How To Pay Back Your Student Loans: The Ultimate Guide
Modified date: Aug. 29, 2020
Need to pay back your student loans? Confused about the best way to do it? Money Under 30 has you covered.
Whether youre itching to get out of debt right away or hoping to balance loan payment plans with goals like retirement or graduate school, theres a smart solution available. Weve compiled resources to help you find a payback plan that works for any situation.
This post covers broad student-loan related topics, including forgiveness, consolidation, and other terms youll need to know.
Whats Ahead:
Why Does Paying Back Your Student Loan Take So Long
Tuition rates rising faster than the rate of inflation, costly textbooks, and compulsory meal plans have all made it so that students these days have to borrow more than previous generations. Stagnant wages means that it takes student longer to pay back the debt as well.
It doesnt help that millennials never learned how to deal with student debt or lines of credit. The younger generation never learned how to make a financial plan and prioritize how to pay off debt.
For many younger folks these days, coming up with a more aggressive repayment schedule for your student debt just isnt a priority. But its not their fault because theyve all been told a lie.
Dont Wait To Start Paying
It is never too early to start paying back your student loans, even if you havent yet graduated. Most lenders give borrowers a six- to nine-month grace period from when you graduate or leave school until when you need to start paying your loans back. The grace period is there to help you to find the right repayment plan that fits your needs and land a job so you are more financially stable.
However, just remember that during any grace period, interest is still accumulating on your loan and the amount that you owe is climbing. So, forget waiting for the grace period to be over instead, start paying your loan back as soon as possible. If youre working a part-time job, consider taking even 10% of your paycheck to pay down your debt. Chipping away at it when you can will definitely help in the long run.
If you are waiting to see what the current presidential administration will do about loan forgiveness, you should still continue to make payments to reduce your balance.
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Keeping Her Expenses As Low As Possible
After graduating from college, Becky continued living on a college students budget.
I didnt change my lifestyle at all after college, she said. There was no lifestyle inflation. So I essentially didnt spend money on anything like clothing or going out to eatwhat I would consider discretionary categoriesbecause my whole philosophy is spending based on your goals and values.
Since she lived in a high-cost area, she also lived with her parents for nine months.
It was really humbling that this decision I made to have four years as an independent adult resulted in another period of my life where I had to live with my parents and be dependent, she said. That was kind of tough on my ego. But ultimately, it was very helpful for my financial goals.
Consider A Floating Interest Rate
When you graduate from school, you have two options for your student debt: you can go with a fixed or floating interest rate. Many of us go with fixed but dont dismiss floating outright. With the floating rate, you could save a lot of money, especially if interest rates keep falling . Consider all your options before deciding whether to lock in with your student loan interest rate.
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What If I’m Going To Grad School
For students who are going straight from undergrad to graduate school, and taking out loans for grad school, too, you have two options:
1) While you’re in school, your loans will be in what’s called student deferment. That means you have the option, while you’re in grad school, to defer those undergraduates loans and wait to start paying them off after you’re done with grad school.
2) You can also choose to waive that deferment while you’re in school and start tackling that debt as soon as possible.
“You can start paying on those undergraduate loans while you’re getting your graduate degree and be on a payment plan and be rocking and rolling,” Williams said.
How To Get Your Money Back If You Paid A Scammer
Scammers might urge you to pay them in ways that make it harder to get your money back, but there are some steps you can take depending on the payment method you used.
- Debit or credit card: Contact your bank and report a fraudulent charge. Ask them to reverse the charge and refund your money.
- Bank account transfer: If a scammer made a transfer from your bank account, report it to your bank.
- Cash: If you sent cash through the mail, contact the U.S. Postal Inspection Service and see if they are able to intercept the package. If you used a different mailing service, contact that company as soon as possible.
- Gift card: Contact the company that issued the gift card, report the fraudulent activity and ask for a refund. Hold on to the gift card and the gift card receipt if possible.
- Wire transfer : Contact the company.
- Money transfer app : Contact the company to see if it will issue a refund. If the account is linked to your bank account, call your bank, too.
- Cryptocurrency: These payments are typically irreversible. The recipient would have to be willing to give you your money back, though it’s still worth a try to contact the cryptocurrency company.
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Student Loan Interest Deduction
When you make monthly payments to your student loans, that includes your principal payment as well as any accrued interest payments. Whether you have private or federal student loans, the student loan interest deduction lets you reduce your taxable income, depending on how much interest you paid. For 2021, this reduction went up to $2,500 a year.
