Life with student loans often means getting beaten up by the fine print. Interest compounds, fees get charged, and rates go up. Today we will look at ways of turning the tables.
These strategies won’t make student debt disappear overnight. Instead, these strategies provide guidance to help consumers use the existing student loan rules and regulations to their advantage.
Use the System to Beat Student Debt
1) Have the government pay student loan interest – The newest student loan repayment plan, Revised Pay As You Earn Plan (REPAYE), was created to lower payments for borrowers who did not qualify for Pay As You Earn. One unique perk of REPAYE is that the government pays half the interest that the student loan payment doesn’t cover. This means borrowers with large balances, but small payments, can save a bundle.
2) Save for retirement and get lower student loan payments – Income driven repayment plans, such as IBR, PAYE, and REPAYE are great because student loan payments are based upon what a borrower can afford to pay rather than what they owe. Putting money in a 401(k) or other pre-tax retirement account shields that money from being counted as income for purposes of calculating monthly payments.
3) Take advantage of federal loan borrower protections and low private loan interest rates – Borrowers are usually advised to borrow federal student loans during school. This is due to federal protections such as student loan forgiveness and income-driven repayment plans. The downside to these loans is that they can come with higher interest rates. By refinancing after college, borrowers with steady jobs and good credit scores can lock in lower interest rates. This approach gives borrowers the federal protections when they may be needed the most, and lowers interest rates once those protections are unnecessary.
4) Utilize student loan forgiveness programs – The two most common avenues to student loan forgiveness are Public Service Loan Forgiveness and forgiveness after 20-25 years of income-driven payments. Depending upon a borrower’s debt and income levels, these programs can save thousands of dollars. The key is to understand the fine print. Mistakes in the enrollment process can leave borrowers starting from the beginning.
5) Keep spousal income out of student loan payment calculations – When the government calculates a borrower’s ability to pay student loans, they normally include the income of their spouse as well. However, if a borrower on IBR or PAYE files their taxes separately, they can exclude spousal income from their student loan math. The downside is that it means a higher tax bill. The advantage is lower student loan payments.
6) Refinance multiple times – Unlike a mortgage, where there are high costs to refinancing, refinancing student loans has no transaction costs. Borrowers who improve their credit scores or income can often refinance at an even lower rate than their previous refinance. There is no limitation to how many times a borrower can take advantage of this process and there are many companies offering refinancing services.
7) Force lenders to respond to borrower issues with government oversight – The Consumer Financial Protection Bureau (CFPB) has a great procedure for filing complaints against student loan lenders and servicers. In most cases, the student loan company is forced to respond to the borrower’s complaint. Over the past six years, borrowers have received over $750 million from student loan companies because of the CFPB complaint process.
8) Avoid deferments, forbearances, and interest-only payments – All three of these options are designed to increase lender profits and provide little help to borrowers. With each of these options, the interest grows but the principal remains untouched. Payments towards interest increase lender profits, while payments towards principal reduce the borrower’s debt. For borrowers who are about to increase their income, these options might help. For borrowers who don’t expect their finances to improve, these options just delay student loan issues and only serve to make them worse.
9) Get meaningful help from student loan lenders – Private student loan lenders are notoriously unhelpful. Troubled borrowers are often only offered help in the form of deferments and forbearances. During this time, interest continues to accrue and debt goes up. This only makes things worse for the borrower. However, borrowers who push the issue can get some private lenders to lower interest rates so that the troubled borrower can actually pay down the principal on their student debt. The Rate Reduction Program with Navient is one such example.
10) Always seek out lower payments – Borrowers who can afford the minimum payment on all of their student loans rarely seek out lower payments. However, if a borrower is able to get lower payments on their low-interest student loans, they can free up funds to attack their high-interest debt. Making this move doesn’t change monthly spending, but student loans get eliminated faster. This is because a higher portion of monthly student loan payments will go towards principal rather than interest.
Student loan companies are experts at maximizing profits at the expense of borrowers. Borrowers who take the time to learn the rules of the game can turn the tables and find ways to save cash each month and eliminate debt faster.