On unsubsidized loans it will always make sense to pay off the interest prior to the first payment.
There are many different student loan debt strategies to destroy your debt. I hope this article helps you make a wise choice for your student loan repayment. Thanks for reading!
Drew Cloud is the founder of the Student Loan Report. After struggling to repay his own student loans, he decided to make this site to help keep borrowers up-to-date on the current student loan news. Aside from starting this site, Drew is a freelance writer who typically talks about student loans, personal finance, and education. Drew contributes much of the news to the site as well as opinion posts.