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Why you can relax about your student loans

Jun 6, 2018

studentloans

Student debt has become an unfortunate rite of passage for many U.S. millennials. Roughly 44 million have some kind of student loan debt, with the average payment around $350 per month. Paying down debt is difficult at any stage of life, but for individuals just beginning their careers, the burden can feel insurmountable.

 


   Want more student loans facts? Check out Student Loan Hero’s   
roundup of 2018 student loan debt statistics.



Paying off student loans is nothing to take lightly. If left unaddressed, the balance can affect your credit score, limit your options for buying property, derail your retirement savings, keep you from taking risks in your career or in your life that might help you in the long run—and induce some serious anxiety when you check the balance. But while you may feel like you’ll never be free of your student loan payments, I’m here to tell you that you will make it through to the other side. In fact, you may have more options for clearing away the debt than you think you do.


As with most financial goals, knowledge is power when it comes to paying off your student loans. The first step to getting a handle on your loans, if you haven’t already done so, should be to figure out exactly how much you owe, and to which organizations. Too many people think of their debt the way wizards in the Harry Potter universe think about Voldemort—the number that must not be named. That big red balance on the page may be scary, but figuring out what it is—and what your monthly payments will be over the course of your repayment plan—will help you make a solid plan for defeating them.


    How much will you pay each month? Estimate your loan repayment for Federal student loans.   
   


Once you know your balance and the monthly payment, several other factors should affect your plan of attack for paying down the debt. These include the type of loan you have (private or federal), your eligibility for forgiveness programs or income-driven repayment plans and your long-term financial goals.

Whether your loans are private or federal will determine many of your options. Federal loans are distributed by the government, and may be called Direct Subsidized or Direct Unsubsidized, Direct PLUS or Federal Perkins loans. In contrast, private loans are distributed by other lenders such as banks, credit unions or schools. Private loans typically come with higher interest rates than federal loans (meaning over the course of the repayment you will end up paying more). Private loans also offer fewer options for income-driven repayments or debt forgiveness.

Your interest rate should affect the amount that you pay towards your loans, versus reaching other goals like retirement savings. Assuming an annual rate of return of 8% on investments over the course of your life, if your loan interest rate is under 8%, you should not sacrifice retirement savings to pay off the debt. However, if you have a private loan with a high interest rate, you should pay it off as quickly as possible. (If you have credit card debt—typically with the highest interest rate of all—that should be paid off before you make any additional payments on your student loans.)


    Should you use extra money to pay off debt or invest for the future? Weigh your options with this calculator.   
   


Regardless of which type of loan you have, you may have more options for paying it off than you think.



Federal loans
Private loans
Loan forgiveness programs
Individuals in public service jobs (government workers, not-for-profit employees, teachers) may be eligible for Public Service Loan Forgiveness (PSLF) through the U.S. Department of Education. Under this plan, the loan balances of qualifying individuals are forgiven after 10 years (or 120 payments).

 
Income-driven repayment plans
The Revised Pay as You Earn (REPAYE) program, administered by the U.S. Department of Education, caps student loan payments at 10% of discretionary income. Balances are forgiven after 20 years of payments for undergraduate loans (25 years for graduate loans).
 
 
Loan assistance
Some companies have responded to the surge in student debt by offering payment matches as a perk. Be sure to check with your HR department to see if this is something your company does, or would be willing to do.


Refinancing
Many banks will offer you the chance to consolidate and/or refinance your student loans for a lower interest rate. Refinancing is a great option for individuals who feel confident the lender will approve their application (applying and then being declined can negatively affect your credit score) and who would like a lower or fixed interest rate.

Individuals who may be eligible for loan forgiveness or repayment plans should beware of refinancing. Once you refinance federal loans with another lender, you lose out on those opportunities.




Extra payments
Putting tax returns, bonuses or any other unexpected windfalls toward the principal of your student loans (especially the loans with the highest interest rates) can go a long way toward bringing down your balance and shortening the repayment period. If you are fortunate enough to find yourself with money you weren’t expecting and already have three months of emergency savings, consider putting some or all of it toward your balance. If you expect your loans to be forgiven, it would be better to put your extra money toward savings.






Once you have a plan for paying off your debt, try not to focus too much on the balance. Automate your payments as much as you can, put extra money towards them when you can, and otherwise try not to sweat them too much. Once the payments are incorporated into your budget, hopefully you can find a balance that allows you to continue paying your bills, saving for other goals and living your life.



Kristen Euretig, CFP®, owns Brooklyn Plans, LLC, a financial planning firm dedicated to helping today’s women.

These articles are for informational purposes only and do not constitute tax or financial advice. Individuals should contact their financial professional for assistance.

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