A 6-Step Guide to Managing Your Student Loans
In this excerpt from Laura’s new book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, you’ll get solid tips to manage student loans wisely and use lesser-known strategies to make education debt much more affordable.
I know many of you are suffocating under a mountain of student loan debt. Approximately 43 million borrowers, or seven in 10 U.S. graduates, are carrying over $1.25 trillion in student loans. The average debt is at an all-time high, $37,000 per graduate.
No matter if you can afford your student loan payments or are struggling to make them, it’s important to know your options. Many graduates have multiple loans from a variety of lenders. So, get familiar with what you owe and who you owe it to. If you’re not sure, visit your lenders’ websites or review free copies of your credit reports at CreditKarma.comor AnnualCreditReport.com. Having all your loan accounts and their interest rates and terms listed in one place allows you to see the big picture of your finances and know what to prioritize.
If you have more than one federal student loan, the government can consolidate or combine them into one loan with an interest rate that’s a weighted average of all of your rates. A consolidation doesn’t reduce the interest rate, but it does give you these benefits:
- Fewer accounts and payments to keep track of each month
- Any older, variable-rate loans are converted into one fixed-rate loan (since 2006 they are all fixed)
- No or minimal fees
- Lower monthly payments, if the length of your payment term is extended
Both students and parents can consolidate education loans; however, you can’t combine loans that are in different names. Only loans from the same borrower can be consolidated—even married couples must keep their respective education loans separate. There are usually minimal fees to do a student loan consolidation, and you can work with any lender you choose.
The major downside to consolidating federal student loans is that you may lose special features or benefits that come with your original loans, such as forgiveness for public service work, forbearance for financial hardship, repayment options, and certain interest rate discounts and rebates. So, always ask potential lenders what loan options you’d give up in a consolidation.
Use the Loan Consolidation Calculator at FinAid.org to compare the monthly savings to the increase in total interest expense over the life of the loan. Carefully analyze the cost of repaying your original loans against the cost of paying for a consolidated loan.
Now, let’s talk about private student loans, which come from private lenders instead of the federal government. In general, you can’t consolidate federal and private student loans together. However, you can consolidate multiple private loans.
The main difference is that unlike consolidating federal loans, the interest rate on your new private loan is not a weighted average of your old loan rates. A private lender will evaluate your current financial information and may give you a lower interest rate—which is actually a refinance.
Doing a refinance means that you pay off one or more of your high-interest loans with a new loan that has a lower interest rate. While the federal government offers consolidation, student loan refinancing is only available from private lenders.
Private lenders will evaluate your financial situation for approval. But if your finances and credit are better than when you first got your loan, you may be able to refinance at a lower interest rate, which would allow you to:
- Lower your monthly payments
- Shorten your repayment time so you pay off the debt sooner
- Reduce the total amount of interest you must pay
- Choose a variable interest rate loan, which can be more affordable if you plan to pay off your loan relatively quickly
- Enjoy the benefits of consolidation, including having one simplified monthly bill
When you have lower payments, you can pay more toward your principal balance each month, which pays down your loan faster and allows you to easily save money.
When you have lower payments, you can pay more toward your principal balance each month, which pays down your loan faster and allows you to easily save money.
There are private lenders that may refinance both federal and private student loans for as little as 2 percent or 3 percent with repayment terms ranging from five to 20 years. Every lender’s underwriting requirements for refinancing are different, so you need to shop and compare offers from several companies to make sure you get the best deal. If you’re not sure where to start, check out my Online Loan Comparison Chart for some of the best places to refinance your student loans.
Finaid.org has a list of federal and private student loan institutions, including lenders that specifically offer consolidation loans. You can also get a consolidation loan directly from the U.S. Department of Education at StudentLoans.gov.
If you have student loans that you want to whittle down faster, without doing a consolidation, there are several options. Here are six more ways to make your federal and private student loans more affordable.
- Make accelerated loan payments.
- Pay more than the minimum.
- Use windfalls to pay down debt.
- Explore loan forgiveness programs.
- Find out if your employer has student loan benefits.
- Automate your loan payments.
Here they are in more detail.
