The first student loan payment can be scary. When the average borrower begins their repayment journey, they face many hard questions: Am I doing this right? Am I paying too much? Will I ever get my loans paid off? How does anyone get their debt paid off? Will I be doing this for the rest of my life? How am I going to do this?
Borrowers starting repayment join a fraternity of 45 million Americans who are collectively responsible for paying back nearly $2 trillion in student debt.
The good news is that a double major in mathematics and government red tape isn’t required to get things figured out.
This guide was set up with the purpose of showing borrowers new to repayment how the various repayment plans, repayment strategies, and federal programs all come together. The goal is to cover the basics and to point borrowers in the right direction who have unique or special circumstances. If it seems that something is missing or you have a specific question, please let us know.
Step One: Start a List of Lenders and Student Loans
Before a strategy can be formed, it is critical to account for all the loans that must be paid off.
This step really isn’t difficult, but it can be depressing. Try not to get overwhelmed. If it helps, making a total of all the debt really isn’t necessary.
The best way to track student debt is by loan rather than by lender. For each loan, collect the following:
- Lender Name
- Loan Amount
- Interest Rate
One thing not to worry about at this time is the minimum payments. In future steps we will see that the “minimum payment” number can drop considerably.
Tracking down federal student loan information is pretty simple. The government tracks all federal loans and their servicers. Log in to your account with the Department of Education and pull up a list of your loans. One of the better aspects of the federal records is that they show the name of the student loan servicer responsible for each loan. Some borrowers may have to work with multiple services, while others only have to deal with one company.
Private loans are a bit more tricky as there isn’t a single place where they are all tracked. The quickest and most efficient way to find private loans is on a credit report. The credit report should list the lender, loan amounts, and will often also include the interest rates as well. More specific details can be acquired by reaching out to the appropriate lenders. In order to verify the information on the credit report, borrowers can contact their school’s financial aid office to get information on loans borrowed and approximate amounts. However, be advised that loan balances will have increased due to interest accumulation during school. Lenders may also change if one lender sold the debt to another.
Once you know what you owe, you can form a strategy…
Step Two: Federal Student Repayment Plan Selection and Strategy
There are two basic ways to eliminate federal student debt.
The first method is to qualify for a student loan forgiveness program and have your debt discharged. There are many different student loan forgiveness programs, but for the majority of borrowers, forgiveness means loan discharged through Public Service Loan Forgiveness or forgiveness coming after 20 or 25 years of payments on an Income-Driven Repayment (IDR) Plan.
We should note a couple of important things on the subject of student loan forgiveness. First, way more borrowers expect to have their loans forgiven than will actually get their loans forgiven. This is because there are a lot of hoops to jump through, and meeting all of the necessary requirements can be difficult. Second, many borrowers will find that paying off their debt in full actually costs less than chasing after forgiveness. This is because the monthly interest charges on the student debt can really add up.
The other way to eliminate federal student loans is to pay off the balance. It isn’t sexy, but it is how the vast majority of people eliminate their federal loans.
Rather than talking about the different repayment plans and forgiveness eligibility criteria, let’s first sort through how to handle federal student loans in a few different circumstances.
Circumstance 1: AHHH!!! I have no idea how I am ever going to pay off this debt.
If your entire salary for the next 5 years would only put a small dent in your federal debt, things might seem hopeless.
The good news with federal loans is that they are set up so that borrowers always have some form of hope.
Borrowers who don’t think they will ever be able to afford their debt should look seriously into finding an employer that qualifies for Public Service Loan Forgiveness. Because government jobs, as well as non-profits, are included, the number of qualifying employers is pretty large. When chasing after Public Service loan forgiveness, it is important to understand all of the rules. There has been a lot of news devoted to the 99% PSLF rejection rate, but things are not as bad as they sound. Qualifying for Public Service Loan Forgiveness isn’t easy, but it isn’t impossible either.
The borrowers who can’t find PSLF eligible work can still get their loans forgiven through income-driven repayment (IDR) plan forgiveness. There are several IDR plans, but they all work in a similar manner. Borrowers make payments based upon their discretionary income. Generally speaking, these payments are 10, 15 or 20% of a borrower’s discretionary income. After making the payments for 20 or 25 years, depending upon the plan selected, the loans can be forgiven. It is a long process, and there is a big tax bill at the end, but for borrowers with huge debts and smaller incomes, it is the best path to debt freedom.
Anyone considering either form of forgiveness should carefully review the various federal repayment plans in order to select the best income-driven repayment plan for their situation.
