Student loans are an integral component of financing many college educations. Before accepting one, it is crucial that you fully comprehend its terms.
Consider all possible strategies to reduce the amount you must borrow, such as filing the FAFSA, applying for scholarships and using work-study or tuition installment plans.
Paying Off Your Loans
No matter which plan or payment structure you choose for student loan debt repayment, your goal should always be to clear it as quickly as possible. To maximize this speed of repayment, pay extra towards principal and consider refinancing to reduce interest rate (for example by signing up for autopay or availing yourself of discounts offered by loan servicers and private lenders).
Reevaluate your loan repayment options annually to determine whether a different one might save money in interest charges. For instance, if you're on an income-driven plan, make sure that paperwork renewal deadlines are met each year, and verify your household income hasn't changed since last renewal.
Make payments biweekly rather than once every month for optimal savings and faster debt relief. Doing this may save a year or more of payments in total!
Interest Rates
Interest rates should be an integral component of any decision to borrow money for college. Higher rates not only impact new loans but can also increase existing loan costs.
Rates depend on various factors, such as the 10-year Treasury note auctioned each year plus margins that differ by federal loan type; undergraduate direct loans have fixed rates while PLUS loans use an auction of 10-year Treasury notes with margins as their base for their variable interest rates.
Borrowers with good credit scores may qualify for lower student loan interest rates than those with poor ones, and to find the most competitive offer it is important to compare several student loan lenders.
Students looking to limit their borrowing should apply for scholarships and grants whenever possible. Paying down debt quickly can also help lower total loan costs; biweekly payments instead of monthly can save both time and money by decreasing interest expenses while simultaneously decreasing total payment amounts.
Deferment
Deferment and forbearance allow you to temporarily stop making loan payments; however, they should only be used as last resorts during times of hardship. Instead, consider increasing your income through side hustles, negotiations with employers for raises or moving to higher-paying positions, or enrolling your federal loans into income-driven repayment plans such as Pay As You Earn or Revised Pay As You Earn for federal loans.
These plans tailor your monthly payment based on your income, with some capping it at 10% of discretionary income or what would have been due under a 10-year standard repayment plan. They also offer loan forgiveness after 20-25 years have been paid back.
A key strategy for effectively minimizing student debt is limiting what you borrow in the first place by cutting costs, applying for grants and scholarships, working part time while in school and/or working during breaks from studies. If your loan balance becomes excessively high however, be sure to investigate all available payment plans as well as refinancing options available to you and consider refinancing as soon as possible.
Forgiveness
Debt forgiveness plans can significantly shorten the time it takes you to repay your student loans; however, these programs don't come free and could come with strings attached.
Before your federal student loans can be cancelled, for example, you might owe at least $10,001 and may also need to pay taxes on any forgiven balances.
Consolidating federal loans could make repayment easier by eliminating multiple monthly payments for different types of loans; however, doing so could potentially end up costing more due to higher interest rates and prolonged pay-back terms.
Forgiveness programs can provide relief to borrowers in greater financial need and advance economic opportunity, provided they target those most likely to benefit. A recent court ruling invalidating a massive student loan forgiveness program costing taxpayers $42 billion was due to Obama administration attempts at usurping Congress' authority which exceeded its legal limits.
