Debt Management Strategies
A quick internet search for how to manage student loan debt will generate plenty of advice from so-called experts. While there may be some merit to the recommendations offered on the different blogs and websites you find, student loans are not one-size-fits-all, and neither are the solutions to manage them. With so many suggestions out there related to navigating student debt, how do you know what advice is legitimate and which options to consider in your own life?
In this section, we will discuss some of the most common strategies used to manage and even reduce debt as well as what to consider before making changes to your loans or repayment plans.
For borrowers who are still in school, in the midst of their grace period, or experiencing the initial challenges of debt management, consider the following:
Sign Up For Auto-Pay
As a federal student loan borrower, you are eligible for a quarter of a percent reduction on your interest rate if you elect to have your student loan payments made through automatic pay. This option tends to be an easier way for individuals to save themselves a little bit of money because once the auto-pay is set-up, you don't have to think about it again. Just be sure to know what day the payment occurs and which bank account you have linked to your loan servicer account to avoid insufficient fund penalties or fees associated with overdrafts.
Start Budgeting Your Anticipated Monthly Payment
Another way to prepare for your repayment and start managing your debt is to estimate what your monthly student loan payment will be and how this new expense fits in with your anticipated income and cost of living. Review our Prepare For Repayment section to access different repayment calculators.
Target Your Loans With The Highest Interest Rate
After you select your desired repayment plan, you may find you are able to pay more than you are required to. There is no penalty for paying more than your monthly payment amount and many borrowers choose to contribute additional funds to pay down their student loans faster. But which loans should you try to pay down first? From a strictly financial perspective, paying down your loans with the highest interest rates first will save you more money in the long run because the loan will be paid off sooner and less interest will have accrued. You may also find it advantageous to target down a private loan, even one with a comparable interest rate as your federal loans, as these types of loans do not have the same repayment plan options available. If your financial situation changes, you will not have the same type of flexibility to adjust how much you pay on your private student loan.
The other targeting strategy you may come across is called the snowball effect. This strategy holds that borrowers should target pay their smallest debt first, regardless of interest rate. While this strategy may not save you money in the long run, it is designed to foster positive behavior change and provide emotional gratification. Since the borrower targets the smallest debt, they are likely to have that amount paid in full in a relatively short amount of time. That accomplishment can serve to further encourage you to pay off your debts quickly and may result in even more money being put towards your student loans, creating a snowball effect of debt management that the strategy gets its name from. If you struggle to find the motivation to pay off your debts or feel discouraged because it does not look like you are making any progress towards your debt, this strategy may be worth considering.
Financially Prioritize Your Payment
Once you have an idea of what your monthly loan payment will be, your next step is to see how this new expense fares when you take into account your income and other living expenses. Unless you are able to change your repayment plan or work with your servicer to adjust your monthly payment, your student loan debt is a non-negotiable expense, so it may help you manage your other financial responsibilities if you prioritize the loan payment when making decisions about job offers or relocating. Aside from rent and possibly transportation costs, your student loan payment could very well be the most expensive item you have in your budget. With that in mind, you may find yourself adjusting your housing choices and transportation preferences to accommodate for the extra expense of the loan.
If you do not have the ability to choose more budget-friendly housing and transportation, or there is another non-negotiable expense that will make it difficult to manage your debt, your next step in financially prioritizing the loan payment will be to cut down on all discretionary spending. This can include expenses such as cable, streaming services, shopping, restaurants, entertainment, and travel. By no means is this an easy feat- these types of "unnecessary" spending oftentimes align with our personal values and are deep-rooted in our financial behaviors. Being as proactive as possible to plan for this payment while being flexible enough to make tough decisions financially in order to prioritize your student loan payment may help you to better manage your student debt.
For borrowers who are currently repaying their loans and are in need of additional debt management strategies, consider the following:
Adjust Your Repayment Plans
One of the benefits of borrowing from the Federal Government are the numerous repayment plan options available. Selecting the right repayment plan to align with both your financial goals and constraints isn't as straightforward as it seems- after you review the 8 different repayment plan options, these are the considerations you'll want to make before selecting a new plan:
- Maximum monthly pay: Based on your current income and living expenses, what is the most you can afford to pay?
- Cost of flexibility: Income driven repayment plans are designed to provide you with a more manageable monthly payment and that additional flexibility comes at a cost...interest accrual. Paying down smaller amounts of your loan each month means that it will take you longer to pay off the loan, giving more time for interest to accrue.
- If you are a borrower pursuing Public Service Loan Forgiveness, keep in mind that only certain repayment plans are eligible under the program. The eligible repayment plans are Income Driven Repayment Plans or the Standard Repayment Plan. Consider an Income Driven Repayment Plan to maximize the forgiveness benefit.
What is Public Service Loan Forgiveness? This program was designed to help alleviate some of the burden of student loan debt for borrowers pursuing fields in areas of public service. Typically, these types of employment opportunities are associated with low salaries, making it difficult for individuals with large amounts of student loan debt to work in this industry, pay towards their loans, and fulfill their other financial responsibilities.
To qualify for Public Service Loan Forgiveness, a borrower must meet the following criteria:
- Federal Direct Loans- Subsidized, unsubsidized, or Grad PLUS.
- Full time employment- Must be considered a full time employee.
- Employed by a government agency or qualifying 501(c)3 non-profit organization- Verify that you are employed with an eligible employer using the employer database on studentaid.gov.
- Select an eligible repayment plan- Remember that all of the Income Driven Repayment Plans are eligible and will give you the maximum forgiveness benefit compared to the Standard Repayment Plan.
- Make 120 on-time payments- A total of 120 payments must be made before a borrower is granted loan forgiveness. These payments DO NOT have to be consecutive.
Speak with your loan servicer about exploring the right repayment plan for your financial situation.
Consolidate Your Loans
If you have been assigned multiple servicers to manage your federal loans, are looking for lower monthly payments, or would like more time to pay off your loan, loan consolidation may be an option worth considering. Loan consolidation combines all of your eligible federal loans into one loan and uses the average weighted interest rates of your previous loans to serve as the new interest rate. The terms of the consolidated loan allow you to pay off the loan in 30 years. This typically results in the borrower making a lower monthly payment, which could make managing the loan easier for an individual. Keep in mind that consolidation does not mean you will owe less; in fact you may discover that over the life of a consolidated loan you paid more in total due to additional amounts in interest accrual. Be sure to refer to studentaid.gov as you weigh all of the pros and cons with loan consolidation.
NOTE: The Department of Education offers consolidation for eligible federal loans. If you are working with a lender outside of the federal government and the term consolidation is used, please be aware that it is not true loan consolidation through the Department of Education. You will lose access to the benefits available to federal borrowers such as repayment plan options and loan rehabilitation.
Refinance Your Loans
The option to refinance your loans and find a new lender that offers a lower interest rate is another way that borrowers look to better manage their debt. Refinancing a loan occurs when a borrower replaces their current loan with a new loan. The new lender essentially takes responsibility for the old loan and the borrower is assigned a new loan from the lender in return. Refinancing is typically most advantageous for individuals who borrowed a private loan at a high interest rate or for individuals who borrowed federal loans and do not need to rely on the flexibility and financial security that comes with the numerous repayment plan options. Individuals with excellent credit history and/or high, regular income tend to receive the best interest rates and repayment terms compared to other borrowers.
NOTE: To reiterate, if you are a borrower currently working with the federal government and are considering refinancing your loan with a private lender, consider the impact that losing the benefits of being a federal student loan borrower will have on your financial situation.