Student Loans 101: Repayment Strategies & Best Practices

If you have student debt, there’s something you should know:

You’re not alone. 

In fact, over 44 million Americans owe student loan debt to the tune of $1.7 trillion. 

Whether you recently graduated from college or are in the midst of your repayment journey, we have one simple goal with today’s article: to introduce some powerful loan repayment strategies that can help you get out of debt and take command of your financial future. 

Student Loan Forgiveness: The Latest News

Over the last few years, loan forgiveness has been a hot-button topic on Capitol Hill.

Some politicians, including President Joe Biden, have promised $10,000 in loan forgiveness

Others have asked for more, urging the current administration to cancel $50,000 in loan debt for all borrowers. 

And while some leaders are calling for a total cancellation of the $1.7 trillion debt, others are putting up a fight

Ultimately, President Biden is expected to make an announcement on loan forgiveness later in the summer, shortly before the loan moratorium ends on August 31st. 

While some measure of student loan forgiveness may happen, it’s highly unlikely the government will absorb the entirety of the outstanding balance. 

If they do, it will be a cause for celebration. 

Either way, borrowers would be wise to build a repayment strategy that they can confidently adhere to regardless of what Capitol Hill decides.

Note: Unless President Biden extends the pause (which has been in effect since March 2020), loan payments will officially resume on September 1. Now is a great opportunity to prepare for the months (and years) ahead.

Part 1: Should You Pay Off Your Student Loans Early?

This might sound like a silly question at first. 

Who doesn’t want to get out of debt ASAP, right? After all, compound interest takes no prisoners, and the longer it takes to pay off loans, the greater the total cost.

But here’s an important distinction: there’s no one-size-fits-all solution for loan repayment. 

Yes, there’s a unifying goal that all borrowers share — to get out of debt — but the pathway to reaching that destination won’t ever be the same. 

In other words, you should focus on choosing strategies that not only eliminate your loan debt, but that align with the full picture of your short and long-term financial health. 

So…should you pay off your student loans early? Here are a few scenarios where “fastest” may not be best:

  • If you don’t have any savings, rushing to pay your student loans could be risky.
    Having cash on hand to cover unexpected costs is of paramount importance. After you establish an emergency fund, you can incrementally assign more funds to your loan balance.
  • If you carry high-interest debt, those obligations should take priority over student loans.
    For example, the average credit card interest rate is 16.61% right now, and it may climb to 19% over the coming months. That’s considerably higher than the average student loan, and as such, it should be paid down more assiduously.
  • If you intend to capitalize on loan forgiveness programs, don’t rush to repay.
    Public Service Loan Forgiveness (PSLF) and income-driven repayment plans are effective, long-term strategies that can help cancel part of your balance.

    Note: If you pay your loans early, you may not be eligible for either program. 

Income-Driven Repayment Plans (What You Need to Know)

If you have federal student loans, you may want to consider signing up for Public Service Loan Forgiveness (PSLF) or an income-driven repayment. 

According to the U.S. Department of Education, there are four income-driven repayment plans that set your monthly amount at an affordable level “based on your income and family size.” 

These programs include:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan) 
  • Pay As You Earn Repayment Plan (PAYE Plan) 
  • Income-Based Repayment Plan (IBR Plan) 
  • Income-Contingent Repayment Plan (ICR Plan)

Except for ICR, each of the plans requires payments of 10% of your discretionary income — the amount remaining after paying for essentials (i.e. food and rent). 

After 20 years of consistent payments (or 25 years if your loans were for a graduate degree), your remaining loan balance will be forgiven. 

To learn more about the four income-driven repayment plans, click here

Note: If you are employed full-time (30+ hours a week) by a U.S. federal, state, local, or tribal government, or a not-for-profit organization (including a branch of the U.S. military), you are eligible for Public Service Loan Forgiveness (PSLF). 

With this program, your federal loan balance will be forgiven after 120 qualifying monthly payments. 

Click here to learn more about PSLF. 

Part 2: Three Strategies for Faster Loan Repayment

Paying off student loans early requires a full-court press commitment. 

Check out the following strategies to speed up your repayment (and save money in the process):

Pay More Than the Minimum 

As with credit cards, paying the minimum can be a seductive trap. 

Though they may provide temporary relief, minimum payments are a highway to debt hell. 

Why? Because whenever you pay the smallest amount, the interest mercilessly accrues on your principal balance.

That’s how one graduate left college with $79,000 in loan debt, paid $175,000 over forty years, and still owes over $236,000.

Like a financial Terminator, interest takes no days off, no long weekends, and no bank holidays. And while President Biden’s moratorium froze interest on federal loans, “they’ll be back” on September 1st. 

But enough with the bad analogies. Here’s why paying more than the minimum is essential.

Let’s say you have $29,000 in debt — roughly the national average — with a 6% interest rate and a 10-year loan term. 

In this case, your minimum monthly payment would be about $322

After ten years of payments, you would have spent a total of $38,635 — $9,635 of which would have been exclusively paid on interest. 

Now, here’s what happens if you double the minimum payment to $644 a month. 

Instead of paying nearly $10,000 in interest over the life of the loan, you’ll pay only $3,938 and reduce the loan repayment to just 52 months (instead of 120). 

It pays to pay more than the minimum. 

Want to learn more? Use this free student loan calculator to run your numbers.

2. Make Extra Payments

If you can pay more than the minimum, you’re off to a great start.

But to really expedite the repayment process, you need to throw in extra payments whenever possible. 

Maybe that means taking windfall money — like a tax refund, a job bonus, or even a lottery ticket — and deploying it on the student loan battlefield. Or, maybe it simply means budgeting more rigorously to generate extra cash. 

Whatever you choose, a little extra will go a long way. 

To illustrate, let’s continue with the example above. 

In addition to your $644 monthly payments, you decide to pay an extra $150 a month towards your principal balance.

Guess what? Those extra $150 payments will reduce the loan term by eleven months (and save you over $835 in interest). 

Pay more now.

Pay less later. 

It’s as simple as that. 

3. Consider Refinancing

Looking for an effective way to pay off student loans without making extra payments?

Consider refinancing, where you can roll your outstanding loans into one private loan (at a lower interest rate).

The ideal result? To pay less each month over a shorter period of time.

As of mid-June, the average refinancing for 10-year fixed rates sits at 5.40%, while 5-year-variable-rate loans are roughly 3.80%

If your current student loan rates are 6% or higher, refinancing could make a big difference.

To illustrate, let’s briefly go back to the example of $29,000 in loans at 6% over ten years. 

If you refinanced those loans to 4%, you would reduce your total interest paid to $6,233 — and save over $3,400!

Want to learn more? SoFi and Laurel Road are among the most popular refinance lenders.  

Part 3: Stay The Course (And Get Rewarded Along the Way!)

Okay, let’s exhale. That was a lot of information.

If you’re still with us, we hope you realize how many paths you can take to paying off your loans.

Yes, the road to repayment requires careful planning and discipline. But more than anything else, it’s a journey that simply takes time

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