You’re eligible for the deduction if you paid student loan interest in the given tax year and if you meet modified adjusted gross income requirements , For 2021, you qualified if your MAGI was less than $70,000 . Partial deductions were offered for those with MAGI between $70,000 and $85,000 .
With federal student loan repayments on pause and interest at 0%, you might not have paid any interest over the past year. That said, you should log into your student loan portal and check form 1098-E for any eligible interest payments.
If eligible, this deduction will lower your taxable income, which could reduce how much you owe the IRS or increase your tax refund. You might even get placed in a lower tax bracket, which could qualify you for other deductions and credits.
Take Full Advantage Of Tax Deductions And Credits
Effectiveness level: Medium
If youre paying off student loans, youre likely eligible for the student loan interest deduction on your federal taxes. You may deduct up to $2,500 on your taxes each year for the interest you pay on student loans.
While you must meet other requirements, generally a lot of student loan holders in their 20s will be eligible. Thats because this deduction can be taken even if you dont itemize your taxes .
Tax credits can be even more valuable than tax deductions. In general, a $2,500 tax credit will save you more money than a $2,500 deduction will.
You might be eligible for tax credits if youre currently paying tuition, including while youre in grad school. While there arent any tax credits related to simply paying student loans, its worth checking out if youre currently in college or thinking about going back to school soon. See our post on student loan tax credits for more information.
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Did I Ever Have A Pell Grant
Many borrowers have absolutely no idea if they had a Pell Grant at some point. To find out, you’d go to the StudentAid.gov and then to “My Aid” to review your account. Or review your paperwork that you have when you received financial aid from college.
An online outside resource called Summer might help if it’s available to you through your employer, financial institution, a national organization or union. The American Federation of Teachers, for example, offers Summer as a free member benefit. Summer has worked with more than 100,000 borrowers in managing more than $8 billion in student loan debt.
Summer, a debt management software program launched in 2017, has a new “Forgiveness Eligibility Tool” to determine whether you’re eligible for up to $10,000 or up to $20,000 in debt forgiveness. The Federal Student Aid website was down a bit during the first few days after the big Biden news, so this tool was a huge help then.
“The way we like to frame it is sometimes navigating these student loan programs can be like filing your taxes without an accountant or without tax software,” said Bridget Haile, vice president of operations and client experience for Summer.
“You’re dealing with really complex federal rules and requirements.”
Take A Job That Offers Forgiveness
Effectiveness level: Medium-High
Certain jobs, like public service work or teaching, may offer forgiveness for part or all of your student loans. All you have to do is meet the requirements to get your student loans forgiven. See our guides to Public Service Loan Forgiveness and teacher student loan forgiveness for more details.
There is one potential downside: You need to meet all the requirements and complete the full term of work required to get any forgiveness.
Since these forgiveness programs are typically used in conjunction with income-driven repayment plans, your payments will decrease but interest charges will accumulate. If you wind up ineligible for forgiveness for any reason, youll be stuck with greater interest charges.
In addition to these federal student loan forgiveness programs, some states also offer loan repayment assistance programs . These LRAPs also usually come with a work requirement. If you qualify, you could get money toward paying off your federal student loans.
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Fixed Vs Floating Interest Rates
You can request to have a fixed interest rate. You can only make this change once. Contact the NSLSC or the Alberta Student Aid Service Centre for more information.
|
CIBC prime rate plus 2% |
Prime rate of Canadian banks plus 2% |
To compare the cost of choosing floating and fixed rates, use the Government of Canadas loan repayment estimator.
With A Plan Loan Repayment Doesnt Have To Be Complicated
Repaying your student loans, just like getting through culinary school, simply requires a plan. With the Escoffier team of financial aid advisors on your side, you can finish school with a clear understanding of your loan obligations and a plan for how to repay them.
Talk to a financial aid advisor about how you can fund your education and get started on the path to a career youll love!
To learn more about how to fund your culinary school education, try these articles next:
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Bring Your Canada Student Loan Back Into Good Standing
If your loan is in collection, Contact the CRA to:
- see if you qualify to have your federal student loan brought back into good standing
- make payments equal to 2 regular monthly payments and choose one of the following options:
- pay off all outstanding interest on your loan, or
- add all unpaid interest to the balance of your loan
Once you make your payments, contact the NSLSC. You should receive a new repayment schedule within 1 month.
