It isn’t easy to pay off all of your student loans by the time you turn 40.
The sad reality is the most student loan borrowers are still making payments well into their 40’s. However, student debt freedom 10 or 15 years after college is possible.
There are several strategies that borrowers can use to reach this goal.
Student Loan Forgiveness Help is Limited
While there are a variety of federal student loan forgiveness programs, the only one that can eliminate all federal loans by the age of 40 is Public Service Loan Forgiveness (PSLF).
PSLF requires borrowers to make ten years worth of certified payments while working for a public service employer. Those who start working for the government or a non-profit shortly after college can get their federal loans forgiven with plenty of time to spare.
Outside of the PSLF program, the other federal programs will take too long for forgiveness. Income-Driven Repayment plans all provide a route to forgiveness, but this path takes 20 or 25 years. Unless you graduated college as a teenager, IDR forgiveness wouldn’t happen before you hit 40.
Federal Student Loan Repayment Strategy
Paying off federal loans by a specific date presents several challenges. The standard 10-year plan will eliminate federal loans before 40, but the payments are often too high for many borrowers.
From an accounting perspective, the most efficient route might be to refinance the loans at a lower interest rate with a 15-year repayment length (this strategy will be discussed in more detail in the next section). However, this option comes with significant risks. Refinancing federal loans means eliminating income-driven repayment plans and student loan forgiveness options. Giving up the federal loan perks is a major risk unless eventual repayment in full is a certainty.
For borrowers that want to keep the federal protections, the best bet is likely to select an income-driven repayment plan and sign up for the plan with the lowest monthly payments. The student loan repayment simulator is a great tool from the Department of Education that can help identify the best option.
Getting the lowest monthly payment might seem counter-intuitive if your goal is to eliminate debt quickly. However, going this route allows borrowers to focus on the high-interest debt first. Once the high-interest private loans have been addressed, borrowers can revisit their federal elimination strategy.
Managing Private Debt in an Affordable Way
The fastest way to eliminate private student loans would be to follow an aggressive repayment strategy. While aggressive repayment might work for borrowers with smaller balances or larger incomes, it isn’t realistic for all.
If you are 24 and the goal is to eliminate student loans by 40, refinancing your private loans on a 15-year fixed-rate repayment plan is an excellent option. Payments won’t change for the duration of repayment, and you will have the smallest monthly payment that still meets your goal.
At present, the following lenders offer the lowest interest rates on a 15-year fixed-rate loan:
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| 1 |  | 5.91%* | Splash Financial Review |
| 2 |  | NA | SoFi Review |
| 3 |  | 6.39% | ELFI Review |
One limitation of this approach is that borrowers will need a steady income and solid credit score to qualify for refinancing. Another issue is that most refi lenders only offer 5, 7, 10, 15, or 20-year repayment lengths. Borrowers targeting a specific date may need to work with a lender that lets borrowers specify a custom repayment length. The only lender currently offering this option is Earnest.
Mixing Approaches: If aggressive repayment isn’t feasible or refinancing isn’t an option, borrowers may need to explore other options. Targeting a single loan using the snowball or avalanche method may open up new choices. Each time your finances change, such as eliminating a loan or getting a raise, it is good to revisit your elimination strategy.
Other Factors to Consider
Student Debt elimination isn’t the only financial issue for people in their 20’s and 30’s. Other life goals should be considered.
Saving for Retirement – If you don’t start saving for retirement until your 40’s, it will be very hard to retire. Fortunately, it is possible to build a retirement and eliminate student loans at the same time.
Buying a House – From an accounting perspective, homeownership can be a mixed bag. The upfront costs are high, but staying in the same house for a long time can be beneficial. Additionally, many people prefer to own a home for reasons that go beyond dollars and cents. It is definitely possible to buy a house and pay down student loans, but handling this combination presents some challenges.
Emergency Fund – One of the most critical details in any financial plan is having an emergency fund. If you don’t think you will have any financial emergency between now and your 40’s, you may be very disappointed. For parents, having extra money set aside for a rainy day is especially important. Learn how much student loan borrowers should leave in an emergency fund.
The First Steps are the Hardest
If you are just getting started in student loan repayment, things may seem bleak.
The good news is that most borrowers find circumstances get better as time passes. As you advance in your career, your salary will hopefully increase. Additionally, each month you make a student loan payment, your balance gets slightly smaller and generates a little less interest going forward.
Even if you can only spare an extra $10 this month to attack your loans, it can make a difference in the long run.
