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Paying off student loan debt

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Dealing with Student Loan Debt

The joy and sense of satisfaction that comes with completing your education may also come with the dread and acknowledgement that you must begin to repay your student loans.

Understand Your Current Financial Situation 

The first step in repaying your student loans is to track your cash flow.  This will give you a good idea of where your money is coming from and where it is going each month. Tracking for a number of months and prioritizing your spending may help you find a little wiggle room in your budget for making your debt payments.

While paying your debts and other expenses, it is also important to maintain an emergency fund of $500 or $1,000 in the event that your car breaks down or your laptop suddenly needs to be replaced.  It is also a priority to begin saving in a retirement account, as the compounding interest over the next decades will give you a better shot at a secure retirement.

Learn your student loan repayment options

Most people start out with the Standard Repayment Plan that features equal monthly payments over a ten-year term.  This repayment plan may work for you, or you may recognize that those monthly payments may be too high.  There are other alternatives:

  • Graduated Repayment Plan—monthly payments are lower at first, but increase every two years.
  • Extended Repayment Plan—monthly payments can be fixed (the same) or graduated for up to 25 years.  This makes the monthly payment smaller than the standard or graduated repayment plans.
  • Pay As You Earn Repayment Plan (PAYE) —payments will be 10 percent of discretionary income.  Payments are recalculated every year based on updated income and family size information. You must have high debt in relation to your income to qualify. Anything not paid in full after 20 years may be forgiven.
  • Revised Pay As You Earn Repayment Plan (REPAYE) —payments will be 10 percent of discretionary income.  Payments are recalculated every year based on updated income and family size information.  Anything not paid in full after 20 years for undergraduate loans or 25 years for graduate may be forgiven.  Similar to the PAYE, but:
    • This plan is available for any Stafford, graduate PLUS loan, or any direct loan consolidation that does not contain a Parent Plus loan.  PAYE is limited to loans made or disbursed on or after October 1, 2011.
    • This plan does not cap the maximum payment.  As you income increases, so will your payment with no upper limit to the amount of your monthly payment. With a PAYE, the maximum payment is capped at the same monthly amount as the Standard Repayment.
  • Income-Based Repayment Plan (IBR)—monthly payments are limited to 10 to 15 percent of your discretionary income. Payments are recalculated every year based on updated income and family size information.  You must have high debt in relation to your income to qualify. Anything not paid in full after 20 for undergraduate loans or 25 years for graduate may be forgiven.
  • Income-Contingent Repayment Plan (ICR)—payments are based on the lesser of 20 percent of discretionary income or fixed payment calculated over 12 years.
  • With many of these options, you may:
  • End up paying more interest than you would have under the standard repayment plan.
  • Have to pay income tax on any part of the loan that is forgiven.

To qualify for any of the payment plans, your loan must be in good standing.  This means you are current with your payments.  If you loan is in default, you will have to rehabilitate your loan first.  A student loan is considered to be in default when there has been no payment for 270 days.  To rehabilitate a loan, you must agree in writing to:

  • Make nine consecutive monthly payments
  • Make each payment within 20 days of the due date
  • Make a payment equal to 15 percent of your discretionary income.  You can ask for a lower amount if this is a hardship.  In some cases, your payment could be a low as $5 per month.

Once the rehabilitation period is complete:

  • The default status of your loan will be removed
  • You will be eligible for deferment, forbearance, choice of repayment plans, and loan forgiveness.
  • You may be eligible for additional federal student aid.
  • The credit reporting agencies (Equifax, Experian, and TransUnion)  will remove the record of your default from your credit history.  Late payment reported before the loan defaulted will not be removed from your credit history, however.
  • Those going into the public service sector can apply for Public Service Loan Forgiveness if you are performing the following jobs:
  • Government organizations at any level (federal, state, local, or tribal)
  • Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
  • Other types of not-for-profit organizations that provide certain types of qualifying public services

One way to get ahead in your student loan obligation is to work for an employer that offers student loan repayment as an employee benefit.

Loan Consolidation

Carefully consider if loan consolidation would be helpful to you.  While it is an advantage to get a lower interest rate, and therefore pay less interest over the long run, you will lose certain protections if you move away from your original federal student loan, such as interest rate discounts, principal rebates, or some loan cancellation benefits. The same considerations apply if you are thinking about refinancing a federal student loan into a private student loan.  These are two different debt instruments and the consumer protections covering them can vary greatly.  In addition, eligibility requirements are different for private student loans versus federal, including credit score thresholds that must be met in order to receive the best interest rates. Read the fine print and ask many questions before you consolidate or refinance your student loan.

Make a plan that works for you

Once you have taken a hard look at your current cash flow and your options for repayment, it is time to make a repayment plan.  Gather all of your debt obligations in one place so that you can compare them.  Look at the total balance, the interest rate, the monthly principal due and the monthly interest due.  Think about what would help you to stay motivated in paying down your debt.  Is it eliminating the debt with the highest interest rate or reducing the number of debts you have?  

To tackle the debt with the highest interest rate, use the “avalanche” approach to debt repayment.  If you owe money on a credit card charging an interest rate of 29.99 percent, while owing on a student loan with an interest rate of 6.8 percent, use any leftover money from your cash flow to bring down the balance on your credit card, while still making regular payments on your student loan.  Likewise, if you have multiple student loans with varying interest rates it might make sense to pay ahead on private student loans with higher interest rates, as they frequently have fewer protections like deferment or forgiveness.

If you’d rather reduce the number of debts you have, use the “snowball” approach. List your accounts in order of total balance from smallest to largest and begin to make extra payments on the smallest balance first.  Paying off the smallest account will give you the sense of satisfaction getting rid of a creditor before moving on to your next larger account balance.   

Once you have chosen a repayment plan, set up automatic monthly payments from your bank account if you have one.  This will give you the peace of mind that your debt obligations will be paid on time each month.  You will also avoid dreaded late fees and damage to your credit history. But, make sure you have enough in your account, however, to cover the automatic debits from your account.

Keeping a clear focus on your debt obligations will help you to wipe out your student loans.  To stay true to your goal, draw a picture or write a phrase relating to your goal.  Put is somewhere you will see it at least once every day. Expressing your goal of paying off your student loans – either to yourself or publicly – may help you to accomplish this sometimes seemingly Herculean task.

Tools to Help

Cash Flow Budget Template

Download

Debt Repayment Worksheet

Download

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What You Can Do Right Now

Information is great. But taking small steps now can lead to big changes.
  • TODAY
  • Develop a cash flow budget to understand what your current monthly income, debts and expenses are.
  • NEXT WEEK
  • Once you begin to repay your student loans, they are automatically placed in the Standard Repayment Plan. This ten-year repayment plan may or may not work for your budget.
  • See if there may be other student loans repayment options that are more affordable for you.
  • IN THE NEXT FEW MONTHS
  • Get all the information on your current debt in one place. With this in hand you can make a plan to pay your student loans in a way that is right for you.
  • Do you have debt beyond student loans? Create a debt repayment plan that includes your credit cards, car loan, or other obligations.