In the landscape of higher education, student loans have become an unavoidable reality for millions of Americans. While they offer the opportunity for educational advancement, they often leave graduates saddled with significant debt. According to recent statistics, 42.8 million people have student loans, and the total outstanding student loan debt in the United States alone exceeds $1.7 trillion. That’s a staggering figure that continues to rise with each passing year.
The average college graduate owes approximately $37,000 for just federal loans, but many individuals owe $200,000 or more. That’s potentially a mortgage!
In the face of such daunting numbers, it’s more important than ever to approach student loan repayment with a strategic mindset. It’s not just about making payments; it’s about mastering debt and taking control of your financial future. Here, we will provide 5 actionable strategies to help you tackle your student loans head-on.
From understanding the intricacies of your loans to implementing proven student loan repayment strategies, we’ll guide you through every step of the process. Whether you’re just starting your repayment journey or seeking to optimize your existing plan, this blog is designed to empower you with the knowledge and tools you need to succeed.
Let’s dive in and discover how you can repay your student loans on your terms — and pave the way to financial freedom.
Student Loan Repayment Step #1: Identify Your Loans
Before devising a repayment strategy, it’s crucial to grasp the fundamentals of your student loans and which types of loans you have. Generally, student loans fall into two categories: federal loans and private (sometimes called alternative) loans.
Federal Loans:
- Direct Subsidized Loans: These loans are available to undergraduate students with demonstrated financial need. The government pays the interest while you’re in school and during certain periods of deferment. The maximum loan amount is $23,000 (as of mid-2024).
- Direct Unsubsidized Loans: Available to both undergraduate and graduate students, these loans aren’t based on financial need. Interest accrues from the moment the loan is disbursed. The maximum amount you can borrow is $31,000 as a dependent student or $57,500 as an independent student, which includes subsidized loans. For a graduate student, the absolute maximum you can borrow is $138,500, which includes the amount borrowed for your undergraduate degree.
- PLUS Loans: These loans are available to graduate or professional students and parents of dependent undergraduate students. Interest accrues from the disbursement date.
- Perkins Loans: Offered to undergraduate, graduate, and professional students with exceptional financial need. This program has been discontinued, but existing borrowers may still have Perkins Loans.
Private Loans:
- These loans are offered by banks, credit unions, and other financial institutions. Compared to federal loans, they typically have higher interest rates and fewer borrower protections.
- Terms and conditions vary widely among private lenders, so it’s essential to carefully review the terms of your private loans.
Student Loan Repayment Step #2: Evaluate Your Loan Details
Understanding the specifics of your loans is paramount to crafting an effective repayment plan. Here are some essential details to consider:
- Interest Rates: Federal loan interest rates are fixed for the life of the loan, while private loan rates may be fixed or variable. These change frequently, so it’s important to understand what your rates are. For the 2024-2025 academic year, for example, the interest rates for federal loans are as follows:
- 6.53% for undergraduate students
- 8.08% for graduate students
- 9.08% for Parent PLUS loans
For private loans, the interest rate varies based on the creditworthiness of the applicant and their co-signer, if any, and ranges from 4% to 18%.
- Origination Fees: Many loans have origination fees, and they differ from lender to lender. In the world of real estate, for example, they call them “points.” It’s a fee you are charged for the privilege of borrowing money. That’s the reason why you may borrow $10,000 but the very next day you owe back $10,500. The additional $500 is the origination fee tacked on to the amount you originally borrowed.
Currently, Federal loans charge a 1.057% origination fee for Direct Loans and 4.228% for PLUS loans. Private lenders vary, and some do not offer origination fees at all. However, if you don’t pay those upfront, they are rolled into the ongoing rate. Essentially, you’ll pay this one way or the other.
- Repayment Terms: Federal loans offer various repayment plans, including standard, extended, graduated, and income-driven plans. Private loans may have different repayment terms and options.
- Grace Periods: Most federal loans offer a 6-month grace period after graduation before repayment begins, meaning you can expect your payment to begin in November or December after you graduate. Private loans may or may not have a grace period, depending on the lender.
- Loan Servicers: Federal loans are serviced by various loan servicers assigned by the Department of Education, while private loans are serviced by the lender or a third-party servicer.
Student Loan Repayment Step #3: Organize Your Loan Information
To effectively manage your student loans, it’s essential to keep detailed records of each loan, including:
- Loan type and lender
- Principal balance
- Interest rate
- Repayment term
- Servicer contact information
Maintaining organized loan information will help you stay on top of your payments and make informed decisions regarding your repayment strategy. Set payment and recertification dates in your calendar, perhaps a few days before, and ensure you create a notification so that you don’t forget to take appropriate action.
Understanding the nuances of your student loans lays the foundation for successful repayment. Armed with this knowledge, you can move forward with confidence as you embark on your journey to conquer student loan debt.
