Print Posted on 11/03/2017 in Financial Planning

How To Reduce Student Loan Debt

How To Reduce Student Loan Debt


Student loan debt has quickly become one of the major obstacles facing many Americans. While the percentage of individuals seeking higher education has risen, so has the amount of student loan debt accumulated.

In fact, nearly 70% of recent college graduates leave school with student debt. So if you’re pursuing a degree, chances are you’re going to graduate with some debt. In a recent study of the 2016 graduating class, Student Loan Hero found that the average graduate had $37,172 in debt.

Student loans aren’t all bad. They provide many with a way to pursue higher education that wasn’t previously possible. In many ways, taking on some student loan debt can be a good choice because it opens the door for more opportunities that come with a college degree.

The downside of taking on loans is that you have to pay interest on them. This poses a problem for many who cannot afford to make more than the minimum payment after graduation. As a result, they end up paying more over a longer period of time.

Part of the issue is that many students taking on loans aren’t realistic in what they choose to study. It’s important that you realize you’re going to need to choose a career path that will allow you to be able to pay off your student loans.

That doesn’t mean that you need to be a doctor or lawyer, but you should keep in mind that whatever career you choose needs to provide you with the means you need to live. This includes your budget and other monthly payments.

Student loan debt has grown exponentially over the past few decades. According to a 2017 study conducted by Make Lemonade, 44 million Americans have borrowed a total of $1.4 trillion in student loans. It’s no wonder that student loan debt is now the second highest debt category for consumers, trailing only mortgage debt.

The process of taking out student loans is fairly simple. University admissions offices usually take care of most of the process for you. 

There are numerous private and federal loan programs that you can apply for in order to help with the upfront cost of tuition. What’s much more difficult is the loan repayment process, especially when payments are so expensive.

The repayment process doesn’t have to be difficult. In fact, there are many different strategies you can use to help make this process go more smoothly and actually save you money.

Even if you’re lucky enough to have a high starting salary at your first job, paying back your student loans will still take time. To help ease the process of paying off your student loan debt, we’ve narrowed down some strategies you can use to eliminate your debt faster.

Read on to find out the strategies you should be using to eliminate your student debt as soon as possible. 

How To Reduce Your Student Loan Debt

Refinance Your Student Loans

One of the best ways to reduce your student loan debt is by refinancing your current loans. This can help you lower your student loan interest rate and your monthly loan payments.

Even though you can’t refinance your loans obtained through the federal government unless you convert them to private debt, you can refinance any loans you acquired through private lenders. 

Typically, private lenders offer borrowers lower interest rates, which can be as low as 2.5%-3% depending on your credit. These interest rates can be significantly lower than government loans and in-school private loan rates.

Generally, when shopping for loans you have the option of choosing either variable or fixed interest rates. The terms of these loans usually range from five to twenty years.

When looking to refinance a current loan you need to understand that you are taking on new debt in order to repay your old loans. You’ll want to find a loan that has a lower interest rate and a shorter repayment period. That way you’ll be able to pay off your loan sooner without having to pay as much on interest.

Refinancing your current loan can simplify and reduce your monthly payment because instead of dealing with multiple lenders, you only need to worry about your new loan provider. As mentioned earlier, you can refinance federal loans; however, you’ll need to convert them into private loans with a private lender.

Choosing to convert federal loans into private loans will remove your eligibility for federal programs such as Public Service Loan Forgiveness. If you don’t foresee needing these federal programs, then by refinancing your loans you’ll be able to make your student loan payments much more manageable.

Every lender will have their own eligibility requirements that can include minimum annual income, monthly free cash flow, credit score and history. The best way to increase your chances of getting approved for a loan is to apply to multiple lenders. However, don’t apply to too many, because hard inquiries temporarily reduce your credit score.

Click here to find out what loan programs you qualify for.

If refinancing your student loans isn’t for you, you have a few other options when it comes to reducing your student loan debt such as federal repayment programs.

Check Out Federal Repayment Programs

Borrowing money from a private lender is one way that many students pay for tuition, but there are also a few loan programs provided by the federal government. Most individuals end up using a combination of the two, but the steps to eliminating debt is different depending on the lender.

Those who have borrowed student loans from the federal government have the benefit of being eligible for several repayment plans. While these plans don’t actually eliminate your debt faster, they do provide you with the ability to qualify for student loan forgiveness after a certain amount of time.

There are many repayment plans offered by the federal government. For now we’ll just focus on a few of the more common income driven repayment plans.

