All the options on how to pay down student loans
We’ve broken down before all the ways to help you pay for college. One of them is taking on “good debt,” AKA student loans. Best strategies to pay off that good debt though when college is over? Let’s discuss.
The key parts that make up a student loan:
PRINCIPAL: The amount you borrow.
INTEREST: The amount (cost of borrowing) you need to pay in ADDITION to the principal.
TOTAL LOAN = principal + interest. The total amount to pay back over the loan repayment term (usually 12-30 years).
LOAN SERVICER: The company that collects loan payments and who you call if you have questions.
6 months after you graduate. This grace period provides time to land a job and start earning money before payback time.
Pro tip: Take advantage of the fact that, thanks to the COVID-19 stimulus package, no interest is accruing until Sept. 30th 2020 (whether you’re pre or post grace period). If you’re still in school, this is a period where daily interest is not accruing. If you’ve graduated, this means you can pause federal student loan repayment with no interest/penalties. It also means any spare cash you have can be used to obliterate the principal instead.
Here are 3 strategies. Which sounds like a better fit with your plans?
If you need wiggle room on loan payments while launching your career:
Income-driven repayment (IDR). There are 4 similar types to choose from. They all reduce your monthly payment to 10-20% of income, ensuring you don’t pay more than you can afford. This option is only for federal student loans (remember: federal and private loans are different).
🔑 Key to know: While you pay less per month, overall you pay more interest because these plans stretch your time to being debt-free from 10yrs to 20-25 years. The silver lining: if you still have student debt by then (as you approach 50!), the government forgives it.
If you plan to work for the government or a nonprofit:
Public Service Loan Forgiveness (PSLF) will wipe out what’s left of your federal loans after you make 10 years’ worth of monthly payments while working for the government or an approved nonprofit. Like IDR, it’s only for federal loans.
🔑 Key to know: Tons of fine print hurdles before you successfully get forgiveness. Read the program rules and regularly check in with your loan servicer to ensure you’re on track. Pro Tip: Make the qualifying payments on an IDR plan. You pay less overall that way, meaning you get more forgiven in the end. Why pay off all the debt before you’re forgiveness-eligible?
If you have a solid private company job and building strong credit:
Refinance. Refinancing = swapping your loan for a “new” loan with a lower interest rate. The catch is you need good credit and high enough income to show the new post-grad-you deserves a new lower-interest loan.🔑 Key to know: Refinancing would make your loans private, which means they no longer are eligible for options 1 & 2 (and once you refi, you can’t go back). A potential workaround: Refi some of your loans and keep the others eligible for IDR and/or PSLF.
Since interest accumulates even while you’re in school, channel that inner overachiever and try to make voluntary payments during college — or at least before your grace period ends 6 months post graduation. Since the payments are voluntary, you can pay as much or as little as you want.
THE GOOD NEWS if you have student debt? You’ve got options. Even better news? You’ve got us in your corner on this and all other things in your financial future.