Finding a way to pay off $40,000 in student loans presents some unique challenges.
For starters, it is a lot of money. However, what makes this amount unique, is that it falls on the border for many different repayment strategies. For example, with less debt, chasing student loan forgiveness usually doesn’t make sense. For larger debts, pursuing forgiveness is a common option. With $40,000 of student loans, you fall into a gray area.
40k isn’t a ton of student debt, as many borrowers have six-figure balances. However, it certainly isn’t a little bit either. Today we will cover the different repayment strategies available and how to plan around the student loan cancellation currently debated in Congress.
Easy Strategy for the Hardest Loans to Repay
Private loans are usually the hardest to pay off. They don’t have flexible perks like Income-Driven Repayment or student loan forgiveness. Some borrowers even face double-digit interest rates.
If there is an easy aspect of private loans, it is the debt elimination strategy. Most borrowers will want to pay off their private loans first. If you lose your job or face a financial hardship, having federal loans is preferred.
When eliminating private loans, the most efficient approach is to attack the highest interest loan. Once the high-interest loan is paid in full, borrowers can attack the next highest interest rate loan.
Those with decent credit scores may also want to explore student loan refinancing. Lowering interest rates means a larger portion of monthly payments goes towards principal, and debt is eliminated faster. This page tracks the lenders currently offering the lowest interest rates.
Federal Repayment Plan Options
If you have around $40,000 of federal student loans, picking a repayment can be tricky, depending upon your income.
For this exercise, let’s assume Darrell is a single borrower with 40k in federal student loans at 6% interest who makes $60,000 per year. (Those that wish to use their exact numbers can use the Federal Student Loan Repayment Simulator.)
There are several different repayment options. Each one has unique pros and cons:
Standard Repayment Plan – Under the Standard 10-Year Repayment Plan, Darrell would pay $444 for the next ten years and spend just over $53,000 paying off his debt.
PRO: Of the federal repayment plans, this option gets the debt eliminated the quickest and keeps the total spending the lowest.
CON: The Standard Repayment Plan has the highest monthly payments.
Income-Driven Repayment (IDR) – There are several different IDR plans that each have slight eligibility differences, but the pros and cons of each option are similar. On the Pay As You Earn Plan, Darrell’s monthly payments would start at $341 per month. Assuming Darrell doesn’t get a raise during repayment, it will take him approximately 17 years and just over $62,000 to pay off his loans.
PRO: IDR plans require borrowers to pay a small portion of their discretionary income each month. This option keeps monthly payments affordable. IDR plans also qualify for student loan forgiveness.
CON: If a borrower doesn’t qualify for Public Service Loan Forgiveness, the standard forgiveness options require at least 20 years of payments. Darrell will repay his balance in full before reaching forgiveness. Additionally, total spending on this option is about $10,000 more than the standard plan. IDR plans usually work best for borrowers with smaller incomes or huge loan balances.
Extended Graduated Repayment – This option stretches payments out over 25 years and gradually increases monthly payments each year. Darrell’s monthly payments would start a $200 per month and eventually grow to $389 per month. In total, Darrell would spend over $84,000 repaying his $40,000 in federal loans.
PRO: For Darrell, this plan has the lowest starting monthly payments. (Note: other borrowers may find the IDR plans have the lowest monthly payments, it all depends upon your loan balance and income.)
CON: This plan does not qualify for any form of loan forgiveness. Total spending for this option is the most expensive.
Deciding between these three routes isn’t easy. Standard eliminates the debt the quickest but has the higher monthly payments. Extended Graduated Repayment has the lowest monthly payment, but nothing else going for it.
I’d advise Darrell to go with an Income-Driven Repayment Plan. If his income ever drops, his payments will also go down, and loan forgiveness might become a better option. Plus, Darrell isn’t obligated only to pay the minimum payment. He can always pay extra to eliminate the loans more quickly if he wants. Using this approach, IDR plans usually offer borrowers the most flexibility.
Important Note: A borrower with a $60,000 salary repaying $40,000 of federal student loans at 6% interest was intentionally chosen because the best repayment option isn’t obvious. Borrowers in other circumstances may find that the best repayment choice is far more clear.
Student Loan Forgiveness Math
As shown in the example above, if you are someone with 40k in student debt, chasing student loan forgiveness may not make sense.
If your loan balance is larger, or your salary is smaller, the math might shift towards going after loan forgiveness. Additionally, if you work for an employer eligible for Public Service Loan Forgiveness, going after PSLF might make sense.
For many borrowers with $40,000 in student loans, the answer may not be obvious. The higher your salary, the less it makes sense to chase forgiveness. On the flip side, if you are worried about job stability and your ability to earn long-term, keeping forgiveness on the table by signing up for an IDR plan is wise.
Paying Off $40,000 in Student Loans as Fast as Possible
Some borrowers might decide they will never benefit from forgiveness. These borrowers want to pay off their loans as quickly as possible. We call this aggressive repayment.
The big advantage of aggressive repayment is that it minimizes spending on interest. The sooner you pay off your loans, the less you spend on interest. A full breakdown of the aggressive repayment strategy is available here.
Borrowers trying to pay their loans off as quickly as possible often refinance their federal loans with their private loans. The risk is that the federal loans become private loans and ineligible for Income-Driven Repayment and loan forgiveness. Borrowers commit to paying off their balance in full. The major benefit is lower interest rates.
At present, the following lenders offer the lowest refinance rates:
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| T-1 |  | 5.28% | ELFI Review |
| T-1 |  | 5.28%* | Splash Financial Review |
| 3 |  | 5.49% | Laurel Road Review |
