How to pay off student loans

One thing about student loans is that they’re easy to forget about. Some people might say that’s crazy, how could you possibly forget that you owe $50,000?? Or whatever the amount is.

But since many loans don’t require any payments while the borrower is in school, it can be easy to forget that they’re even there. On top of that, many college students have no idea what they’re about to face when they graduate — especially since so many don’t even know what types of loans they have, how they work and if they’re being charged interest or not.

And if you don’t know, that’s OK! Below is an outline of what you need to understand and the best ways for paying back your loans!

Paying student loans while you’re in school

If you’re still in school and you have loans that are accruing interest, try to pay off the interest payments each month in you can. You’ll have a better idea of what you’ll face when you graduate and you’ll also owe less money when that time comes.

Picking up a side job while you’re in school can help you make those payments and also put some money away in savings.

Paying attention to your student loans will help keep you on track and also help you avoid getting way behind on payments.

Paying student loans after you’ve graduated

If you haven’t taken the time to sit down and actually look at your loans and how much you owe — it’s time to rip off the Band-Aid!

It can be a little terrifying, which is why so many people choose to put it off. But if you don’t have an idea of what you’re facing, it will take you a lot longer to get your loans paid off and they’ll cost you a lot more money over time.

Understanding the interest on your loans

Several years ago, I made myself sit down and look at all the details of my loans — I cried and freaked out a little bit, but then I got it together and started going through every detail of my loans.

And what I discovered was that a huge chunk of my monthly payments was going toward interest — not even the actual loan, just interest!

If you’re facing some pretty hefty loans, just thinking about looking at all of the details can be kind of miserable, especially if you don’t have the money to pay them off anytime soon.

It’s easy to simply set your monthly payments on autopilot and never look back. But while that’s a good way to make sure you don’t miss any payments, ignoring the big picture may be costing you more than you think.

Just like other loans, interest is the fee you pay the lender for letting you borrow the money — and it’s calculated daily, based on the loan’s interest rate.

So if you’ve been making monthly payments for a while and are wondering why the total balance has barely gone down at all, you need to take a closer look at what you’re paying in interest.

Let’s say you have a $50,000 loan with an interest rate of 7 percent. Here’s how to calculate your daily interest rate:

(interest rate) x (current principal balance/total loan balance) / (number of days in the year) = daily interest

So using the same example:

.07 x 50,000 / 365 = $9.58

That means you would be paying $9.58 per day in interest! If your minimum monthly payment is $500, in a 30-day month, you would be paying $287.40 in interest alone, which means only $212.60 of that payment is going toward the actual loan balance.

It sucks, but it’s just how student loans work. When you make a payment, the lender applies the money to different parts of your loan in a specific order, so once the first thing is covered, the remaining amount of the payment is applied to the next thing and so on. Here’s the order:

  • Late fees

  • Interest

  • Principal

So when you’re just making the minimum monthly payments on a big loan with a high interest rate, that balance isn’t going down anytime soon.

Go through your loans to see what you’re paying in interest and how your monthly payments are being applied, because even if you’re paying hundreds of dollars each month, you may not even be making a dent in the total cost of your debt.

So that’s something you really need to pay attention to!

If you can afford to pay more each month, do it. And if you have several loans, put the most money each month toward the loans with the highest interest rates, while still making the minimum payments on the other loans.

You also need to know your options — because there are a lot of programs that can help you pay back your loans — IF you only borrowed federal student loans.

So here are a few of those options — and again, these are not available for private loans — only federal student loans.

Federal student loan repayment programs

If you have federal student loans, there are some options available that you may be able to take advantage of.

  • Income-based repayment: Income-driven repayment plans help borrowers keep their loan payments affordable with payment caps based on their income and family size. There are now four types of these plans available: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and Income Contingent Repayment (ICR).After you qualify, your monthly payment may be adjusted each year based on changes in income and family size. You will have to verify your income every year, which means if you start to make more money, your payments may go up.

    • PAYE – Pay As You Earn – Caps monthly payments at 10% of your income; all debt is forgiven after 20 years of on-time payments.
      Important note: If you took out loans before 2007, your payments are capped at 15% — and you must pay on time for 25 years to have your loans forgiven.

  • Loan forgiveness: In addition to repayment options, there are also ways to have your student loans forgiven. Public service employees can qualify for full loan forgiveness after making 10 years of monthly payments on their federal student loans. Get more details to see if you qualify.

There are also other options like deferment and forbearance, which allow borrowers to postpone their payments if they’re struggling to even get by or due to other economic hardships.

  • Deferment: A deferment allows you to postpone your loan payments for anywhere between 1 and 3 years, depending on your situation. For Perkins and subsidized Stafford loans, the advantage of deferments is that interest does not accrue during that period while you aren’t making payments.But for unsubsidized and PLUS loans, interest does accumulate during deferment. So if you don’t pay the interest charges during that period, they are applied to the total loan balance and when the period is up, your monthly payments will be higher than they were before deferment, because of the added interest.

  • Forbearance: If you can’t make your monthly loan payments but don’t qualify for deferment, your lender may grant you a forbearance period. With forbearance, you may be able to delay your payments or reduce your monthly payment for up to 12 months.But! With forbearance, interest will continue to accumulate on every type of loan — including subsidized, unsubsidized and PLUS loans.

So if you don’t pay the interest charges during that period — on subsidized, unsubsidized or PLUS loans — the fees are applied to the total loan balance throughout the duration of your forbearance. Then when the period is up, your monthly payments will be higher than they were before, because of the added interest.

These options can help you when you’re struggling to make your monthly payments, but just keep in mind that if interest is accumulating, you should try to continue paying off the interest while your monthly payments are delayed.