Now, let’s talk about your specific loan type and how to pay it off!
Jump to the section that’s relevant to your loans:
- Private Student Loan Repayment Strategies
- Federal Student Loan Repayment Strategies
- Income-Driven Repayment Plans
Student Loan Repayment Step #4: Understand Your Repayment Options Based on Loan Type
When it comes to student loan repayment, there are many rules and avenues that one can go through. Here, we will point out a few key concepts to help you navigate through it all.
Private Student Loan Repayment Strategies
Generally speaking, if you have private student loans, your only option is to pay them back. The key to this type of debt is low interest rates and then paying it off as quickly as humanly possible.
Refinancing Private Student Loans:
Most individuals who originally took out these loans did not have established credit, and as a result, they may have higher interest rates. Take a look at your current credit, and if it is good or excellent, it might not be the worst idea to look into refinancing your loan to reduce the interest being charged.
A few things to consider:
- Pay attention while shopping around, as these do require credit checks which can lower your credit score. Do some research first to see if they perhaps have an ability for a soft pull (which doesn’t affect your credit score) before you commit.
- Take a look at the current rates, and if your current loan interest rate is at or below the lowest rate you find, it would not make sense to refinance, as there will be no reduction, but you will get charged the origination fee, basically making your overall loan even bigger.
- If you don’t have good credit, focus on increasing your credit score first, before looking for the refinance option. Remember, the higher the score the lower the interest rate.
- Consider your objective with the refinance. If you need to pay off your loan over a longer period of time, your monthly payment will be lower, but the overall amount you pay will be more and you will most likely be charged a higher interest rate.
Federal Student Loan Repayment Strategies
Federal student loans are debt, like any other, but they operate a tad differently. These loans come with certain protections that we don’t see in other aspects of lending and borrowing. They also come with many protections that can be beneficial to the borrower. For example, there are 6-month grace periods for all federal student loan borrowers (some are automatic, others you have to request), forbearance, discharges, and forgiveness.
An often confusing component of federal student loans, however, is the different repayment plans and options. We’ll tackle all these options now to help you figure out your path and strategy.
Repayment Options for Federal Student Loans
Federal student loans offer quite a few repayment options:
- Standard – 10-year repayment, similar to private student loan structure
- Extended – The same concept as standard, except you can choose up to 25 years to pay your loans back
- Graduated – Starts off at a lower amount and gradually increases every two years; to be paid off in 10 years
- Income-Driven Repayment (IDR) – your repayment amount depends on your income
Income-Driven Repayment Plans:
Income-Driven Repayment plans (IDRs) have several different options. Each has benefits and downsides, and it’s absolutely not a one-size-fits-all situation. The interesting and often confusing part of these repayment plans is that the amount you borrowed does not impact how much you need to pay each month. It’s all based on income (thus the name).
- Income-Based Repayment (IBR): Caps monthly payments at a percentage of your discretionary income (10% or 15%) and forgives any remaining balance after 20 or 25 years of qualifying payments. The plan is open to all student borrowers.
It has middle-of-the-road income protection, and payments are capped if you qualify for NEW IBR. If you qualify for new IBR, only 10% of your discretionary income is used, and any remaining balance is forgiven after 20 years or 240 qualifying payments. The downside is that interest capitalizes if you leave the plan. (Yes, there are 2 IBRs: new and old.)
- Pay As You Earn (PAYE): Similar to IBR, PAYE offers middle-of-the-road income protection but caps monthly payments at 10% of discretionary income for all who are enrolled. It also forgives any remaining balance after 20 years of qualifying payments.
PAYE is no longer open for new enrollment as of July 1, 2024, but those who are in the program can stay. However, if they leave, they cannot come back. So, you have to decide if a potentially higher payment option is better for a shorter repayment period.
- Saving on a Valuable Education (SAVE, formerly REPAYE): As of spring 2024, this is the newest plan that offers the best income protection. Payments are based on 5 to 10% of your discretionary income. This program is open to all student borrowers, and outstanding balances are forgiven after 10-25 years, depending on the type and amount borrowed.
If you enroll in IDR and your calculation estimates that you owe $0/mo, you don’t have to send in any money. Each month under that plan will count towards the 10- to 25-year timeline, after which you get forgiveness. (Yes, even if you pay $0/mo for some of those months.)
However, there is no cap on the payment. This means that as your income grows, your payments will grow as well. Depending on how much you earn, you might find yourself paying off more with this plan down the line than you would on any other plan. So make sure to assess all options here and ensure your plan is the right one.
- Income-Contingent Repayment (ICR): This strategy offers the lowest income protection threshold and highest discretionary income payment at a 20% or 12-month adjusted amount—whichever is less. Because of that, this plan is the least favorite among borrowers; however, it is the only IDR that accommodates Parent PLUS borrowers, but only if you consolidate (more on this in a section below!).
