Got an overwhelming student loan debt balance? You're not alone.
So-called “super-borrowers” are racking up student loan debt to the tune of $100,000 or more for the sake of an education.
While many of them are taking on six-figures in loans to earn an MBA or get through law school, others are using the money to fund their undergrad experience at pricey private universities.
When you consider that 20-somethings face one of the toughest job markets in history, it’s a big gamble to make.
Figuring out how to organize and pay student loans when you owe the equivalent of a mortgage is no easy task, especially if you’re struggling to get by on an entry-level salary.
If you're worried about drowning in student loan debt, check out these tips for easing your financial load.
Start With Income-Driven Repayment Options
An income-driven repayment plan could give you the financial breathing room you need if you have federal student loans.
Unlike the standard plan, which caps the repayment period at 10 years, these plans can give you up to 25 years to pay back what you owe.
If you haven’t paid off the balance by then, you may be able to have the rest of the debt forgiven.
There's only one catch: the forgiven amount is treated as income on your taxes.
How payments are calculated
Generally, income-driven repayment plans are designed to tailor your monthly payment to your budget. There are several income-driven plans to choose from:
- Income-based repayment (IBR)
- Income-contingent repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
Income-based repayment (IBR)
With income-based repayment, your payment amount depends on when you took out your loans.
- If you got your loans after July 1, 2014, they're set at 15 percent of your discretionary income. You have 20 years to pay them off.
- If you took out loans before that date, 10 percent is the cutoff. The repayment period stretches to 25 years for later borrowers.
But, do income-based repayment plans actually work?
If your goal is to lower your monthly payment so your budget isn't as stressed then yes, an income-based plan can do that for you.
But, stretching out your repayment term means you'll pay more in interest overall.
And, if a big chunk of your $100,000 debt is forgiven, that could mean a temporarily higher tax bill.
Income-contingent repayment (ICR)
Income-contingent repayment is a little different.
With this plan, your payments are set at 20 percent of your discretionary income or what you would pay on a repayment plan with a fixed payment for 12 years, whichever is less.
There's only one repayment term, of 25 years.
The original Pay As You Earn program allowed students who received Direct Loans after October 1, 2007 to limit their payments to 10 percent of their discretionary income.
Under this program, your payment can never be more than it would under a 10-year Standard Repayment plan.
Qualifying for PAYE wasn't that easy, however; you need to have a demonstrated financial hardship.
The Revised Pay As You Earn Program simplifies things, reducing payments to 10 percent of discretionary income.
And, you can use the REPAYE program to get help with both undergraduate and graduate loans.
The repayment term is 20 years for undergrad loans and 25 years for graduate loans.
That can be a huge help if you borrowed heavily to pay for graduate or professional school.
If your income goes up as you can get further along in your career, your payments will adjust. That can help you make a bigger dent in what you owe and cut down on what you pay in interest overall.
Deciding Which Payment Plan Is For You
The first thing to figure out is which income-driven repayment plan you're eligible for. With REPAYE and ICR, any borrower with eligible federal student loans can apply.
With IBR and PAYE, you need to have taken out your loans on or after October 1, 2007.
To qualify, the payment you'd be required to make under either plan must be less than what you'd pay on a 10-year Standard Repayment plan.
As you compare plans, consider two things: how much your monthly payment would be and the repayment term.
A longer term may mean a lower payment, but you're going to end up paying more for interest.
Not only that but you have to factor those payments into your budget for the long term.
Paying on your loans--even if the payment is low--for 25 years can take a toll mentally.
Look Into Loan Forgiveness
If you racked up big student loan debt, a job in public service could be the answer to getting rid of it.
The Federal Public Service Loan Forgiveness program allows you to cancel out any remaining student debt when you work in a service role.
Here's how it works:
- You commit to working for a government or non-profit organization.
- While you're employed, you make 120 qualifying monthly payments on your loans.
- Any remaining loan balance is forgiven if you meet both requirements.
This kind of loan forgiveness has pros and cons. On the upside, you can get a substantial amount of loans wiped out this way. And, you can get on an income-driven repayment plan to lower your payments during your public service career.
That means your budget is less strained, which is important because public service jobs may not pay as well as the private sector. That could be seen as a downside if you're hoping to turn your professional degree into a six-figure salary.
You also have to remember to recertify for forgiveness each year while you're employed, and not every employer is eligible. Only certain types of employers qualify for public service loan forgiveness. Those include:
- Local, state, tribal and federal government agencies
- Tax-exempt nonprofits
- Other types of nonprofits that provide qualifying public services
You can also get forgiveness if you're a full-time AmeriCorps or Peace Corp volunteer. Forgiveness isn't available, however, if you work for a labor union, partisan political organization, for-profit company or ineligible non-profit.
Other Types of Loan Forgiveness Programs
In addition to Public Service Loan Forgiveness, there are a few other ways to get your loans forgiven.
If you're a doctor, for example, you can look into military programs that offer repayment assistance.
The U.S. Army offers several programs to help lighten the student loan burden for doctors, dentists, nurses and other medical professionals who commit to serving in the armed forces.
Loan forgiveness programs for grads with a medical background can also be offered by individual hospitals or private healthcare employers. Just keep in mind that you may be required to work for a specific hospital for a set period of time to qualify for loan forgiveness.
Attorneys can find assistance through law schools, private law firms and state-sponsored programs. Again, there's usually a work commitment involved. The American Bar Association maintains an extensive list of resources for attorney loan forgiveness and repayment assistance.
Is Loan Forgiveness Worth It?
