Depending on if and when Congress can ever decide on a broad student loan relief package, millions of college graduates will continue to struggle, owing a large amount of debt long after leaving school. If you are one of the many Americans with significant student debt, then you should take a proactive approach to paying off your loans as fast as you can. Here are some personal finance tips that can help you become debt-free.
1. Apply for an Income-Driven Repayment Plan
Many students end up borrowing more money to pay for college than they anticipated – leaving then with much larger student loans after leaving school. Furthermore, a lot of college graduates fail to find a job that pays enough to enable them to repay their student loans in a timely manner (if at all). If you are struggling to afford your federal student loan payments, then you should consider applying for an income-drive repayment plan. IDR plans can lower your monthly bill by recalculating your payments based on your discretionary income, not your total student debt. Your discretionary income is any amount you make over 150 percent of the federal poverty rate. Depending on the IDR plan that you choose, you could have your payments capped at 10 or 15 percent of your discretionary income. What happens if you make less than 150 percent of the poverty rate? Your monthly payment will be $0. IDR plans will also pay up to three years of interest on your loans if your payments aren’t enough to cover all (or any) of the interest. Your repayment time will be extended to 20 or 25 years, depending on the plan you choose. However, you will likely pay considerably more interest in total by extending your repayment time. However, any remaining debt that you have at the end of your repayment plan will be forgiven.
2. Refinance Your Student Debt
Most federal student loans have pretty competitive (low) interest rates. Unfortunately, private loans often have much higher interest rates – especially when student borrowers have little-to-no credit history when they take out the loans in college. If you have private student loans and a good credit score – or you can get someone with a good credit score to cosign – then you could try refinancing your debt to get a lower interest rate. A lower interest rate will not only reduce your monthly payments, it will reduce the overall amount that you must repay your lender.
3. Make Bi-Weekly Payments Instead of Monthly
Another personal finance tip that can help you save money on your debt is to make bi-weekly student loan payments instead of monthly payments. By making payments every two weeks you will be able to reduce your principal more quickly, thereby paying less interest over the life of your loans. Just check to see if your lender allows that repayment option.
4. Deduct Your Student Loan Interest on Your Taxes
Most student loan borrowers with low-to-moderate incomes can claim a tax deduction for the interest on their federal and private student loans. For borrowers who qualify, they can deduct up to $2,500 of interest per year on their federal tax return. Depending on the state you live in, your student loan interest might be deductible on your state taxes as well.
5. See If Your Employer Offers Student Loan Assistance
Finally, a growing number of employers are offering student loan assistance to help employees pay off their educational debt. Talk to your company’s human resources department to see if they offer any student loan assistance. Oftentimes, employers with student debt assistance programs will require that you agree to work a certain number of years for them in order to quality.
In short, if you feel like you are drowning in student loans and you worry that you will never be debt-free, there is hope! Oftentimes, you can dramatically reduce your monthly payments by signing up for an IDR plan. Even if you don’t think that you qualify, go ahead and apply anyway. You should also check refinancing rates on student loans to see if you could reduce your payments by getting a lower interest rate. Another personal finance hack to save on interest is to make bi-weekly payments instead of paying monthly. There’s a good chance that you could save money on your taxes by deducting your student loan interest. Lastly, it doesn’t hurt to ask your employer if they offer a student loan assistance program to employees.