September 27, 2022

Buried in Student Loan Debt? Consider These 7 Repayment Strategies

Earning a college degree is seen as a key component of the American dream, but that achievement often comes at a steep cost. The average student loan debt is around $30,000, according to U.S. News data. For borrowers who attended graduate or professional school, that figure may run into six figures.

Burdensome amounts of college debt can hold you back from other financial goals like buying a home or saving for retirement. However, there are several ways to pay off student loan debt faster – and while saving money. Here are some strategies for repaying your student loans, so you can get your finances back on track.

1. Enroll in an Income-Driven Repayment Plan

Borrowers with federal student debt have access to four types of income-driven repayment plans, depending on the type of federal loans they have:

  • Income-Based Repayment Plan.
  • Income-Contingent Repayment Plan.
  • Pay As You Earn Repayment Plan.
  • Revised Pay As You Earn Repayment Plan.

Under these programs, your monthly payment will be limited to between 10% and 20% of your discretionary income, based on your family size and the type of IDR plan you choose. Besides the obvious benefit of increased affordability, perhaps the most important aspect is the potential for student loan forgiveness down the line. After a repayment period of 20 or 25 years, your remaining debt balance will be discharged.

If you have federal student loans, you could be eligible to have some or all of them forgiven through certain debt forgiveness programs. In addition to income-driven repayment plan forgiveness, here are a few federal programs for which you may qualify:

  • Public Service Loan Forgiveness. Public servants, including government and nonprofit workers, may be eligible to see the remaining balance of their federal student loan debt forgiven after 10 years of repayment through the PSLF program. You can use Federal Student Aid’s PSLF Help Tool to see whether you work for a qualifying employer and generate your PSLF form.
  • Teacher Loan Forgiveness. Teachers who work full time for five consecutive academic years at a low-income school may be eligible for the discharge of some or all of their federal Direct and Stafford loans, up to $17,500 in total. To qualify, you must meet the FSA’s requirements as a highly qualified teacher.
  • Total and Permanent Disability Discharge. Borrowers who are permanently disabled may qualify to have the entirety of their student loan debt forgiven. The Department of Education automatically identifies eligible TPD beneficiaries using existing data from the Social Security Administration. You can also apply on the FSA website by providing documentation from your doctor’s office.
  • Closed School Discharge. If you attended an institution that closed while you were enrolled or shortly after you left, you may not have to repay your student loan debt. You’ll have to meet a number of eligibility criteria and apply for a closed school discharge through the Education Department. In some cases, your debt may be automatically discharged – if that’s the case, you’ll get a notification from your loan servicer.
  • Borrower Defense to Repayment. If your school engaged in misconduct while you were enrolled, you may be eligible to have some or all of your student loan debt forgiven through the borrower defense program. You may even qualify to receive a refund of past payments, depending on your circumstances. You can learn more and start your application on the FSA website.

If you have federal student loans …

Borrowers with multiple federal student loans – including those from different loan servicers – can combine their debt into one loan with a single monthly payment through a Direct Consolidation Loan. Most types of federal student loans are eligible, including subsidized and unsubsidized Direct loans, graduate PLUS loans, parent PLUS loans, Stafford loans and PLUS loans from the Federal Family Education Loan Program.

Through federal loan consolidation, you may be able to lower your monthly payment by extending your repayment term. Most importantly, consolidating your federal student loans may give you access to added benefits like income-driven repayment and the Public Service Loan Forgiveness program.

There’s no fee to consolidate your federal student debt into a Direct Consolidation Loan, and you can apply on the FSA website.

If you have private student loans …

Private student loan borrowers aren’t eligible for a federal Direct Consolidation Loan, but it’s still possible to combine multiple private student loans into one. This can streamline your debt repayment process, making it easier to budget for your monthly payments.

Like with federal student loans, you may be able to lower your monthly payments by opting for a longer repayment period. Alternatively, you can possibly get out of debt faster by increasing your monthly payment amount and shortening your loan term. As an added benefit, you may be able to qualify for a lower interest rate by consolidating, since private student loan rates vary by lender based on the borrower’s creditworthiness.

If you have both federal and private student loans …

Borrowers who wish to combine their federal and private student loans into a single monthly payment would need to move all of their debt into a private student loan. This will result in the loss of several benefits like income-driven repayment plans, federal deferment and forbearance, as well as most student loan forgiveness programs.

Given this downside, it may be more prudent to consolidate your federal and private student loans separately. You can combine your federal student loans into a Direct Consolidation Loan, while at the same time consolidating multiple private loans into a single one. This would result in two separate monthly loan payments, but it would allow you to keep access to federal benefits.

