Student loan repayment is one of the most complex and multifaceted personal finance topics. There are so many different options, pitfalls and considerations to keep track of, that there’s really no “one size fits all” approach. What’s worse, borrowers are expected to start tackling their loans as soon as they leave college.
That’s what I learned during my journey to pay off a $28,000 student loan balance in three years. After reaching that goal and building a career around writing about similar stories, I’ve come up with a few pieces of wisdom that every borrower should know.
Refinance Your Student Loans
Borrowers refinance their student loans in order to qualify for a lower interest rate that will save them thousands of dollars or more.
Lenders that offer student loan refinancing look for borrowers with a low debt-to-income ratio, a good credit score, and a stable job. You can still look into student loan refinancing even if you don’t have a high income or a perfect credit score.
Both private and federal loans can be refinanced, but refinancing federal loans will cause you to lose special benefits like deferment and forbearance. Private lenders usually don’t provide deferment or forbearance, so you should only refinance from a federal loan if you’re completely confident in the stability of your financial situation.
Popular student loan refinancing lenders include SoFi, Earnest, and Commonbond.
Consider Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program is one of the most complicated student loan repayment options. In 2018, less than 1% of applicants in 2018 actually received loan forgiveness. But if you can make it work, PSLF is also the best loan repayment option available.
The PSLF program is only available to borrowers with federal loans working for the government or a non-profit. PSLF-eligible consumers have to make 120 payments on their federal student loans, at which point the remaining balance is forgiven. Borrowers use an income-based repayment option with PSLF to reduce their monthly payment.
Only federal Direct Loans qualify for PSLF, which excludes Perkins Loans or Federal Family Education Loans (FFEL). If you have FFEL or Perkins loans, you have to consolidate them into a Direct Consolidation Loan in order to become eligible for PSLF.
You also have to verify that your employer fits the program’s guidelines. The federal government provides an Employer Certification Form that you should send in once a year or every time you switch jobs. If you’re interested in PSLF, contact the federal government to determine if you have the right loans and the right job.
There are other student loan forgiveness programs available through the federal or state government. If you’re a teacher or medical professional, you can often get a portion of your loans forgiven by working in an underserved community.
Look into Income-Based Repayment
A report from the Urban Institute found that more than 20% of borrowers defaulted on their student loans in 2018. That number is projected to increase to 40% by 2023. Defaulting occurs when a graduate hasn’t made a payment for at least nine to 12 months. Like bankruptcy, a default can destroy your credit score and make it hard to qualify for a mortgage or other loan. A default will usually stay on your credit report for seven years.
Most people default because they can’t afford their monthly payment. Switching to an income-based repayment option will lower that monthly bill and allow for some breathing room to avoid default. Typically, income-based repayment options are only available to borrowers with federal loans.
Income-based repayment will increase the total amount of interest paid and extend repayment beyond the standard 10-year term, but it also won’t affect your credit score or have any other negative consequences. If it prevents you from defaulting, it’s worth it.
To change your payment plan, contact your federal loan provider and ask them how to switch. You can use this calculator to see what your monthly payment options are and how much your plan would change.
Private lenders rarely have income-based options, but it never hurts to ask. If you can’t afford any of the monthly payment options, ask your lender about deferment or forbearance. This should always be a last resort because deferring your loans could escalate the total interest and make debt payoff even harder.
Take Responsibility for Your Loans
Some people default on their student loans for a simple reason: they lose contact with the lender. It’s an understandable scenario. Students move away after college graduation and information about their loans doesn’t get forwarded to their new address.
By the time borrowers in this situation discover they owe anything, there may already be extra fees or penalties. Some people don’t find out until they’ve defaulted and their wages are already being garnished.
To find your loans, check your credit information on an app like Mint or Turbo. If you think you remember having a loan with a particular provider, call their customer service line to verify. You should also ask your parents if they know any information about your loans. Make sure to be thorough, as it’s likely that you have more than one loan provider.
Pick a Repayment Strategy
There are two efficient strategies to choose from if you want to repay your loans early: the snowball method and the avalanche method.
The snowball method advises borrowers to pay off the smallest loan balance first. This results in borrowers knocking off individual loans faster, which has been proven to be more motivating. The avalanche method involves paying off the loan with the highest interest rate first, leading to a smaller total interest burden over the life of the loan.
Each method has its own pros and cons, and consumers should pick whichever one best fits their financial strengths and weaknesses. If motivation is an issue and paying off your loans feels like a slog, the snowball method may be your best bet. If you’re a highly disciplined borrower who likes to maximize profit and minimize expenses, the avalanche method is probably a better fit for your personality.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.