Paying off Student Loans - Federal
The value of a great education isn’t priceless, it’s years of student loan repayments. Maybe you’ve just graduated or maybe you’ve been out in the working world for a while and your financial situation has changed. If so, you’re going to want to choose a repayment plan that provides you with the right balance between minimizing your monthly payment and minimizing your total interest paid over the life of your loan.
This section focuses on federal student loan repayment but check out my other posts on private student loans and student loan consolidation and refinancing (that post is highly recommended!) to learn all you need to know about paying off your loans and saving the most money!
According to our student loan statistics, about 90% of new students loans are federal. Federal student loans repayment plans generally extend between 10 to 25 years. You can choose several plans for repayment.
First Things First
These are some resources that I like and suggest to readers and friends. While this guide is a short primer on paying off your student loans, these books are inexpensive and in-depth resources to help you save money and pay off your debt sooner.
Paying Off Student Loans
- The Standard Plan: If you’re itching to get rid of your student loans as quickly as possible, this is the plan for you. This is also the plan with which you will pay the least interest. Your monthly payments might be slightly higher with this plan, but you’ll be done paying years sooner. In fact, for this plan you usually have ten years or less to pay your loans off.
- The Graduated Plan: This plan offers you lower monthly payments at the start of your loan with payments gradually increasing every two years. The idea behind this plan is that when you first graduate, you’ll be making far less than you will later on in your career. This repayment plan is generally for ten years as well. The problem with this plan is that for the first few years you might just be paying interest and not touching the principal balance, which means your total debt will not actually be decreasing. You’ll end up paying more in interest using this method.
- Income-Based Repayment Plan: This plan is for student loan borrowers who have large amounts of debt and small annual incomes. You usually are eligible if your annual income is less than your student loan debt. If you borrowed before July 1, 2014 then you will pay 15% of your discretionary income over 25 years. If you borrowed before July 1, 2014 then you will pay 10% of your discretionary income for 20 years. This plan takes into account not just your income but also your family size. As with any plan that extends payments over a longer term, you will pay significantly more in interest. There is a chance, however that after the 20 or 25 years the remainder of your loan will be forgiven. If any amount is forgiven, this might have income tax implications since forgiven debts are treated as taxable income.
- Pay As You Earn Repayment Plan: This plan requires you to pay 10% of your discretionary income for 20 years. In all other ways, it is very similar to the Income-Based Repayment Plan.
- Income-Contingent Repayment Plan: This plan requires you to pay the lessor of either 20% of your discretionary income or whatever you would pay on a fixed payment plan over a twelve year term, adjusted to your income. This plan will usually require you to make larger payments than the Income-Based Plan and the Pay as Your Earn Plan but will still be based on your income and family size. This plan does not have an income requirement in order to enroll.
- Extended Payment Plan: This plan allows you to make smaller payments over a longer period time compared to the Standard Plan. To qualify, you must have over $30,000 in student loans. You can pay a fixed or a graduated amount and extend your payments for up to 25 years.
Pros and Cons
There are pros and cons to each of the above methods. Ultimately, you will have to decide whether its more important to you to pay less interest over the course of your loan or to have smaller monthly payments. Obviously, if you’re not making very much smaller monthly payments might be necessary. However, if you’re making enough to potentially pay more than I would suggest you do so even if it means you have to scrimp a little. It’s always best to pay less interest and get your student loans out of the way so that you can move on to other important life events like getting married, having kids, or saving for a down payment on a home.
Paying Off Student Loans - Private
You’ve got your degree, a job and now it’s time to get started paying off student loans. Being an adult is fun, isn’t it?
The terms of your repayment will depend on what the lender offered when you first signed up. Most have grace periods after you graduate that will give you six months to get a job before you have to start making payments. You might decide to refinance your student loans before even starting to repay – or you might consider doing so at a later date since it can often save you considerable interest!
When you do start paying off student loans, you’ll notice that the balance is higher than the amount you borrowed. That’s because private student loans start charging interest from the date that you borrow. That interest builds up and gets capitalized which means it becomes a part of the main debt or principal. Interest is then charged on that higher principle. This is the power of compounding interest and while it can be helpful for someone when they’re investing, it’s harmful when you’re in debt. It means your debt increases at a much faster rate. If you paid just the interest while you were in school, then you don’t have to worry about this.