Leverage Tax Deductions And Credits
If youre currently paying tuition to either an undergraduate or a graduate program, you may qualify for a tax credit. You can save up to $2,500 through the American Opportunity Credit, and $2,000 through the Lifetime Learning Credit. If youve graduated but are still paying off your student loans, you could qualify for a tax deduction of up to $2,500.
While tax credits are usually more beneficial than deductions, both reduce the amount of money you have to pay in taxes. That leaves you with a bigger tax refund, and therefore more disposable income to put toward your student loans each month. This can help you pay down your student loan balance more aggressively and get out of debt faster.
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Live Modestly In College And University
It may not seem like theres any urgency in paying back your student loan, but sooner rather than later, youll graduate and have to start paying interest. Although you may get a six-month grace period before youll have to start paying back your loan, youll be accruing interest over this period. Thats why it helps to watch your spending while youre still in school.
From credit cards to nights at the club, theres a lot of temptation to spend. You can fight the urge to spend by creating a budget and sticking to it. Not only will it help keep your spending in check as a student, but it will also prepare you for the real world when youre adulting.
‘it’s Weird’: Melania Trump’s Post
Washington Millions of federal student loan borrowers will soon see up to $20,000 of their debt wiped away thanks to a new plan announced by President Joe Biden last week.
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More On Cost Of Living
Paying off the loan earlier can make it cheaper in the long run as there’s less time to accumulate interest. Nevertheless, it’s also worth keeping in mind that student loans are currently usually written off after 30 years, regardless of the amount still owed.
However, there are plans to potentially increase this to 40 years. Also, while there’s no penalty for making extra repayments to reduce a student loan, these payments are not refundable in case of financial difficulties later.
Gemma is a business advisor, finance expert and TV host, an ambassador for the charity Surviving Economic Abuse, and a former boardroom adviser to Arnold Schwarzenegger on The Apprentice.
Student Loan Repayment Strategies
If you have multiple loans, how should you approach them? Start by making the minimum monthly payment on each loan. Set up automatic transfers for each loan on the same day each month. That way, you wont risk late payments.
If you can contribute anything extra to your loans each month and pay them down more quickly, you can save yourself interest charges over the years of repayment. Two popular approaches for paying student loan debt faster are the snowball method and the avalanche method. Both approaches require you to make minimum payments on all but one of your loans. Then youll send extra funds to that one loan until it is paid off. But where these strategies differ is in which loan you pay down first.
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Repayment Assistance Plan Stages
The plan has two stages: interest relief and debt reduction.
1. Interest relief
The interest relief stage is available for up to 60 months, or until you are out of school for 10 years, whichever comes first.
During the interest relief stage
- your monthly affordable payment will first go toward paying down your loan principal
- if your payment is large enough, the remainder will go toward monthly interest
- the governments of Canada and Ontario cover all monthly interest that is not covered by your payment
If you are not required to make any payments at all during this stage, the governments of Canada and Ontario will cover your entire monthly interest charges and your loan principal would stay frozen.
Visit theNational Student Loans Service Centre website to get more information.
2. Debt reduction
The debt reduction stage occurs after the interest relief stage, which is after you have received interest relief for a minimum of 60 months or you have been out of school for 10 years, whichever comes first.
During the debt reduction stage:
- you will make either no payments or a monthly affordable payment, depending on your income and family size
- your monthly affordable payment, if any, will go first toward paying down your loan principal
- if your payment is large enough, the remainder will go toward paying monthly interest
Visit the National Student Loans Service Centre website to get more information.
Borrowers Could See ‘an Extra $150 To $300 A Month’
The burden of student loans has been blamed for holding Americans back from buying homes, starting families and saving for retirement.
Now that the Biden administration has wiped out hundreds of billions of dollars in education debt and proposed a new income-driven repayment plan that could cut monthly payments in half for undergraduate loans, many borrowers will have lower monthly payments, or none at all.
This “gives borrowers a chance to achieve their goals,” said Jaylon Herbin, a policy and outreach manager at the Center for Responsible Lending. That’s particularly true for women and Black borrowers, who carry higher balances after graduating, he said.
“Canceling student debt will bridge that racial wealth gap and give people the opportunity to start a business, have a family and purchase that first property or home,” Herbin said.
Considering the average student loan payment, forgiving $10,000 per borrower means “an extra $150 to $300 a month in their budget,” according to Herbin. That opens the door to “go ahead and obtain wealth and assets,” he said.
The White House also expects the average annual student loan payment will be lowered by more than $1,000 for current and future borrowers after the new cap on income-driven repayment plans.
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