10 Ways to Reduce Your Student Loan Debt

Free yourself from student loan debt faster with these tips.

Student loans are an enormous economic burden for Americans, coming in right behind mortgages as the largest kind of consumer debt. And although student debt is often used as a political talking point, you can rest assured that for now, your student loans aren’t going away.

There are, however, some ways you can reduce the burden of your student loan debt by pursuing better loan terms, shorter repayment periods or lower monthly payments. Here are 10 potential ways to improve your student debt scenario:

1. Ask for Employer Assistance

Government employers have long offered loan repayment assistance or tuition reimbursement programs. But more private companies are now initiating student loan assistance policies, in part to attract millennial talent.

If you’re hunting for a job, pay attention to the benefits offered by potential employers. Some offer student loan assistance as part of their benefits package. If you’re already employed, double check with your current employer on the possibility you’re missing out on a valuable policy.

2. Consolidate Your Loans

Most federal student loans are eligible for consolidation, a process in which multiple student loans are combined into one loan. The interest rate is then calculated using a weighted average of the collective interest rates. While this won’t necessarily save you money on interest, it can simplify your repayment by consolidating them into one bill.

Consolidation could alter your monthly payments by changing your repayment period. Choosing a longer repayment period would lower your monthly payment but increase the overall amount of money you repay. Choosing a 10-year standard repayment plan would result in the highest possible monthly payment but minimizes the time and money required to pay off your loan.

You may also become eligible for alternative repayment plans and potential loan forgiveness that may have been unavailable before consolidation (more on those in a minute).

3. Pay Ahead of Time

Some federal student loans, like Perkins Loans, do not accrue interest while you’re enrolled in school and during the grace period after graduation. If you start making payments before interest kicks in, you can reduce the overall interest you’ll pay. And while it may be extremely difficult to do, paying the balance in full ahead of time will render your loan interest-free.

4. Pay Extra

In the same vein, paying down the principle on your loan by paying extra each month will reduce your balance faster and save you money.

“I began a very aggressive savings fund to pay down my loans,” said Katrina McGhee, Life and Budget Coach at Katrina McGhee, LLC. “Pre-paying your principle on a loan is a great approach if you are able to make it work for you … Reducing your balance saves you a lot of interest in the long run.”

If you have multiple loans to pay, you may want to pay more money toward your higher-interest loans first to get them out of the way.

5. Apply for Public Service Loan Forgiveness

If you work for a government organization or a qualifying not-for-profit, you may be eligible for public service loan forgiveness. You will have to be employed full time and have the right kind of loans and payment type. Under this program, your student loan will be forgiven after a certain amount of payments. (You can read more about how to get student loan forgiveness here.)

“This plan enables those in public service … to potentially get forgiveness after 120 qualifying payments,” said Robert Farrington, Founder of TheCollegeInvestor.com. “There are restrictions, so educate yourself, but that program can get you tax-free loan forgiveness after essentially 10 years.”

6. Sign Up for Auto Pay

You could get a small reduction in your loan interest rate by signing up for online statements and electronic payments, where your lenders will automatically deduct your monthly payment from your checking or savings account.

“Many lenders and loan servicers will offer an interest rate discount of 0.25% for signing up for direct debit and/or online statements. This is an easy way to save a little on interest over the course of your loan,” said Farrington.

7. Roll Student Loan Into Your HELOC

If you have a mortgage with some available equity, you could roll your student loan into your home equity line of credit (HELOC). This could reduce your interest rate and result in tax benefits.

“With $40,000 left to pay off on my MBA loan, I decided to roll my student loan into my HELOC,” said McGhee. “This had two big benefits: it reduced my interest rate from 8% down to just 3% and it also meant any interest I paid was now tax deductible.” (Student loan interest is also tax deductible, as long as your income is below a certain threshold.)

8. Pick a Different Repayment Plan

There are many repayment plans available to borrowers, including income-based repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and income-contingent repayment (ICR). These plans will adjust your payment amount based on your income. Here’s what you need to know about some drawbacks to some income-based repayment plans.

“There are several different types of plans … but they all cap your monthly payment at a certain percentage of your discretionary income,” said Farrington.

There are also repayment plans that will adjust the repayment period (for instance, extend the lifetime of the loan) or restructure your payments (for instance, increase monthly payments over time).

Federal borrowers can change repayment plans at any time for free.

9. Apply for Deferment or Forbearance

Student loan deferments and forbearance let you temporarily pause or reduce your monthly payments. Deferment stops interest from accruing on certain types of loans during the deferment period, while loans in forbearance always continue to accrue interest.

You’ll have to work directly with your loan servicer to access these options. There are strict eligibility requirements, but they are wide ranging and could include financial hardship, unemployment, changing jobs, being deployed in the military or having medical expenses. Here’s a quick rundown on how deferment or forbearance can affect your credit.

10. Refinance Your Loan

You can refinance your federal student loans with a private lender to get a better interest rate, which could save you thousands of dollars in interest in the long run. To get the best interest rate, you’ll need good credit. Don’t know where your credit stands? You can check using Credit.com’s absolutely free credit report summary.

You’ll also probably want stable employment and financial security. That’s because refinancing to a private lender eliminates the access to federal repayment options like income-based repayment, deferment or forbearance and public service loan forgiveness. To give up these options, you should be reasonably confident you won’t lose your job or need access to alternative plans.

Here are some tips and guidance for refinancing your student loans.

Image: Jacob Wackerhausen

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Help! My Kid Wants to Go to an Expensive College

Q. I’m having a disagreement with my son about college. He got into the three he liked best with scholarships — we don’t think we will qualify for federal aid but we will apply anyway. The one he likes best will cost about $9,000 more per year than the other two, and that’s money we haven’t saved yet. But he has his heart set. How do we handle this?
— Mom

A. This isn’t an easy situation, and when you don’t have enough money to pay for college, there could be many touchy conversations ahead for you and your son.

You’ll need to have a conversation with your son as an adult, said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland, N.J.

Williams said the discussion points should include why he likes the more expensive school. Is it because there’s a program for his major that surpasses the others? Are his friends going there? Is the school located somewhere he hopes to live in the future? Does he have concerns about finding a job and they have a job placement program?

She said being conscious of “the why” is a good jumping off point.

If the more expensive school is still in the lead, it may be time to discuss student loans, Williams said.

“Be sure that he understands his decision to attend the more expensive school will entail his taking on some debt,” Williams said.

If you’re not well-versed in student loans, it would be a good idea to go with your son to meet with a loan representative at a bank to discuss how they work, current interest rates and more.

Your son also needs to realize that paying for college isn’t exactly a parental responsibility, however much you may want to pay for his education. You’re not a money tree. You have other financial goals, and they could be derailed if you take on too much college debt on your own.

[Editor’s Note: Keep in mind that student loans and how well you pay them off impacts your credit score. You can track your credit-building progress by getting two free credit scores each month on Credit.com.]

More on Student Loans:

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