NOTE: If you are considering consolidating your loans, it’s possible to consolidate your own student loans and then consolidate Parent PLUS loans separately! Speak with a Certified Student Loan Professional (CSLP) about your options. Guiding Wealth can help with that! Contact us today.
Refinancing Federal Student Loans
Refinancing a federal student loan allows you to replace existing loans with a new loan from a private lender that potentially offers a lower interest rate and/or better terms. Lower interest rates can save money on interest over the life of the loan and simplify repayment with a single monthly payment.
However, refinancing removes protections that federal student loans have, so while you could potentially get a lower interest rate or adjust terms, you will not be able to engage in a repayment plan that fluctuates based on your income. Additionally, you will not have any of your loan forgiven or discharged (unless special provisions within the private lender allow or specify that).
Do your due diligence and compare not only the interest rates and overall cost of the loan but also the payments. If there were forgiveness pieces with your federal loans that you are potentially missing out on due to refinancing, you might be overpaying in the long run.
Consolidating Federal Student Loans
Consolidation is what happens when you combine multiple federal loans into a single Direct Consolidation Loan with a fixed interest rate based on the weighted average of the loans being consolidated. This process will streamline your repayment with a single monthly payment, but it could also potentially extend the repayment term, which may mean that you’ll be paying more or for longer.
For this reason, it’s important to consider if consolidating your loans is the right move for you. There are key times when consolidation may be in your favor, like when you are in default (failure to make payments for a set number of months or longer). At other times, consolidation works against you, like if you have longer repayment periods (like we mentioned above) or loss of certain loan benefits.
You’ll want to weigh these options carefully before moving forward with consolidation. Once you make the change to refinance or consolidate, there is no going back.
Student Loan Repayment Step #5: Check Your Employer Benefits!
In addition to the above-mentioned student loan repayment strategies, there’s one other resource people forget to look: their employment benefits package! Some employers offer assistance as part of their benefits package, regardless of the type of student loan you have.
Employers may offer direct payments toward employee loans or a “stipend” that you use to pay down your loans yourself. Other employers may match what you pay towards your student loan in your employer-sponsored retirement plan as if you were making contributions. If you can’t afford to both pay down your student loans and save for retirement, this is a great benefit to have!
Research potential employers’ benefits packages to identify companies offering Employer Repayment Assistance Programs (ERAPs). During the negotiation process, you can also ask for ERAPs as part of your salary.
Your Next Step in Strategic Student Loan Repayment
Navigating the world of student loan repayment can be daunting, but armed with the right strategies and mindset, you can conquer your debt and achieve your financial goals. Throughout this blog post, we’ve explored various strategies for effectively repaying your student loans.
From understanding the intricacies of loan details to implementing repayment strategies specific to your type of loan, each step is crucial to your success. Remember, there’s no one-size-fits-all approach to student loan repayment. It’s essential to tailor your strategy to your unique financial situation and goals.
As you embark on your journey to crush your student loans, keep these key takeaways in mind:
- Knowledge is Power: Understand the details of your loans, including interest rates, repayment terms, and available options.
- Budget Wisely: Create a budget to track your income and expenses, and allocate funds strategically toward loan repayment. We show you how to create a student loan repayment budget in this blog!
- Implement Proven Strategies: Explore repayment methods, refinancing, and employer programs.
- Stay Motivated: Celebrate milestones, visualize your goals, and seek support from friends, family, and online communities.
- Be Persistent: Anticipate setbacks, stay flexible in your approach, and never lose sight of your ultimate goal of financial freedom.
By taking proactive steps and staying committed to your student loan repayment goals, you can overcome the challenges of student loan debt and pave the way to a brighter financial future. Remember, you’re not alone in this journey, and every small step you take brings you closer to your goal.
If you’ve read through all of this and still feel super overwhelmed — or find yourself having more questions than answers — we can help. Here at Guiding Wealth, you’ll work with a Certified Student Loan Professional (CSLP) who has extensive experience navigating the complexities of student loans!
We’ve helped families and new grads navigate their student loan repayment journey with much more ease.
If you want expert advice from a Certified Student Loan Professional — and a clear plan to pay off your student loans (without eating ramen every day even after college is over) — book a custom one-time financial plan.
When you sign up for a one-time plan, you’ll work 1:1 with a financial planner (with their CSLP certification). You’ll receive customized advice about your student loan repayment options, as well as how each option plays into your overall financial picture. For just one affordable payment, you’ll receive a personalized plan that will tell you exactly how to approach your loans strategically.
NEV KRAGULJEVIC, CSLP
Nev is a financial planner who has spent 25 years working for colleges and universities around the country. Over the course of his career, Nev has worked with close to 500,000 college students and parents navigating the intricacies of college education. He retired from his career in higher education to spend his early retirement year serving people as a financial planner, including students and families who want to understand their college affordability options! Learn more about Nev here!