First Things First
These are some resources that I like and suggest to readers and friends. While this guide is a short primer on paying off your loans, these books are inexpensive and in-depth resources to help you save money and pay off your debt sooner.
Paying Off Student Loans
You then have to start paying the money back and that can be easy with private student loans. You can set up an automatic withdrawal right from your bank account. This is often a good idea because it’s simple, will ensure you’re never late for a payment and often the lenders give you a discount on your interest rate if you sign up for this as it saves them money to process payments in this way. If you don’t feel comfortable giving your lender access to your primary bank account I would suggest setting up a bank account and just putting the money to pay your loan each month in it.
Most student loan repayment plans are based around 10 year repayments, but lenders often offer alternative options like 15, 20, 25, and even 30 year repayment plans that you can work out. It’s important to call and negotiate your student loan repayments so that you won’t have a problem paying them each month.
Obviously shorter repayment schedules mean that you’ll pay less interest and longer repayment schedules mean that you’ll pay more interest. You don’t want to become delinquent in your payments because that’s when bad things happen. Not only will interest build up but so will potential fines and charges. If you let it go too long you might even go into default and have your paycheck garnished. If your loans go into default you lose a lot of potential options for negotiating better terms or loan relief with your lender.
While each lender has different repayment terms, here are a few of the largest private loan lenders and the repayment options they offer.
Sallie Mae Hardship Programs
Sallie Mae is one of the biggest providers of federal and private student loans. They offer a number of programs to help students pay back their loans when they’re experiencing financial difficulties.
- Graduated Repayment Period: If the borrower has a problem getting a job after graduation or isn’t making a lot of money, they can request a 12 month graduated repayment period. This means that after the initial 6 months grace period in which they don’t have to make any payments they can get 12 months in which they only pay the interest on their loan. This will mean the payments are significantly lower than if they were making full payments.
- 12 Month Rate Reduction: This program offers borrowers a temporary low interest rate, sometimes as low as 1% and can include a modification of the loan term. To qualify student loan holders make three sequential on-time monthly payments at the reduced rate. This program is very successful and has helped many students get back on track. Depending on the borrower’s employment status and finances, they can potentially extend this program past 12 months.
- Other Programs: Sallie Mae offers much of what you’d expect from a student loan provider like temporary or permanent reduced monthly payments, extended repayment schedules, and other hardship programs.
Wells Fargo Hardship Programs
Wells Fargo is another of the most popular loan providers. They offer a number of programs to help borrowers who are facing hardship.
- Extended Grace Periods: Borrowers who are having a hard time finding work can potentially qualify for an extension of the 6 month grace periods
- Payment Relief: Wells Fargo offers both short-term payment relief and payment relief up to six months. This is great for borrowers who lose a job and need a short break.
- Other Programs: Wells Fargo offers many of the programs that you’d expect including forbearance and deferments, extensions of terms, and hardship programs.
Find out What Your Lender Offers
Check out your original loan contract as well as the website of your student loan provider. The best idea is to call and talk to your lender if you are experiencing a difficulty in repaying. Many companies don’t publicly publish all their programs so someone over the phone might be best able to match you with one of their programs. The good news is that student loan lenders want to make sure that you don’t default so they have lots of options with which to help you in the short or long term to pay back your loan.
Monthly student loan payments can be so great a burden that borrowers feel stuck and unable to move forward in life. If you could pay off your student loans today, what could you do with the extra money you’re no longer using for your monthly payment? How much faster could you accomplish your goals? Refinancing is one tool to help you pay off your student loans faster.
Refinancing a student loan, like refinancing any other debt, reevaluates the debt and changes the terms of the loan accordingly. Essentially, you take out a new loan, pay off the old loans completely, then make payments subject to the terms of the new account. Refinancing is a way to move your debt to another financial institution, extend or shorten repayment terms, find better interest rates, or lower monthly payments. Many people seek to refinance when they are struggling to make payments, but it is actually an effective way to get students loans paid off faster as well.
