Increase Income Cut Expenses
Two things anyone can do to help themselves out of financial stress is to find a second source of income and/or reduce spending in every category in their budget.
There is money to be made taking a second job as a tutor, a coach, a freelance writer or even taking on the traditional side jobs as a waiter, pizza delivery or babysitting. Create a bank account where any money made on the side goes and use that to make payments on student loans.
The added benefit of a second job is that you have less time to spend money on things like dining out, entertainment, clothes, etc. That means you already should be started cutting expenses in the areas where want so often supersedes need.
Try a few more expense-cutting steps like getting a roommate to share rent/utilities/food expenses using public transportation or walking instead of having the expense of a car move home with you parents until you earn enough to afford expenses and student loan debt.
These might feel like drastic steps, but there arent nearly as penalizing as defaulting on a loan.
Effective Ways You Can Lower Your Student Loan Payments
Planning your route to a college degree doesnt happen overnight. It requires extensive research and brainstorming. After all, even should you not make the right decision for your career, youd still have to repay the student loans.
Exploring and applying for financial aid itself is a pretty cumbersome task and often:
- Requires a lot of documentation
- Gets you stuck following different formalities
- Go hunting to determine reliable student loan plans
Also, note that student loan repayment is a much more challenging aspect of availing financial assistance. This is because you cannot surely predict your financial status, interest rates, and employment plan after college is over. To an inexperienced post-graduate just stepping in the real world, it can prove very discouraging and depressing.
However, a few smart maneuvers and techniques can help you reduce your student loan payments effectively. These are not illegal or under-the-table kind of tactics. Instead, they are about wise budgeting and smart utilization of your rights and connections. Allow us to enlighten you with the ones listed below:
Pay More Than The Minimum
Paying more than the minimum and putting the extra money toward reducing your principal balance is the fastest way to become debt-free.
This strategy lowers the remaining amount due and, because interest is calculated on your remaining balance, reduces total interest owed.
You can set up an automatic monthly payment for more than the minimum to ensure you always pay a little extra. You can also make extra money you earn, such as a year-end bonus, and apply it to your loan balance.
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Enroll In A Graduated Repayment Plan
A Graduated Repayment Plan is perfect for someone who doesnt qualify for an income-driven repayment plan for their federal loans, but cant afford their payments under a standard 10-year term.
With a Graduated Repayment Plan, your payments start out very low, regardless of your income. Every two years, your payment increases. After 10 years of making payments, your loans are paid off.
Choose Your Loans Carefully
Best for: Those who are just beginning their college education
For federal borrowers, there are generally three types of loans: Direct Subsidized and Direct Unsubsidized, which are sometimes referred to as Stafford Loans and Direct Stafford Loans, and Direct PLUS Loans . Direct Subsidized and Unsubsidized Loans have lower interest rates than Direct PLUS Loans, but there is a cap on how much youre able to take out. Private student loans may also have caps, and your interest rate is determined by your credit score.
While a difference of 1 or 2 percent may not seem like a lot on paper, remember that you will typically make 120 loan payments which means that borrowing as much as you can with the lowest interest rate could save you thousands of dollars.
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Consolidate Your Federal Student Loans
With a Direct Consolidation Loan , you consolidate all of your federal student loans into one loan with one monthly payment. You can also extend your repayment term, which can lower your monthly payment. Depending on how much you owe, the repayment term can be from 10 to 30 years. The new interest rate for your DCL will be a weighted average of all of your federal student loans.
The downside of consolidation is that whenever you lengthen your repayment term, you end up paying more in accrued interest over the life of the loan. Also, consolidation is only available for federal student loans. If you have private student loans, consider refinancing.
What To Do When Student Loan Repayment Options Leave You Hopeless
With student loan repayment plans, income caps help borrowers manage high monthly payments. But if youve wondered, What is the threshold for student loan repayments? and found that even income-based repayment plans leave you with high monthly costs, look into refinancing to reduce your bill. Refinancing may allow you to bring your monthly payments down to a level you can handle, no matter your income.
Katie Gustafson contributed to this report.
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How To Refinance Your Private Student Loan
Considering the huge financial benefit you could get, refinancing your student loans is a pretty easy process.
There are just three simple steps:
After you’re approved, your new lender will pay off your old loan and you’ll begin making payments on your new, lower-interest loan.
To choose a lender, start by creating a basic spreadsheet so you can get a side-by-side view of different banks to compare interest rates, loan terms, and other factors. If the thought of making a spreadsheet gives you hives, no problem. Check our Best Banks chart for an easy comparison.