Federal loan consolidation

After you’ve exhausted all of these options, you may want to consider federal loan consolidation.

A Direct Consolidation Loan allows you to combine multiple federal student loans into one loan – so you would have one single monthly payment instead of multiple payments.

Before you consolidate your loans, there are a few things to consider.

Pros of loan consolidation

  • Simplifies your student loan repayment with one monthly bill.

  • The new loan may extend your repayment period by 10 to 30 years, giving you more time to pay it off.

  • Consolidation may make you eligible for repayment plans you couldn’t previously qualify for.

    • If your current loans don’t qualify you for income-based repayment plans, consolidating them into one federal Direct loan could allow you to take advantage of this offer, which means your payments would be tied to your income and the total loan balance would be forgiven after 20 to 25 years of on-time payments.

    • The same goes for federal student loan forgives programs.

  • While some of your loans may have a variable interest rate, the new loan will have a fixed rate.

Cons of consolidation

  • By extending your repayment period, you will have to make more payments and pay more in interest (although you could always just pay the loan off faster than the scheduled repayment term).

  • Your monthly payments may also increase, so make sure to compare your current monthly payments to what you would be required to pay each month on the new, consolidated loan.

  • When you consolidate, you lose any borrower benefits that were offered with your original loans.

  • If you have a Perkins loan, those come with their own cancellation programs – so if you consolidate, you may want to keep the Perkins loan separate in order to take advantage of the cancellation program.

  • Once you consolidate, it cannot be undone.

Federal loan consolidation is FREE — so do not let a company, scammer or anyone try to charge you for consolidating your loans for you.

For more details on all of the federal student loan repayment options available to you, including loan consolidation, check out the Federal Student Aid website.

Refinancing student loans

After you’ve exhausted all of these options, or if you have private student loans, that’s when you may want to consider refinancing.

Student loan refinancing has become an increasingly popular way for borrowers to decrease the total cost of their debt — while shrinking the time it takes them to get it all paid off.

While borrowers didn’t used to have many options, unless their degree or career made them eligible for programs like loan forgiveness, there are now several lenders offering student loan refinancing.

Here’s how it works: The lender pays off your current loan and issues you a new, private loan. Then from that moment on, you pay the private lender.

Refinancing can be tricky, especially if you have federal loans, because refinancing means you’re moving from a federal loan to a private one – and we made very clear earlier in this guide that private loans are a bad idea.

What to consider before choosing to refinance

As a general rule of thumb, you really don’t want to refinance federal student loans until it’s your absolute last option.

So before you decide to refinance, there are a few things to keep in mind to make sure it’s the best option for you. And this is crucial, because you don’t want to refinance and then realize you just made your situation even worse.

Make sure to do your research and find out if you are eligible for any of the federal programs listed above. Once you refinance to a private loan, all of those options go away and you’re stuck — so you just want to make sure you don’t miss out on any opportunities already available to you, including repayment plans, loan forgiveness, forbearance, deferment, consolidation etc.

Once you’re issued a private loan, the rules change. There is no wiggle room on repaying that loan and private lenders really have no interest in helping you figure out your situation — so there is no negotiating your monthly payments or anything else.

Now, what if you’re past the point of being able to take advantage of postponing your payments and you’re making too much money for an income-based plan to do you any good?

That’s when refinancing may be an option — and it’s available for both federal and private loans.

Keep in mind, good refinancing offers typically aren’t available to people with poor credit, often not even for people with fair credit.

But if you don’t qualify for a good offer that makes sense, that doesn’t mean you won’t be able to get a good offer down the road.

When should you consider refinancing?

If you aren’t sure whether you should refinance your student loans, here are some situations when it can be beneficial.

1. You want a lower interest rate

If you took out federal student loans when interest rates were high — like 6.8 percent— or maybe you took out private loans to pay for costs that federal loans didn’t cover, then you may want to consider refinancing. Refinancing will allow you to take advantage of lower interest rates that weren’t available when you originally took out your loans.

2. You have great credit (or a co-signer)

Lenders offering student loan refinancing use several factors when determining whether they will give someone a loan, including credit score, income, educational background and employment history. The importance of each factor is different for each lender, but as a general rule, you’ll get better offers — with lower interest rates — if your credit score is in the 700s or 800s. You may be able to get a decent deal with decent credit, but your offers will depend on a combination of all of those factors.

If you have poor credit, you can use a co-signer to get better refinance offers.

3. You have a solid income

Even if you don’t have stellar credit, having a solid income relative to your debt can help you get a good refinance offer. But it’s important to note that lenders will factor your total debt into their decision — so not just your student loans, but also any credit card debt and other loans you have, like a car loan. So if you’re making $70,000 a year, but you have $100,000 in total debt, you may need a co-signer to get a really good refinance offer.

If you don’t qualify for a good offer now, because you have other debts to pay off, start paying extra toward those debts now, in order to reduce them as quickly as possible. Then once you get those down, you can apply for refinance again in a few months.

Who should not refinance student loans?

If you have not tried or used all the available federal student loan repayment options, do that first – before you consider refinancing.

How to save the most with refinancing

The main reason people refinance is to get a lower interest rate, but there’s another part of the process that can save you even more.

Refinancing to a lower rate can save you money over time, but choosing a shorter loan term is what will save you the most. The down side is that it will increase your monthly payments, but with a shorter term, you’ll get your loan paid off quicker — and at an even lower cost.

If you can afford the higher amount, choose the shorter loan term to save more on the total cost of your loan.

If you can’t afford the higher monthly payments, you may want to reevaluate your budget and put off refinancing until you can. Because once you agree to those bigger payments, there’s no going back.