Interest rates are constantly fluctuating. If you have a fixed-rate student loan, you could be paying more interest by missing out when rates are low. But if you have a variable-rate loan, you could pay more when rates swing back up. On top of fluctuations within your account, financial institutions all offer different rates. Federal student loans are subject to interest rates set by the Department of Education, but private institutions offer more competition.
Interest rates are expected to rise through 2017 so now is a great time to refinance into a fixed-rate loan with a lower interest rate. Through refinancing, you are hitting a reset button on the account. Your loan payments will be evenly spaced over a longer period of time, whether by choice or because you were three years into a ten-year repayment and now you are back to a fresh ten years. This gives you the ability to make larger payments every month that lowers the principal amount. The more money you are able to pay on the principal every month, the faster you will pay off your student loans.
Interest rates are a percentage of the total amount you owe, paid yearly as a fee for holding the debt. In most cases, interest rates are calculated by figuring out how much interest should be charged every day then adding up those amounts to equal the total interest you see on your monthly statement for the period.
One reason it’s calculated this way is to allow for changes in the amount owed. When you make a payment that lowers the principal (or the amount left of the original debt), the amount of daily interest you pay goes down. Periodically unpaid interest will capitalize, or become absorbed by the principal. This should be avoided at all cost because you will begin making interest payments on the interest you haven’t paid.
Lowering your interest rate through refinancing helps you pay off your student loans faster because it means that less of your monthly payment gets eaten up on its way to the principal. The less principal you owe, the less interest you pay, which allows you to pay down more principal. It’s like a snowball rolling down a hill, picking up speed and getting bigger and bigger.
Refinancing into a loan agreement with a shorter term helps you pay off your student loans faster because you will have higher, more aggressive payments each month. In some cases, borrowing for a shorter period of time means you will pay a higher interest rate. However, larger monthly payments will knock down your principal quicker. The best way to pay off a student loan is to make a series of large payments early in the repayment process.
In some cases, you may actually be required to pay a penalty for paying off your loan before the term is over. Refinancing into terms to avoid prepayment penalties is a smart idea if you plan on paying back students loans fast.
Refinancing is a tool that many borrowers could use to get a hold of their student loans and take control of debt. Break the debt cycle and make real progress on your loans with lower interest rates, shorter terms, and no prepayment penalties.
Federal direct consolidation is an excellent way to rearrange your debt if you are struggling to make payments on the amount you owe. However, if you want to pay off your student loans as fast as possible, this program may not be as helpful. Applying for federal direct consolidation can be done through your lender, and while it opens borrowers up to a lot more payment options, it can also limit your payback strategy.
Consolidating your direct loans means paying off each individual loan and beginning repayment on the entire balance as one new larger account. In doing so, the borrower no longer has a bunch of separate payments to make each month but rather one payment to encompass them all. He or she can select from an extensive menu of payment options that make repayment as painless as possible. Borrowers may even qualify to have their debt forgiven after ten or fifteen years of payments.
Borrowers who use federal direct consolidation gain access to a wide range of income-based repayment plans. Consolidated loans can still qualify for public service loan forgiveness, but since the loan term restarts, you may lose the progress you've already made.
If the idea of making payments for ten or fifteen years makes you sick to your stomach, federal direct consolidation is probably not right for you. What the program doesn’t do is provide tools to aggressively pay back loans. What consolidation can offer you is a lower monthly payment by extending the term by many years, up to thirty. Choosing consolidation on a shorter term length may give you a higher monthly payment, but it will also help you pay off your principal sooner. Not only would you pay your loans faster but you will save money on interest.
Other private programs might offer lower, more competitive interest rates, which is an even more direct way to pay less interest. A lower interest rate means your monthly payment can pay down more of your principal every month. Interest rates for direct consolidation are set by the government and don’t rise and fall with the market. While this provides a steady tableau for borrowers attempting to gain control of debt, it doesn’t work in favor of someone aggressively repaying.
