If advice for paying off student loans were as simple as “Just keep paying those monthly payments,” over 45 million borrowers would have no concerns about wiping away more than $1.6 trillion in student loan debt.
But of course many do stress about it. Paying off college loans can get an assist by budgeting, paying more than the minimum, negotiating with lenders, and refinancing.
The Federal Reserve notes in a recent survey of household well-being that 54% of young adults who went to college acquired some debt, including student loans, for education. Unless you’re expecting a windfall from a long-lost relative, it’s likely up to you to come up with a game plan to manage your finances.
But how do you pay off college loans? It might be uncomfortable to think about exactly what you owe, with interest, when you’re forecast to pay off the loan, and how you might weather economic or job downturns. But denial isn’t the best course if you’re to tackle that student debt. Here are some tips to pay off college loans.
Tips to Pay off College Loans
1. Biting the Bullet on a Budget
So you’ve got your degree in hand and are ready to start that nebulous stretch of time known as the rest of your life. Congratulations! But even in the best of circumstances and job markets, student loan debt can feel daunting.
The disconnect between having invested in a degree that hasn’t yet paid off in a career track that seems livable any time soon can be huge, or in some cases almost paralyzing.
Rather than feeling helpless, it’s better to remember that the path to paying off college loans is, at its core, about making a budget and sticking with it.
Try to remove the mentality that you’ll never get where you want to be in terms of financial stability, and replace it with a more optimistic one that whatever reliability you can build into managing debt will see you through to better days.
It’s best to resist the urge to momentarily feel better through retail therapy, and if you do happen to slip up with spending or are caught unprepared for a bill, realize that living within your means is a challenge for many adults, and learning from your mistakes is better than fixating on them.
The important thing is to create a budget you can actually follow. That’s the point of a flexible budget: to give yourself enough flexibility you’ll be able to stick to your goals and spend your money on what you really want to spend it on.
If you’ve never created a budget, again, don’t beat yourself up: According to the National Foundation for Credit Counseling, only two in five U.S. adults say they maintain a budget and track their spending.
2. Paying More Than the Minimum
There’s more to paying off college loans than paying the lowest amount required every month. A big reason to pay more than the minimum each month is that student loan repayment is structured around amortization—a word you might have heard in school if you took an accounting or economics class.
It basically means a portion of fixed monthly payments goes to the costs associated with interest (what the lender gets paid for the loan) and reducing your loan balance (paying off the total amount owed).
When you first start repaying your student loan, you typically pay more in interest than principal, and the ratio gradually reverses as you keep paying your loan.
Paying more than the minimum monthly payment means you can accelerate reduction of the total amount you owe rather than covering the interest—which is effectively the lender charging you for the privilege of having the loan in the first place.
One plan of attack here to consider is signing up for automatic payments so the payments are taken directly from your bank account as they’re due. You can customize the payment amount to be withdrawn on its own, and there can be a discount for doing so: If you have a Direct Loan, you can get an interest rate reduction for participating in automatic debits. (As a side note, many federal and private student loan servicers offer a discount for enrolling in autopay, so it can’t hurt to ask and get that discount, if it’s available to you.)
One final tip: Try to get in touch with your lender before you make additional payments, so you can verify that your extra cash is going toward paying down the loan principal.
If it ever reaches a point where making real progress on repaying your loans feels nearly impossible, and income-driven repayment and forgiveness options either don’t apply or aren’t the right fit, then refinancing with a private lender might be a good option.
Consolidating federal loans through the Direct Loan Consolidation program results in an interest rate that is the weighted average of the original loans’ rates, rounded up, which means you don’t typically save any money. If your monthly payment decreases, it’s usually the result of lengthening the loan term, which means spending more on interest in the long run.
When you refinance federal and/or private student loans, you’re given a new—ideally, better—interest rate on a single new private loan. A lower rate translates to total interest savings over the life of the loan. Further, you may be able to lower your monthly payments with a longer term or pay your loan off faster (with higher monthly payments) if you decide to shorten your repayment term.
A student loan refinancing calculator offers a look at how much a borrower might be able to save by refinancing student loans.
Don’t forget: Refinancing federal student loans with a private lender means you’re no longer eligible for federal repayment programs, forbearance, loan forgiveness programs, and other protections and benefits extended to federal student loan borrowers.
If you landed a job and then were laid off, you still have options.
If you quit without good cause, then unemployment benefits typically won’t be available. But usually the first part of a survival plan for unemployment—loans or not—is to get into the system for unemployment compensation, if possible. A tool from the Department of Labor and this article can help with finding relevant links and resources state by state.
Borrowers of federal student loans were automatically placed in administrative forbearance during the COVID-19 crisis.
Payments and interest were suspended, but normally, in most cases, interest accrues during deferment or forbearance. (Interest that accrues during the forbearance is added to the principal balance, increasing the total amount owed.)
If you’re treading water on loan payments, it might be time to grit down, pick up the phone, and call the loan servicer. Quite a few banks and lenders have forbearance and deferment programs, although they are mostly dependent on the customer reaching out and asking for help.
Because comparison shopping is always advisable on financial decisions, take a look at your lender’s website and see what options it offers for forbearance.
Forbearance can open the door to an agreement related to the original one that may allow for decreased or delayed payments for a specific period of time, often up to 12 months.
Some lenders may offer to reduce the interest rate being charged on the debt, but there are no federal guidelines for terms for forbearance agreements across all industries (with the exception of federal student loans).
On the surface, this sounds positive, but be forewarned that these options can significantly affect credit history and credit scores. The effects on credit depend on the type of loan and the lender, and whether forbearance or other payment or rate adjustments are available or chosen.
Here’s to Stability
You’ve paid down whatever you’ve managed so far on your college loans, so what are your plans now? Are you happy with your current interest rates? Do you like your lender and/or servicer?
As you get more established with a financial track record and the start of a career, know that refinancing or consolidation can help either pay things down more quickly or help secure terms that fit where you are in life right now—and where you’d like to be in the near future.
Whether you’re ready to take on the real world or are still trying to get your feet underneath you, taking steps to protect your financial health during this time is crucial. SoFi® is here to help you get your bearings and understand and manage your student loans.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.