1. Make accelerated loan payments.
A secret weapon you can use to whittle down your balances on student loans (or any type of loan) faster and pay less interest without paying an extra dime is to make accelerated or biweekly payments instead of monthly payments. This strategy works for all types of installment loans, if they don’t impose a prepayment penalty (which typically isn’t the case for student loans).
Biweekly payments take advantage of the fact that one month out of each quarter has five weeks in it instead of four. There are 13 weeks in each quarter, not 12, and there are 52 weeks in a year, not 48. So it’s a sneaky way to get the equivalent of one extra monthly payment made each year.
The additional payment works wonders toward paying down a loan faster, which means you pay less interest over time. This strategy works especially well if you get paid every other week, so you can budget the biweekly loan payment to occur close to each payday.
2. Pay more than the minimum.
If you have extra money each month, you could pay more than the minimum payment. Let’s say you owe $50,000 at a 5 percent interest rate for 10 years. Your minimum payment would be $530 and cost you about $14,000 in interest over the life of the loan. But if you pay an additional $100 each month you’ll save about $3,000 in interest and pay off the loan two years earlier.
When you send more than the minimum payment or make biweekly payments, make sure that you add a note to your payment indicating that you want the extra to go toward your principal balance. Otherwise, the lender may think that you’re prepaying the next month’s payment and simply hold it, which won’t help you get rid of the debt any faster.
3. Use windfalls to pay down debt.
As tempting as it can be to quickly spend a bonus, gift, or tax refund on a luxury item, remember that using a windfall to pay down debt is the absolute easiest and most effective way to get rid of debt faster. When you get a raise or promotion at work, consider it a windfall as well, and make sure you use additional income to accomplish important goals like building an emergency fund, saving for retirement, or paying down debt.
I recommend attacking your highest-interest debt first because it’s costing you the most. If you have debts with higher interest rates than your student loans, such as credit cards, personal loans, or payday loans, always pay off those first.
4. Explore loan forgiveness programs.
Some types of federal student loans come with a forgiveness program that allows some or all of your debt to be eliminated. This might be the case if you work full-time in certain industries, such as teaching or medicine, or if you do public service work for a certain amount of time.
However, be aware that some types of forgiven student debts are considered income, so you may still be on the hook for taxes on amounts you don’t repay. For example, if you earn $40,000 and have $10,000 of student loan debt forgiven, you’d owe income tax on $50,000 instead of $40,000 that year. So make sure you understand the future tax consequences for any forgiveness programs.
5. Find out if your employer has student loan benefits.
Helping workers to pay down their student loans is an innovative benefit offered by some large companies. Check with your human resources department to find out what may be available.
If your company hasn’t created a student loan repayment benefit, propose it as a solution to stay competitive, retain the best talent, and help workers reduce financial stress.
6. Automate your loan payments.
Many lenders offer to automate loan payments by drafting them from your bank account on a given day each month. They know you’re less likely to miss a payment this way. And in exchange, your lender may offer a slightly lower interest rate, which helps you pay off your student loans a little bit faster.
Your options depend on the type of loan you have—and you can learn more at StudentLoans.gov. Just remember that if you reduce your monthly student loan payment or lengthen the repayment period, that increases the amount of interest you pay over time.
When you borrow from the government to pay for school, they expect you to pay the loan back on time every month. Defaulting on a federal student loan is very serious because the feds can use everything in their power to collect money from you, including garnishing your wages, keeping your tax refunds, and withholding benefits, such as Social Security retirement payments.
So, if you ever find that you can’t make a student loan payment, contact your lender to explain your situation before they’re forced to contact you. And finally, if you have a lot of student loans, don’t get anxious about them, simply make smart decisions about how to handle them going forward. Taking control of your debt is ultimately what gives you power over it.
This post is an excerpt from my new book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, an Amazon #1 New Release. If you’re dealing with student loans, you’ll get solid tips to manage them wisely and use lesser-known strategies to make education debt more affordable.
Get More Money Girl!
To connect on social media, you’ll find Money Girl on Facebook, Twitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile app! Click here to sign up for the free Money Girl Newsletter!
Smiling Graduate Student image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