Income-based repayment plans (IBR) are an excellent option for individuals looking to reduce student debt. Under this repayment plan, an individual’s monthly loan payments are dependent upon their income, the size of their family, and the total amount borrowed. If you haven’t paid off your loan in twenty-five years, the remaining balance can be forgiven.

Another fantastic repayment plan that you should consider is the pay as you earn plan (PAYE). Similar to the IBR plan, your monthly payments are based on your income, family size, and total amount borrowed. 

The major difference between these plans is that under a pay as you earn plan, your monthly payment is capped at 10% of your income. The remaining balance of your loans can be forgiven after twenty years.

The final repayment plan that we’ll touch on is the revised pay as you earn plan (REPAYE). Similar to the other two plans, your monthly payment is based on your income, family size, and the total amount that you borrowed. 

Just like the PAYE plan, REPAYE caps monthly payments at 10% of your discretionary income. Under this program your remaining loan amount can be forgiven after twenty years for undergraduate loans and twenty-five years for graduate loans. 

This can help lower your monthly payments, but it’s important to realize you’ll still be paying interest on your loan balance. Essentially, that means you’ll be subject to paying higher interest costs.

Depending on your student loan balance, this can be a great option as your debts have the opportunity to be forgiven after twenty or twenty-five years. We encourage you to pay off your loans faster if possible though.

If you’ve taken out student loans through the federal government, it’s worth looking into these repayment plans as they offer effective ways to reduce your loan debt. In some cases, a large portion of your debt can even be forgiven.

These repayment plan options may not take care of all of your needs, but that’s ok. There are still more options that you can take advantage of to reduce your student loan debt such as loan forgiveness programs.

See If You Qualify For Loan Forgiveness

Depending on your profession, you may be eligible to qualify for student loan forgiveness. In order to qualify, you generally need to be a teacher or a public servant. If that applies to you, then you may be eligible for loan forgiveness that can cover either a portion or the entirety of your student loans.

One of the more common programs is the Public Service Loan forgiveness program. This is a federal program that forgives borrowers of federal student loans that are employed in an eligible federal, state, or local public service job.

This includes those who are employed by nonprofit organizations, or 501(c)(3)s. Participants of this programs make 120 on-time payments over the course of ten years.

Those working in the public service sector need to make sure that they are working in a qualified service role and at a qualifying service employer. 

The best way to find out if you qualify is to ask your employer, or click here to find out how much of your loans can be forgiven.

If you don’t qualify for loan forgiveness you still have some options when it comes to reducing your student loan debt. One of the more obvious ways to do this is by making larger or more frequent payments on your loan.

Make An Extra Monthly Payment

By this point, you should be familiar with the monthly payment process. Just like with credit cards, student loans have a monthly minimum payment that you need to make.

Most individuals choose to simply make the minimum payment, which is why it’s not uncommon for someone to take ten years to pay off student debt. By making minimum payments you end up spending more in the long run due to interest. Simply put, the sooner you repay your loan, the less money you waste paying interest.

We talked about the bi-weekly payment strategy in a recent post. This payment strategy also proves to be effective in reducing student loan debt. By making bi-weekly payments on your student loans instead of monthly payments, you’ll pay back your debt twice as fast.

Swinging bi-weekly payments may not financially realistic for some of you, especially if you’re a recent graduate in your first role. Even with an entry-level salary you should still be able to make payments that exceed your monthly minimum.

Making payments exceeding your monthly minimum is the most effective strategy to reducing any debt, especially your student loan debt. Even an extra $20 per payment adds up.

You can start by allocating a larger portion of your budget to your loan payments. Over time, you will grow accustomed to doing this and your contributions will increase. This strategy will save you money on interest and help you work to reduce your student loan debt.

Start Eliminating Your Student Loan Debt

The rise in college tuition has caused more and more students to need the assistance of loans to pay for their education. These students use a combination of federal and private loans to help with the cost.

This has led to 44 million Americans with student loan debt. As new expenses in life add up, many individuals struggle to make loan payments which elongates the time of your loan. It’s in your best interest to pay off your student debts as soon as possible to avoid paying interest.

The strategies outlined in this post should help you as you work to reduce your student loan debt. 

If you do a combination of refinancing your student loans, checking to see if you qualify for federal repayment programs, see if you qualify for loan forgiveness, and make more frequent payments on your loans then you’ll be on your way to reducing your student debt.

Take advantage of the resources available to you and start using them to achieve your financial goals.