Your monthly student loan payment is essentially the lowest amount you can pay toward your student debt without incurring late fees and other penalties. If you have cash to spare, any extra amount on top of your monthly payment can go directly toward lowering your principal balance. Doing so will help you reduce the amount of debt you owe, pay off your loans faster and save you money on interest over time.

Both federal and private student loan borrowers have the ability to make additional payments without fees or penalties. However, be sure to notify your loan servicer in writing to be sure your additional payment goes toward the principal and not toward future payments

Student loan refinancing is when you take out a new loan from a private lender to repay the balance of one or more student loans. Ideally, you’ll want to refinance to a lower interest rate, which can potentially help you pay off debt faster or reduce your monthly payments. Locking in a low rate may also save you hundreds – or sometimes thousands – in interest charges.

Private student loan refinancing lenders determine your interest rate based on your loan amount and repayment term, as well as your credit history and debt-to-income ratio. Applicants with very good credit and a low DTI will qualify for much more favorable rates than those with bad credit and high amounts of outstanding debt. Here are a few tips for getting a low interest rate when refinancing your student loan debt:

  • Work on building your credit score before you apply. Request a free copy of your credit report from all three credit bureaus (Equifax, Experian and TransUnion) to check for mistakes – and dispute any errors if necessary. You can improve your credit by making on-time payments, reducing your credit utilization rate or opening a secured credit card.
  • Enlist the help of a creditworthy co-signer. If you don’t have the established credit history necessary to get a competitive student loan rate, you can consider asking a trusted friend or relative with good credit to co-sign on the loan. Keep in mind that your co-signer will be equally responsible for repaying the debt, so you’ll want to set clear expectations if you decide to go this route.
  • Compare rates across multiple lenders. Each student loan refinancing lender has its own eligibility requirements and formula for calculating your interest rate. You should get prequalified to check your estimated interest rate across at least three lenders to ensure you’re getting the best repayment terms possible for your situation.

Student loan refinancing isn’t right for everyone, though. Keep in mind that refinancing your federal student loans means you’ll lose access to certain federal protections like income-driven repayment plans, administrative forbearance periods and select student loan forgiveness programs like PSLF.

Student loan deferment or forbearance won’t help you pay off your debt faster, but these strategies may be helpful for borrowers who are struggling to manage their monthly payments. Here’s what you need to know about federal deferment and forbearance programs:

Deferment Forbearance
Eligibility Requirements Must be used for a qualifying event like unemployment, economic hardship or cancer treatment.

Typically doesn’t need to be tied to a qualifying life event, but you may need to submit proof of economic hardship to qualify.

Relief Period Depends on the type of deferment; economic hardship deferment can last up to three years, while cancer treatment deferment lasts as long as you are undergoing treatment. General forbearance periods may be granted up to 12 months at a time, and you can request an extension once it expires. Mandatory forbearance may last for longer periods.
Interest Accrual Interest accrues on all loans during deferment, except subsidized federal loans and Perkins loans. Interest accrues on all loans, unless special circumstances like COVID-19 administrative forbearance.
Interest Payments You may be required to make interest payments while in deferment or forbearance, but some loan servicers may allow your interest to capitalize – meaning that it will be added to your principal balance.
Application Process Most types of deferment and forbearance are not automatic. You’ll need to fill out a form and submit relevant documentation to your student loan servicer.
Credit Impact Federal student loan deferment or forbearance has no negative impact on your credit score.

Unlike with federal student loans, private student loan borrowers aren’t necessarily entitled to deferment or forbearance periods. If you’re having trouble making payments on your private loans, get in touch with your lender to discuss your options. The availability, requirements and terms of student loan relief vary by lender.

Although the process can be difficult and consequential, it may be possible to discharge your student loan debt in bankruptcy. In most cases, it’s easier to get your debt forgiven through bankruptcy if you have private student loans rather than federal student loans.

Filing for bankruptcy due to student loan debt should be seen as a last resort if you’ve exhausted all of your other repayment options like income-driven repayment, deferment and forbearance. But borrowers who are experiencing undue economic hardship due to high amounts of student loan debt in default may find bankruptcy a viable option.

Be aware that bankruptcy leaves a long-lasting negative mark on your credit history, which will make it harder to qualify for a mortgage or even rent an apartment. Carefully consider this option by consulting a nonprofit credit counselor and a bankruptcy attorney before you make a decision.

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