Many lenders provide the option to get a quote on their website. This will result in a “soft pull” on your credit, which allows the lender to give you a relatively accurate quote without dinging your credit score.
To apply, fill out the application on the lender’s website. Typically, you’ll need about 20 minutes to complete an application. When you’re done, it’s reviewed by your lender and processed for approval.
Wait for approval, which can take as little as a few days or as long as two to three weeks. You should continue to make payments on your existing loans until your new lender notifies you that the old loans have been paid off.
Most people who are approved for refinancing are able to start saving in about three weeks.
Thing To Do If You Cant Pay Student Loan
The easiest way to solve a problem is to start at the source and in this case, that means your loan servicing company if you have a federal student loan or a bank, if you took out a private student loan.
The loan servicers and banks make money is you simply follow the terms of your loan agreement and pay them back the money you borrowed. They lose money if they have to chase you all over to make those payments.
So, its in their best interests to be helpful. They should provide you with information on various repayment plans that will make it easier for you to afford monthly payments. You could ask them to have a portion of every paycheck deducted to help meet your obligations.
But be careful who you speak with and listen closely to what they say. Unfortunately, many loan servicers have come under fire for offering misleading or sometimes false information to borrowers that drives up the cost of repaying your student loan.
For example, the federal government filed suit in January of 2017 against Navient, the largest servicer of student loans in the U.S. with 12 million customers who owe $300 billion. The suit alleged that Navient made serious mistakes in the collections process that cost consumers millions of dollars.
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If You Have A Plan 4 Loan And A Plan 1 Loan
You pay back 9% of your income over the Plan 1 threshold .
If your income is under the Plan 4 threshold , your repayments only go towards your Plan 1 loan.
If your income is over the Plan 4 threshold, your repayments go towards both your loans.
You have a Plan 4 loan and a Plan 1 loan.
Your annual income is £28,800 and you are paid a regular monthly wage. This means that each month your income is £2,400 . This is over the Plan 4 monthly threshold of £2,083 and the Plan threshold of £1,657.
Your income is £743 over the Plan 1 threshold which is the lowest of both plans.
You will pay back £67 and repayments will go towards both plans.
Boost Your Credit Score
Best for: Borrowers shopping around with private lenders
Having a solid credit score is an important foundation for any type of financial goal. Thats especially true when it comes to student loan borrowing, particularly from private lenders. You may still be able to get a student loan with a bad credit score, but your rates will be higher.
For private loans, the higher your credit score, the lower the interest rate, says Michael Micheletti of Freedom Financial Network. For federal loans, however, boosting your credit score will not matter, because most of these loans do not require a credit check. That includes all federal loans for undergraduates. And while federal Direct PLUS loans require a credit check, rates are not affected by credit scores.
To boost your credit score, be mindful of paying all of your credit card bills on time and maintaining a balance of less than 30 percent of your credit line.
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Consider Consolidating Or Refinancing Student Loans
Consolidating and refinancing offer two ways to streamline student loan repayment. With debt consolidation , you combine multiple loans together at an interest rate that reflects the average rate paid across all of your loans. This can be done with federal student loans to merge multiple loans into one.
Refinancing is a little different. Youre taking out a new loan to pay off the old loans, so you still end up with one monthly payment. But if that new loan has a lower interest rate compared to the average rate you were paying across the old loans, you could save some moneyprovided you dont extend the term. One thing to note about refinancing private student loans is that youll need good credit to qualify, which may necessitate bringing a cosigner on board.
Be very careful to avoid student loan scams, which are particularly prevalent if you try to refinance your loans or investigate loan forgiveness.
You can refinance federal and private loans together into a new private student loan, but doing so will cause you to lose certain federal loan protections on your federal loans, such as deferment and forbearance periods.
Consider An Extended Repayment Plan
If you have more than $30,000 in federal direct loans, you might be eligible for an extended repayment plan. With this option, youll repay your loan over up to 25 years, and you can choose between fixed and graduated payments.
Because of the long term of this plan, your monthly payments will generally be lower than they would be under a standard repayment plan or graduated repayment plan. But its not dependent on your income, so it might be cheaper to sign up for an IDR plan instead.
Although your payments will be low under an extended repayment plan, you could end up paying more money than you borrowed because of interest charges over time.
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Consolidate Federal Student Loans
Federal student loan consolidation combines federal student loans into a single Direct Consolidation Loan. The new interest rate is a weighted average of the previous rates on your consolidated loans.
