Students increasingly walk out of college with more student loan debt each year; in fact, graduates from the class of 2016 have an estimated $37,172 in student loan debt, according to calculations by Mark Kantrowitz, the leading national expert on student loans, and VP of Strategy at Cappex.com, a college scholarship resource website.
Unfortunately, 43% of borrowers who are out of school, according to the The Wall Street Journal, are not actively repaying their federal student loan debt.
Fortunately, there are a number of repayment plans, student loan forgiveness programs and options that exist to prevent you from going down the same path.
To help you get out of debt faster, you’ll need to know about:
- Refinancing and restructuring options
- Types of student loan forgiveness programs
- Student loan forgiveness red flags
- The right strategy to get out of student loan debt
Refinancing and restructuring options
Student loan refinancing
Similar to refinancing an auto loan, student loan refinancing allows you to redefine your student loan term at (preferably) a lower interest rate. Depending on how much your interest rate is reduced, this approach could save you money overall.
Your credit history should suggest that you have a track record for making on-time payments, which is typically reflected by a competitive credit score (typically a FICO score of at least 700). Credit score eligibility requirements vary between lenders, but a bad score will likely prevent you from being approved. If you have bad credit or no credit, a cosigner might help persuade your lender.
Additionally, lenders want to see that you have a steady source of income, and that you make enough money to repay the debt. Being employed with the same employer for a long period of time is also helpful, as it shows you have a higher level of job security and will be at a lower risk of defaulting on your loan.
Student loan consolidation
Depending on the details of your existing loans, consolidating multiple student loans into one, fixed payment can be a good option.
One of the benefits of student loan consolidation is that it simplifies the repayment process. A single payment going out each month is easier to manage than multiple payments going to different lenders with varying due dates.
In the past, student loan consolidation was considered a good way to possibly lower your interest rate– though, some loan interest rates might drop, while others could increase. According to FinAid.org, consolidated interest rates are the weighted average of combined original interest rates, and rounded up to the nearest eighth of a percent.
Though in recent years, the interest rate benefits of student loan consolidation haven’t been favorable.
“Consolidation has a reputation for saving borrowers money,” Kantrowitz said, “but ever since federal loans switched to fixed interest rates in 2006, consolidating federal loans doesn’t reduce the interest rate.”
Instead, Kantrowitz notes that borrowers can save more money refinancing private student loans.
Nearly all federal student loan types, like Perkins, Stafford, Direct and PLUS loans are eligible for consolidation, and extended term lengths of up to 30 years are available.
Income-driven repayment plans
Federal student loan services typically offer an Income-Driven Repayment Plan. There are four different plan options under this umbrella: Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), Income-Based Repayment and Income-Contingent Repayment, each with its own set of income and loan requirements for eligibility.
Important note: There are tax considerations to bear in mind when applying for income-driven repayment plans. “The amount forgiven will be treated as taxable income to the borrower,” said Kantrowitz. “In effect, this substitutes a tax debt for the student loan debt, although the tax debt will usually be smaller.”
Loan repayment assistance programs (LRAP)
A growing number of employers are offering Loan Repayment Assistance Programs (LRAP), which help their employees pay down their student loans. Currently, Kantrowitz estimates 3-4% of employers offer LRAPs, but companies seeking high-demand professions are using this benefit as a signing bonus or recruiting tool more often. As with income-driven repayment plans, LRAPs are considered taxable income.
Student loan forgiveness programs
Getting out of paying student loan debt altogether is no easy task. Unless you can prove that paying off your student loans would cause an “undue hardship” circumstance that affects a minimum standard of living, bankruptcy won’t eliminate the debt.
However, there are a handful of programs that help certain borrowers manage or do away with their student loan debt.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness program specifically serves borrowers who are working in public service fields, such as government, education and nonprofit professions. It provides 100% student loan relief for federal direct student loans only, after 120 on-time payments have been made.
What to know: You must have worked as a public service employee for a minimum of 10 years in order to be eligible. The 120 student loan payments must have been made on-time, but don’t need to have been “consecutive” to qualify.
Under the current law, any remaining debt that’s forgiven under the Public Service Loan Forgiveness program is tax-free, according to Kantrowitz.
Teacher Loan Forgiveness
The Teacher Loan Forgiveness program specifically applies to full-time teachers who have taught at a qualifying primary or secondary school for at least five years.
What to know: Federal direct and Stafford loans are eligible for forgiveness, if the first loan you took out was after October 1, 1998. Forgiveness maximums differ by school type, with a maximum $5,000 of loans forgiven for primary school teachers, and up to $17,500 written off for secondary school teachers.
To see if your school is qualified under this forgiveness program, see the Teacher Cancellation Low Income Directory.
Federal Perkins Loan Cancellation
Another incentive for public service sector employees is the Federal Perkins Loan Cancellation program. This forgiveness program applies to Perkins loans only, and for borrowers who works under a qualified profession, such as firefighters and Peace Corps volunteers.
What to know: The provisions for loan cancellation vary from profession to profession, with some professions eligible for up to 100% of forgiveness. For the full list of eligible professions, requirements and loans amounts forgiven, check out the Federal Perkins Loan Cancellation and Discharge Summary Chart.
Beware of quick-fix forgiveness solutions
When investigating student loan forgiveness programs, you might come across third-party entities that that tout a fast-track way to get your federal student loans absolved, or guarantee that they can get you out of default.
These companies (who often have a legitimate-sounding name, like “Obama Student Loan Forgiveness Program”, or “Federal Student Loan Debt Relief”) can charge upward of $1,500 for a quick-fix solution. In reality they’re simply filling out paperwork for services that the government offers at no cost to borrowers.
If a service solicits payment for their assistance, requires your Federal Student Aid I.D. or Social Security Number, or is highly advertised on Google or social media networks, it might not be a legitimate service.
Figuring out the right student loan strategy
There’s no universal approach to getting out of student loan debt. Depending on your profession, income and total student loan debt, repayment strategies vary. However, there are best practices to keep in mind when developing your student loan debt plan.
“Students have a tendency to choose the repayment plan with the lowest monthly payment, since it ‘saves’ money in their monthly budget,” said Kantrowitz. “But a lower monthly payment usually increases the repayment term and the total interest and total payments over the life of the loan. Rather than saving money, it actually costs them money.”
Pay as much as you can afford
Based on your income and monthly expenses, calculate how much you can reasonably afford to set aside for your student loan payments. This amount should at least meet your loan’s minimum payment, to avoid penalties.
Keep your credit score up
Since many of the forgiveness programs are limited to a few select professions, you might have to look into student loan consolidation or refinancing to get out of debt faster. Making sure you have FICO score at 700 or above can help you secure the lowest interest rates available, and give you more leverage to shop around for competitive consolidation or refinance offers.
Be transparent with your lender
As soon as you know that you won’t be able to make a minimum payment, it’s best to reach out to your student loan servicer to discuss repayment alternatives. Subsequent late payments eventually creep onto your credit report, and adversely affect your creditworthiness.
It’s in your lender’s best interest to work with you, not against you, so with a candid conversation and some paperwork, you might be able to come to a more manageable payment plan.
Speak to a student aid advisor or your loan servicer about the options available to you. Getting out of student loan debt won’t happen overnight, but there are many ways to mitigate the burden it causes on your finances.