Another way that federal direct consolidation won’t help you pay back your loans faster is the limitations on when and how many loans you can consolidate. All federal loans can be included in your consolidation although private loans cannot be. You are also limited because you can’t have a second direct consolidation within a certain period of time. Federal Direct Loan consolidation doesn't let you take a more strategic approach to paying your debt by paying higher interest loans off first and snowballing payments as you go.
The best strategy to pay back your student loans as quickly as possible considers all tools available, including federal direct consolidation. Just because all of your federal loans are eligible doesn't mean that you need to include them. Perhaps the best strategy for paying off student loans as fast as possible involves using federal direct consolidation for some accounts, but you will likely need to leave some accounts out in order to get them paid off faster. For example, a small account with a manageable payment might be easy enough to pay off on it's own within the next 12 months. Since it is a smaller amount, there isn't as much interest accumulating and it's easy to make a payment on the principal. If you chose to consolidate this loan, you are making it as difficult to pay off as all the rest of your loans. This strategy works with accounts that are very large or difficult to make payments on, but it doesn't preserve the advantage of having smaller accounts. Remember, any federal direct consolidation done within 180 days of your original consolidation will be absorbed into the first one.
Paying off your student loans as quickly as possible after graduation will save you the most money over the course of the loan. It also frees you up to do more things in your life. Too many people feel stuck under the expensive burden of student loan debt. The good news is that it’s never too late to tackle your debt and create a plan to pay back your student loans early and save money. Learning the art of the side hustle gives you another source of income to help knock out your loans.
Interest is the fee that you pay for borrowing money. It’s designed to make loans that are quickly paid back less expensive and troubled accounts more expensive. Interest gives a borrower an incentive to pay the loan back faster in order to save money.
Interest accumulates daily and if you do not pay it before a certain period of time, it will capitalize on your loan (or add to the principal). Then, you will begin to accumulate interest on money that was interest in the first place. On the other side of the coin, if you make large payments that bring down the principal amount owed, you will be charged less interest every day. As a result, an even larger percent of your payment goes towards lowering the principal. Your actions during repayment create financial momentum one way or another, where an account that falls behind gets further behind and an account that gets ahead gets easier to maintain. For this reason, it’s important to find a way to make larger payments as early as possible in the loan term. These 5 side hustle ideas can help you do just that.
Creative Services for Hire
A number of online platforms make it easy to offer design, writing, or other creative services online. Web content is in high demand, so if you can translate your hobbies and skills into a tangible product that solves a company’s creative problem, you’ve got a great start to a side hustle. Platforms like Upwork and Freelancer give you a place to meet clients and provide all the basic tools you’ll need, like invoicing and payment protection, without the time investment of building systems from scratch.
Homeowner Skills for Hire
You don’t have to be a homeowner to know how to take care of a property. From lawn care to housekeeping, there are plenty of people in your neighborhood who would be willing to pay you for work around the house. You could offer regular services, like laundry or flower bed care. Or, you could offer seasonal and one time services, like small motor repair or spring/fall window washing. More difficult tasks are worth more in labor cost, but a personalized proposal for each project will get your neighbor’s attention. Consider sharing with your neighbors that you are trying to work to pay off your student loans and you may see a spike in business. Everyone likes to see local people succeed!
Shut Up and Drive
Rideshare services like Lyft and Uber have received mixed reviews since their inception, but there's no denying the side hustle is fierce for lots of people using these apps. If you qualify as a driver, you can leverage the assets and skills you already have (a vehicle and a driver’s license) into a lucrative side hustle.
Direct sale websites like eBay and Amazon changed the way we shop and the way we value goods. A side hustle selling products online involves hunting garage sales and bargain bins to find products that can be sold for more money online. Garage and yard sales can be a gold mine if people don’t understand the value of their belongings. Leverage your knowledge into a side hustle.
Become an Artisan
Websites like Etsy and local craft show opportunities give you a chance to sell handmade goods as a side hustle. Many people already enjoy making crafts and do it without getting paid. If Etsy feels too much like arts and crafts time, consider purchasing used furniture at yard sales then repairing and refinishing it. List your revamped pieces for sale in an online group or local classified and you are in business!