Student loan repayment is a major financial issue for millions of Americans, including recent graduates. With tuition and loan amounts on the rise, it’s essential for anyone with student loan debt to get a handle on what they owe and understand student loan repayment options.
Our Addition Financial members often ask us about student loan repayment and how they can get out of debt as quickly as possible. With that in mind, here are six strategies for student loan repayment and some advice to help you choose the best one for tackling student debt.
6 Key Strategies for Student Loan Repayment
There are several ways to approach student loan repayment, including income-based options and refinancing. Here are 6 strategies to consider, including some student loan repayment options that you can implement before you graduate.
#1: Pay While You’re Still in School
When you have an unsubsidized student loan, interest accrues from the moment the amount you borrow is sent to your school. While you can defer payments until after you graduate, there’s something to be said for starting before that.
You have the option of making payments on the interest of your loan while you’re still in school or even making payments that go toward the principal if you can afford to do so. Starting early will reduce the amount of your payments after you graduate and help you save money in the long run. If you’ve got a job or side gig, using that money to make interest payments is a strategy that really works.
You have the option, if you can afford it, of making payments toward the principal before you graduate. Even making a small monthly payment over and above your interest payment can make a difference.
#2: Make Extra Payments Toward the Loan Principal
After you graduate, another strategy to consider is to make extra payments toward the loan principal. This is a tactic we recommend to anybody who’s trying to pay down debt because making extra payments toward the principal means you’ll pay off your loan sooner and save money on interest.
You should know that all education loans have an option for penalty-free pre-payment. That means you won’t need to pay penalties if you decide to accelerate your student loan payment schedule to get out of debt. If you can fit it into your budget, then set aside extra money each month to pay off your loan debt as quickly as possible.
#3: Refinance Your Loans
Loan refinancing isn’t just for mortgages and car loans. Any borrower may apply for refinancing for student loans as well. If you meet the refinancing requirements, you may be able to qualify for a lower interest rate and lower monthly payments. Refinancing is an option whether you have a federal student loan or a private student loan.
Requirements for student loan refinancing may vary from lender to lender. As a rule, you’ll need a decent credit score (in the mid-600s), a steady source of income and a debt-to-income ratio of 43% or lower.
#4: Set Up Auto-Payments
Student loan payments that aren’t made on time will negatively impact your credit score, something that can lead to difficulties if you want to buy a home. One of the best ways to avoid those issues is to set up auto-payments for your student loan.
While this strategy alone won’t help you pay off your loan more quickly, you could create an auto-payment that includes an extra payment toward your loan principal each month. That way, you’d be building good credit and paying off your debt on an accelerated schedule at the same time.
#5: Take Advantage of Tax Deductions
Another strategy to keep in mind is to take advantage of the federal tax deduction for student loan interest. Doing so could help you if you use the money you save on your taxes to make additional payments toward the principal of your loan.
IRS rules allow for a maximum deduction of $2,500 per year. Keep in mind that the deduction applies to all loans that were used to pay for your education, so make sure to tally the interest for federal student loans and any other amounts you borrowed to pay for school.
#6: Apply for Student Loan Forgiveness
Depending on your income and how long you’ve been making payments on your student loans, you may qualify for student loan forgiveness. For example, income-driven repayment forgiveness (IDR) is available to people with federal student loans managed by the Department of Education.
There are separate loan forgiveness programs for those in public service. Public service loan forgiveness is available for anybody who’s employed by a United States federal, state, local or tribal government as well as those working for a qualified non-profit organization. For the purposes of loan forgiveness, military service counts as public service.
People who have been making student loan payments for 20 or 25 years may automatically qualify for forgiveness under current rules. We should note here that President Biden’s plan to offer $20,000 in immediate loan forgiveness for borrowers earning less than $125,000 per year ($250,000 if married and filing jointly) was struck down by the Supreme Court.
What Resources Are Available for Students Getting Ready to Repay Their Student Loans?
If you have recently graduated or will graduate soon, here are some resources that are available to you:
- Exit counseling: Anybody who receives a federal student loan is required to complete exit counseling before they leave school. Counseling is scheduled through your school’s financial aid office and is designed to help students understand their repayment responsibilities and options.
- Student loan repayment program: If your income is not sufficient to allow you to make payments as scheduled, you may be able to qualify for an income-based repayment plan as noted above. For example, the Saving on a Valuable Education (SAVE) plan limits monthly payments to 10% of your discretionary income.
- Deferral: While there’s an automatic grace period of six months after you graduate, you may qualify for an additional deferral if you go back to school or join the military.
- Loan servicer assistance: If you can’t afford your monthly payments, then you always have the option of reaching out to your student loan servicer to ask about refinancing or an alternative repayment plan.
- FSA resources: We suggest checking out this student loan repayment guide created by the FSA to learn about repayment options, forgiveness and more.
We recommend taking advantage of every resource available to be sure that you understand your obligations and options in regards to student loan repayment.
How to Choose the Best Student Loan Repayment Plan for Your Situation
You should know that if you don’t review your options and choose a repayment plan, your obligations will default to the Standard Repayment Plan. The Standard Repayment Plan requires monthly payments for 10 years, for 120 payments in total. Payments are not based on your income.
To choose the right repayment plan, we suggest looking at your loan amount and estimated monthly payment and calculating what percentage of your income needs to go toward making your monthly payments. If the amount would put a strain on your budget, then you should consider applying for income-driven repayment forgiveness or student loan refinancing.
We realize that student loan repayment can be a source of stress. You always have the option of reaching out to your lender, too. We don’t recommend settling for the Standard Repayment Plan if you can’t afford it.
What is the Role of Budgeting in Managing Student Loan Repayment?
There’s no way to over-emphasize the importance of budgeting in managing student loan debt repayment. Monthly loan payments can put a strain on your finances and budgeting is the only way to understand whether your payments are affordable.
If you’re graduating soon, you can use the information from your exit counseling to wrap your head around the amount of your monthly student loan payments and how they’ll fit into your budget. Remember that you’ll get an automatic six-month grace period before you must begin paying your loan. That said, if you have steady income and can afford to make payments immediately, you’ll be able to get out of debt more quickly than you would if you took the grace period.
Using a budget calculator can help you put your student loan payments into perspective. Budgeting is good for a variety of reasons, but it’s essential if you have debt repayment obligations. You can use your income and other monthly expenses to get a handle on your student loan repayment and make smart decisions about which repayment plan to choose.
Let Addition Financial Help You with Student Loan Repayment
Student loan repayment may be a source of financial and emotional stress. It’s important to get a handle on your obligations and payment requirements, and then use the information you have to evaluate your repayment options. The 6 strategies we’ve included here can help you take advantage of all available resources and choose a repayment plan that works for you.
Do you need an affordable student loan? Addition Financial is here to help! Click here to read about our student loan options and apply today.
Posted on Dec 4, 2023
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