That's really the big question because loan forgiveness--whether it's through the federal public service program or another avenue--typically doesn't come without strings attached.
What you have to consider is what's more important: making a big dent in your loan balance or having flexibility in how you follow your career path.
If you're not comfortable committing to a specific organization for the short term, a forgiveness program may not be the best solution for the long term.
Streamline Private Student Loan Payments
One of the downsides of income-driven repayment and federal loan forgiveness is that they only apply to federal loans.
If you took out private loans to cover the gap for your education costs, those options aren't available.
There is something you can do, however.
Consolidating and refinancing your private student loan debt could help you to get a lower interest rate and potentially lower your monthly payment.
If you took out multiple private student loans, consolidating them allows you to make a single payment each month.
You can pick a loan term with a payment that fits what you can afford to pay.
If your rate is lower, your payment may also be lower, which is good for your budget.
Choosing a Refinance Lender
When you’re shopping around for a private student loan refinance deal, pay close attention to the terms of the loan.
You’ll have to decide whether you want a fixed or variable rate since the one you choose determines how much refinancing really costs you in the long run.
Fixed rates tend to be higher but your payments stay the same over the life of the loan. Variable rates are usually lower but the amount you pay each month or the number of payments you’re required to make can change.
Also, consider your credit score.
The private loan refinancing process includes a credit check. If you don't have a solid score yet, you may have to get a cosigner on-board to qualify.
Normally, that might be your parents. But what if your parents don't have great credit? Or what if they co-signed on your original loans but their credit has since taken a nosedive, or even worse, hurt yours in the process?
Building good credit at a young age takes practice and discipline. When you've got $100,000+ in student loans, the last thing you need is to add to your debt.
Here are some ways to establish or grow your credit score:
- Open a credit card account, but be choosy. Credit cards are one of the easiest ways to build credit when you're younger. But be selective about how many cards you open. Every time you apply for credit, that dings your credit score.
- Pay your balance on time and in full each month. Once you open your credit card account, you'll have to use it to see a positive change in your credit score. Charge only what you can afford to pay off each month and always, always pay on time.
- Keep up with your student loan payments. While credit cards can have a greater impact, student loans also count towards your credit score. Using different types of credit can help your credit history, but only if you're paying on time. Set up payment reminders or automatic payments to avoid late payments on your loans.
What To Do When You Have Trouble Paying Off Student Loans
If you're having trouble keeping up with your payments, here are some do's and don'ts to keep in mind.
Do forget about bankruptcy protection
While it's possible to get rid of student loans through bankruptcy, it's extremely difficult to qualify. Not to mention, filing bankruptcy can destroy your credit.
Don't assume your tax refund is safe
The federal government has the authority to tag your tax refund for unpaid federal loans.
In fact, in some cases, Uncle Sam can even go after your retirement funds by docking the money the government sets aside for your special Social Security account.
Do consider the impact to your credit score before defaulting
Falling behind on your loans can put you at risk of default. Once default is reported on your credit, that can hammer your credit score.
That, in turn, can make it tougher to get a credit card, finance a car or get a mortgage later on.
Some employers even look at credit scores as part of the hiring process.
Don't assume there are no options
If you're feeling swallowed up by your student loans, remember that it's possible to find a way out.
Income-driven repayment or refinancing student loans can help you get caught up and make your debt more manageable.
It's also worth looking into your employee benefits package to see if your company offers anything in the way loan repayment assistance.
Do focus on improving your financial situation
Perhaps the best thing you can do when you're trying to claw your way out of student loan debt is work on your finances.
Start with your job situation
If you're working in a lower-paying role, consider whether there are opportunities to move up at your current employer. If not, ask yourself whether you'd be willing to relocate to another city to look for better-paying opportunities.
Remember, though, that making a bigger salary could mean living in a more expensive location.
This is where you'll need to consider whether the cost of moving is really worth it.
If you're making $25,000 more a year but your cost of living goes up by $20,000, you may not have as much extra money as you think to tackle your debt.
Look at your budget
What are you spending money on that you don't necessarily need to?
Could you downsize where you're living to a smaller place or get a roommate? Are there other expenses you could cut out?
Plugging the numbers into a budgeting app or software program can help. Apps are also useful for tracking your spending since they record debit and credit card purchases automatically.
That can help you spot any spending areas that you could reduce to free up more money for loan repayment.
Consider what you might be willing to sacrifice to get rid of your loans faster.
It might eating out or new clothes or travel.
Giving one or all of those things up for a while may temporarily affect your quality of life, but you may come out a lot happier if you're not carrying around your loans for an extra decade.
But what do you do if you've already gotten your budget down to the bare minimum?
Seek to increase cash flow
At this point, you may have to take a more extreme route and move back home with your parents or take a job that you don't necessarily love to increase your income.
Or if you're in a steady job and you don't want to change your career path, you could take on a part-time gig or start a side hustle to bring in more money.
Of course, that means giving up more of your time. But the financial payoff of making that kind of sacrifice is being student loan debt-free faster.
That can put you a step closer to working on your other money, life, and career goals.
Small Steps Can Lead to Success
Being knee-deep in student loan debt can be a major roadblock to pursuing other major life moves, like buying a home, getting married or having kids.
If you’re staring down six figures in loan debt, it’s tempting to give up on ever making any progress but that’s not the best mindset to have.
Instead of trying to eat the elephant all at once, work on making progress towards smaller goals.
Challenge yourself to see how much of the debt you can dump in six months.
The more you can psych yourself up and make your loan repayment efforts a game, the less it seems like a crippling financial burden.