If you currently have or have ever had student loans, raise your hand. *pause* If you raised your hand (like I did!) then you’re in good company. Almost 70% of today’s college students take out some form of student loans. Given the enormity of the problem, this is a definitely a topic of popular interest! This post is dedicated to showing you how to pay off your student loans, but strategically.
And here’s even better news: you can use most of these in conjunction with one another (e.g. refinance AND pay extra toward your principal) to accelerate your repayment timeline even further!
Lever #1: Seek Professional Help
If you have a LOT of debt – think, north of $100,000 – I have just the resource for you. There seems to be resounding endorsement of Travis Hornsby’s Student Loan Planner company within the financial independence community. Their team of certified CFPs and CPAs will create a personalized plan to help you pay off your student loans. As of September 2019, their one-hour consult had tiered fees: $395 for loans up to $200,000, $495 for loans between $200,000-$400,000, and $595 for loans over $400,000.
Reviewers have noted that given these price points, the service is worth the money for people with 6-figure debt, people with higher incomes, or those who have more complex financial situations.
If you’re a more DIYer or can’t stomach those consult fees, check out LoanBuddy. Similar to the other levers I review below, they will create a personal plan to help pay off your student loans, explore loan refinancing options, and check if you qualify for Public Service Loan Forgiveness. While this initial service is offered for free, you can then upgrade to one of their two plans: Plus or Lifetime. Click here for more information.
But even with support, the hard truth is that there is no magic wand to make student loans disappear (usually). The good news is that there are other distinct levers you can pull to optimize your debt pay-down strategy, all on your own!
Lever #2: Pick A Payment Plan That’s Right For You (Federal Loans Only)
Yes, you want to pay off your loans as quickly as possible. But you also need enough cash flow for housing, food, transportation, and life in general. So why is this a lever if it doesn’t accelerate paying off the loan? Well, life is about balance. And as you may recall, I firmly believe that you need to start investing for retirement as soon as humanly possible. So take that extra cash flow, stick it in a Roth IRA with VTSAX funds and call it a day!
Income-Based Repayment Plans
If you are struggling to meet your federal loan minimum payments, you may want to explore income-based repayment plans. Note that these are for federal loans only and you have to apply to qualify. These plans scale your minimum payments based on your salary, and adjust over time. Better yet, your loan balance may be forgiven at the end of the payment plan. These are the options as of August 2020:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan): Payments are generally 10% of your income.
- Pay As You Earn Repayment Plan (PAYE Plan): Payments are generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.
- Income-Based Repayment Plan (IBR Plan): Payments are generally 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014. The are 15 percent of your discretionary income if your loans are from before July 1, 2014. They will never exceed the 10-year Standard Repayment Plan amount
- Income-Contingent Repayment Plan (ICR Plan): Payments are 20 percent of your discretionary income, or what you would pay on a repayment plan with a fixed payment over the course of 12 years. The second option is adjusted according to your income.
Note that there are many things to note about each plan. Before you pick one, review the following for each plan: repayment timeline, which loans are covered, and what the eligibility requirements for each plan. Please go to the U.S. Department of Education’s website on this subject for more details: Click Here.
Public Service Loan Forgiveness Plan (PSLF)
I also know many people who hope to qualify for loan forgiveness under the Public Service Loan Forgiveness Plan. Please make sure you read the rules and stipulations very closely! I’ve known too many people who accidentally “reset” their payment timelines for a variety of reasons.
If you were previously denied loan forgiveness under PSLF, be sure to check out the Temporarily Expanded PSLF program here. It’s a program for those who didn’t qualify the first time they sought PSLF forgiveness.
Lever #3: Make Extra Payments to the Loan Principal
Pretty straightforward: if you have any extra cash, consider making extra payments to the principal balance(s) of your loan(s). This method undeniably accelerates your payoff timeline by potentially years. Additionally, it saves you hundreds (if not thousands) of dollars in interest payments!
Here’s the trick with this lever: make sure that the extra payments you schedule are specifically allocated to the loan principal. Some lenders will just earmark the money toward your next payment, so make sure that it’s clear where the money should go. I’m pretty sure almost all student loan servicers won’t forbid you from making extra payments to your principal, but do make sure they allow it.
If you’re not able to make extra payments to your principal, well, you should consider refinancing with someone else (see below). But if you’d rather stay with your loan servicer, you should still consider making extra payments now that get applied to future loan payments. This method ultimately does accelerate your payoff timeline, but you still end up paying the same amount of interest as you would have otherwise.
Frankly, if you find yourself unable to make extra loan principal payments you should either:
- Refinance with a better lender (see next section) or
- Save your extra money in a high-yield savings account and pay off the remaining balance when you have enough money.
Lever #4: Refinance Your Loans
There are a mind-boggling number of institutions that offer refinancing for student loans, often at competitive rates. If you’re considering refinancing, keep the following in mind. Forbes also published a comprehensive list here:
- Generally these plans work better for private loans, not public (federal) loans
- Refinancing your federal loans might give you a lower rate with many of the same benefits as you currently have (e.g. with SoFi), but you will probably lose eligibility for total loan forgiveness at the end of a payment plan. Be sure to weigh all the pros and cons before deciding.
- Check that you have a decent credit score (680+), sufficient and steady income, and whether you’re carrying other debt – e.g. car loan, credit card balances. All these factors will affect how good your refinance rates will be, and whether you’ll be offered refinancing at all.
Lever #5: Make A Lifestyle Change
If you need more money to pay down your student loans, consider eliminating or reducing living expenses in other areas of your life. Then, apply those savings toward the principal of your loans (lever #3). See, I told you these work in tandem!
Here are some ideas:
- Go through all your subscriptions (especially streaming music, video, online fitness/health subscriptions) and close any you don’t use anymore or don’t use frequently
- Eat out less and cook more, or eat at cheaper places)
- Shop at cheaper grocery stores
- Take public transportation instead of Lyfts (post-COVID 19)
- If you have a car loan, sell your car and buy a cheaper one in cash.
- Change your living arrangements. If you’re able to take on a roommate, consider doing so to reduce your expenses. If you work 100% remotely, perhaps consider moving to a lower cost of living city.
There’s almost an unlimited number of ways to save on your living expenses! Start experimenting and see what works for you.
OK folks, those are all the ideas I have in me. I would absolutely love to hear if you have any other levers to share or any feedback in general about this post. I envision this being a living document, so I’ll be updating it every time I receive or find more information about how to pay off student loans.
Also, check out my follow up post on how to avoid student loans in the first place!