As the SCOTUS ruling on Biden’s student loan debt relief plan looms large, the topics of student loan repayment and student loan forgiveness continue to make headlines. And with nearly 44 million Americans holding some amount of student loan debt, finding ways to repay those loans is on the minds of many. Here, we’ll look at five strategies you can use to tackle student loan debt.
1. Create a Budget
An effective budget is essential when tackling any debt – including your student loans. As the end of the federal loan payment pause nears, now is as good of a time as ever to reassess budgets. While there are many online resources available on budgeting, some popular methods to consider include the following:
- The 50/30/20 Budget – This budget is based on the percentage of your after-tax income that you should allocate to each category. This means: 50% of your income goes to essentials such as housing costs, food, and transportation; 30% goes towards discretionary expenses like entertainment, dining out, and shopping; and 20% is allocated toward financial goals – including paying down student loan debt.
- The Snowball Method – This budgeting strategy consists of paying off your smallest debt first, then using the money saved from that payment to go towards your larger debts.
- The Avalanche Method – This budgeting approach suggests that borrowers focus on their highest interest rates loans first, while still making minimum payments on all other debts. Once the highest interest rate loan has been paid off, they can focus their efforts on the next highest interest rate.
2. Consider Consolidation
If you have high-interest or variable-interest rate private student loans, consolidation may help reduce your monthly loan payments. Student loan consolidation is when you combine multiple loans into one loan and make a single payment each month. However, before consolidating private student loans, borrowers should be sure to do their research and consider the pros and cons of consolidation, such as:
Pros:
- Potentially lower monthly payments
- A single payment each month
- Ability to change the term of your loan
Cons:
- May increase your overall loan length and cost
- May lose certain repayment options or interest rate discounts
- Only beneficial if the consolidation loan has a lower interest rate than your existing loans
3. See if you Qualify for Income-driven Repayment (IDR)
You may qualify for an Income-driven Repayment Plan if you have federal student loans. IDR plans and requirements vary depending on the type(s) of federal loans you have and calculate monthly payments based on factors such as your discretionary income and family size. There are several types of IDRs available:
- Income-Based Repayment (IBR) – Offers payments as low as 15% of your discretionary income.
- Income-Contingent Repayment (ICR) – Calculates monthly payments over 12 years based on your Adjusted Gross Income or 20% of your discretionary income.
- Pay As You Earn (PAYE) – Payments are capped at 10% of your discretionary income for a term of up to 25 years.
- Revised Pay As You Earn (REPAYE) – This plan offers more flexibility than other IDR plans by calculating your monthly payments off your actual income or 150% of the Federal Poverty Level, whichever is higher, for a term of up to 20 years.
4. Pay Down Principle
If you have the extra funds, consider making an additional payment each month – above and beyond your minimum loan payment – to pay off your debt faster. If you’re able, it may be beneficial to focus on paying down the principal balance of your loan rather than just the interest rate. Paying down the principal of a loan reduces how much interest accrues over time and also helps lower your total amount due in the long run. Note that if you’re pursuing Public Service Loan Forgiveness (PSLF), you cannot make extra payments to reach forgiveness sooner than ten years.
5. Look Into Public Service Loan Forgiveness (PSLF)
You may be eligible for the PSLF program if you’re employed in certain public service positions. Those who qualify for PSLF can have any remaining debt forgiven after 120 eligible payments. To qualify for PSLF, borrowers must:
- Work full-time for a qualifying employer
- In order to qualify, consider signing up for an IDR plan. This will give you access to various options like IBR, PAYE, REPAYE, or ICR, all of which have specific eligibility criteria.
- Make the 120 payments on time in full while employed by a qualifying employer
- Have Federal Direct Loans
Eligible jobs may include:
- Government positions at the local, state, and federal levels
- Qualifying nonprofit organizations
- Full-time volunteer posts in Peace Corps or AmeriCorps
- Members of the armed forces
Bottom Line
Tackling student loan debt may seem like a monumental task, but with a plan and some research, you can align yourself with a repayment strategy that works for your financial situation. When planning how to manage your monthly student loan payments, several options such as consolidation, budgeting strategies, IDR, or PSLF could be available to you. These options could help ease the burden – and stress – of student loan debt, so it’s worthwhile for borrowers to take the time to understand all their options and find the one that’s right for them.
References:
https://studentaid.gov/understand-aid/types/loans/consolidation
https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service
https://www.consumerfinance.gov/ask-cfpb/what-is-pay-as-you-earn-paye-how-do-i-know-if-i-qualify-en-1555/
https://finaid.org/loans/ibr/#:~:text=Income%2Dbased%20repayment%20caps%20monthly,is%20no%20minimum%20monthly%20payment