Strategies for Managing Student Loan Debt
Going into debt on a student loan while you’re working to graduate is stressful enough. But trying to understand loan types, how interest works, and what repayment looks like can be overwhelming.
In this article, you’ll walk through a quick, math-free student loan guide. Next, the article will show you some ways to reduce your student loan burden, whether you are in school or have already graduated. Generally, you will have different options for qualifying for scholarships and grants or for managing federal and private student loan repayment.
How does student loan interest work?
Borrowers can use student loans to pay for four years of schooling at a college or university, community college, or trade, career, or technical school. Federal student loans do not require a credit check, while private student loans may require a credit history or a co-signer.
Once you leave school, you will make fixed payments on the principal amount of the loan, with interest charges on this amount each month. If you don’t pay interest, it “capitalizes” on your loan, meaning it’s added to the loan balance and interest continues to accrue on the new principal amount each month. This may extend your repayment period.
Generally, to reduce the interest charges you owe on your student loan, you can either increase your monthly payments to pay off the principal of the loan (thereby reducing the interest charges), or consider a student loan refinance to your federal or private loans in order to find a more competitive interest rate.
Federal student loans
Federal student loans make up the vast majority of student loan debt. Students can see their eligibility for a federal loan by completing the Free Application for Federal Student Aid (FAFSA).
In most cases, federal loans will not cover all of your school expenses. However, they tend to offer competitive interest rates and a standard repayment period.
You don’t have to start paying off federal student loans until six months after you leave school or fall below halftime (this is called your grace period). However, interest works slightly differently depending on the type of loan.
Direct subsidized loans are granted based on your demonstrated financial need. Subsidized loans do not earn interest as long as you are enrolled at least half-time in school. Instead, the Department of Education pays your interest. They also cover your interest during your grace period or if your loans are deferred.
Direct unsubsidized loans do not require you to demonstrate financial need. Federal unsubsidized loans begin earning interest immediately, regardless of enrollment, deferral, or forbearance. In most cases, you still don’t need to make any payments until your grace period ends. However, the interest will capitalize on your loan if it is not paid, which will increase your loans during your studies.
Private student loans
Private student loans can potentially fill the void if federal student loans do not provide sufficient funding for all of your education expenses.
With private student loans, you might need a credit score. If you don’t have a credit score or credit history, you may need a co-signer, such as a parent or guardian.
Additionally, some private student loans may require immediate repayment. It can be difficult to afford while you are a student.
Ways to make your loan repayments easier
Scholarships and grants
Scholarships tend to be merit-based. Qualifying to receive a scholarship may require a certain GPA or academic level, volunteer experience, one or more letters of recommendation, and a personal essay.
Grants are based on your financial need. The most common scholarship program that students may encounter is the Federal Pell Scholarship and the Federal Supplemental Educational Opportunities Scholarship, which will typically be pursued as part of an application for financial aid at a college or university through a FAFSA application. There may also be state-level grants available.
Federal loan repayment
Income-oriented repayment plans are designed to give you more affordable loan repayment if you meet certain loan and income criteria. They will calculate your “discretionary income” using your total income, along with the appropriate federal poverty guidelines based on your location and family size. Income-driven repayment plans, such as REPAYE, PAYE, IBR, and ICR plans, offer a rebate after 10 to 25 years of on-time payments. Depending on your eligible repayment plan, PSLF may offer early surrender options.
Deferment and forbearance allow you to suspend payments on your federal student loans under certain circumstances. For a deferral, you must meet specific criteria considered a “qualifying event,” such as being unemployed or enrolled in school. Compulsory abstention is granted based on specific conditions such as being a member of the National Guard or the United States Department of Defense. Discretionary forbearance is at the discretion of the lender and does not require a special qualifying event, but is generally capped at one year. The current mandatory forbearance due to COVID-19 is an obvious exception, as it has been ongoing since March 20, 2020.
Federal Loan Forgiveness
Loan forgiveness wipes out some or all of your federal loan balance, if you meet certain criteria.
The Public Service Loan Forgiveness Program provides eligible government (federal, state, city, tribal) and nonprofit employees with loan forgiveness after 10 years on an income-based repayment plan. Examples of potentially eligible roles include teachers, police, firefighters, military, and social workers in public child or family service agencies.
There are many other government and private forgiveness programs for federal loans. They are worth exploring, as forgiveness can significantly ease your debt burden.
Student Loan Refinance
Student loan refinancing involves paying off existing loans with a new loan at a potentially lower rate. As a result, you can lower your monthly payment and potentially save thousands of dollars in interest over the life of your loan.
However, if you refinance federal loans into private loans, you may lose federal benefits such as income-based repayment plans, deferment, forbearance, and forgiveness opportunities.