Circumstance 2: It sucks, but I’m going to get this paid off as soon as possible.
Some people just want their debt to disappear ASAP. They have the means to make it happen and are willing to get it done.
In this circumstance, aggressive repayment is the desired approach. The strategy is to lower interest rates when possible, pay off the high-interest stuff first, and knock it out as fast as mathematically possible.
Circumstance 3: I’m not really sure what I should be doing…
For some borrowers, it is obvious whether they are in circumstance 1 or 2. The rest of us fall into this third category.
Most recent graduates and most people starting repayment probably fall into this 3rd category. We call it the holding pattern. An uncertain future means that student loan forgiveness might be an option, but full repayment is still a distinct possibility.
The following circumstances all would justify a federal student loan holding pattern:
– You don’t have a job yet,
– High-interest private loans make federal loans an afterthought (more on that in a bit),
– Graduate school means more student loans in the future,
– You are considering public service eligible work, or
– There is any sort of financial uncertainty that makes planning strategy difficult.
Staying on a federal student loan holding pattern is relatively simple. Borrowers should review the various income-driven repayment plans and enroll in the one that makes the most sense.
By signing up for an income-driven repayment plan, payments may be as low as $0 per month, but the first steps towards student loan forgiveness can still be set in motion. The downside is that interest will continue to accumulate, but this route affords maximum flexibility.
Step Three: Private Student Loans
Private student loans are far less forgiving than federal loans.
The approach with private student loans is to pay off the highest interest rate loans first. Some lenders have interest rates at 10% or higher, while others have rates as low as 3%. Unless you have rates hovering around 3% or below, you will want to get the private loans paid off as soon as possible.
Some borrowers like to just pay a little bit extra on all of their loans to get them paid off sooner. While this approach is commendable, it isn’t the most efficient approach.
The trick is to pay the minimum on all loans except for the highest interest rate loan. That loan gets every spare penny you have. Once the highest interest rate loan has been paid off, the second-highest rate loan gets attacked. With each loan that gets paid off, things get easier.
One tool that can assist with repayment is student loan refinancing. When a loan gets refinanced, a new lender pays off one or more existing student loans. The borrower then repays the new lender according to new loan terms. Borrowers are often able to qualify for a lower interest rate because they now have degrees and jobs. They are much less of a credit risk than an unemployed college student. There are about 20 different lenders providing student loan refinancing services.
Even if you can only lower the interest rates slightly or for a few loans, it is still a good idea to take the slight improvement. As your balances drop or credit score increases, it is possible to refinance for a second or third time to get even better rates.
The following lenders rank well in our reviews:
|Lender||Interest Rates||Loan Amounts|
|1.33% – 8.11%||$5,000 – No Max|
|Splash Financial Review: Splash has competitive rates, but they start slightly higher than the top lenders. Splash also offers unique 8 and 12 year repayment terms.||Application
+ Up to $500 Bonus
|2.99% – 6.44%||$5,000 – No Max|
|SoFi Review: SoFi consistently offers the best actual interest rates to applicants. Combine that with SoFi's unique job placement program for borrowers and you have a winner.||Application
+ $150 Bonus
|3.20% – 6.69%||$15,000 – No Max|
|ELFI Review: ELFI routinely offers excellent interest rates. Even though ELFI is new, it is the product of a regional bank that has been in business for decades.||Application
+ $150 Bonus
|2.60% – 6.45%||$5,000 – $500,000|
|CommonBond Review: CommonBond has a higher approval rate than many other lenders. The interest rates offered are among the best and customer satisfaction appears to be very high.||Application
+ $150 Bonus
|2.72% – 7.64%||$10,000 – $350,000|
|Citizen's One Review: Citizen's Bank (also called Charter One) is one of the few traditional banks left in the student loan refinance marketplace. Citizen's may be an unremarkable option, but is still a solid choice and worth a comparison shop.||Application
+ $200 Bonus*
Step Four: Marriage, Buying a House, Retirement and Other Life Goals
Student loans can’t be viewed in a vacuum. Life happens.
If other milestones are in your future, it is crucial that student loan strategy adjusts accordingly:
- Student loan strategy can change due to marriage.
- Student loans are a roadblock buying a house, but it still can be done.
Finally, if student loans will be the great financial hurdle of your 20’s and 30’s and beyond, let it serve as an important lesson on the importance of financial planning. Borrowers in repayment, even those who are struggling, can still take steps to plan for retirement.