Consolidating also gives you the option to choose a repayment period of at least 10 years and up to 30 years, which can greatly lower your monthly payments. Some other repayment plans might also require you to consolidate federal student loans to make them eligible for participation.
Unlike refinancing, however, federal consolidation does not result in a lower interest rate or savings of any kind. It can, however, simplify the repayment process and help open up monthly cash flow with lower payments.
Pros: If you have multiple loans from different providers and are overwhelmed by the monthly payment structure, consolidating is an easy way to simplify the repayment process. Instead of paying multiple lenders, you would only pay one.
Cons: Although consolidating is a good way to repay your loans, it does not really save you any money. If youre looking for an easier process, this could work for you. If youre looking for ways to lower student loan payments, there are other options .
How Student Debt Affects Your Credit Score
Student loans and lines of credit form part of your credit history. If you miss or are late with your payments, it can affect your credit score.
Your credit score shows future lenders how risky it can be for them to lend you money. A poor credit score can also affect your ability to get a job, rent an apartment or get credit.
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Pros Of Paying Off Student Loans Early
- Reach other financial goals sooner. By paying off your student loans quickly, youll be able to put more of your focus into things like retirement, homeownership and savings.
- Improve your debt-to-income ratio. Getting rid of a loan lowers the amount of debt you have relative to your income, which will help you qualify for other funding, like a mortgage or credit cards.
- Pay less interest over the life of the loan. The less time you spend repaying your loans, the less interest you pay on them. By paying off your loans early, you can easily reduce the overall cost of your loans by hundreds of dollars.
Your Guide To Canada Student Loan Forgiveness
Student loan debt is a big problem in Canada, and its not going away any time soon. The average new graduate is carrying $28,000 in student loan debt. Pair that with high housing costs and low wages, and its no surprise that most millennials are putting off major life milestones because they simply cant afford it.
There is a small glimmer of hope for those struggling with provincial and federal student loans, and it comes in the form of student loan forgiveness. I took advantage of New Brunswick student loan forgiveness when I wiped out $16,000 of my $42,000 in student loan debt. Without that loan forgiveness program and others like it, theres no way I could have paid off $38,000 in two years.
If youre one of the many young Canadians dealing with high student loan debt, Ive put together a list of possible resources for you to tap to reduce your debt burden. Before you jump to your province and start going click happy, there are a few things you should know:
First, most of these programs are only for publicly funded student loans. If you have loans through a private lender, skip to the bottom of this blog post for additional resources.
Second, every province has a repayment assistance program . A RAP is there if you cant make your minimum student loan payments. Its not student loan forgiveness, its just there to help you if you are having trouble earning enough money to make your minimum payments. Ive listed a few of them below.
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Refinance Private Student Loans
Refinancing is your best option to reduce your monthly payment. Unlike consolidation, this gives you the opportunity to actually lower your interest rate especially if your credit score is excellent or it has substantially improved since you took out the loan.
Although federal student loan borrowers can also potentially reduce their interest rate and payment by refinancing, we generally dont recommend it. Refinancing a federal student loan will remove all of the benefits that federal student loans offer for example, a pause on interest and payments during a pandemic for 2+ years.
Refinance Your Private Student Loans
Another way you can lower your private student loan payments and make them more manageable is to refinance. By refinancing student loans to a longer term, you can reduce your monthly payments, creating breathing room in your schedule.
Additionally, in some cases refinancing even to a longer term can save you money, if you get a lower interest rate.
However, in order to refinance your student loans, you need to meet the credit and income requirements set by the lenders. This is another type of private student loan that replaces your current debts with new loan terms that might be more manageable in your situation.
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Check The Statute Of Limitations
Each state has a statute of limitations for delinquent debt. This means that after a certain amount of time has passed, a lender can no longer sue you for a delinquent debt. Once the statute of limitations has passed on a debt it is called a time-barred debt. Check your states attorney general office for the statute of limitations on delinquent debt.
Potential Pitfalls Of Forgiveness
The IRS likes to tax things, and forgiven debt is no exception. Public service loan forgiveness is not taxable. But any balance wiped out through an income-driven repayment plan can be counted as income and taxed. It’s important to prepare for this eventual tax bill. Consider setting aside money in a dedicated savings account.
Note that the American Rescue Plan , passed by Congress and signed by President Biden in March 2021, includes a provision that student loan forgiveness issued between Jan. 1, 2021, and Dec. 31, 2025, will not be taxable to the recipient.
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