Pay Off Student Loans Faster With These 3 Options
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If you’re paying down student loans, you’re not alone. More than 40 million people are juggling an estimated $1.3 trillion in outstanding student loan debt. Among members of the class of 2014 who borrowed to attend college, student loan debt averaged nearly $30,000. But it’s not just a problem for new grads – many older workers struggle to make headway against six-figure student loan debt burdens.
The good news is you can’t be arrested for not repaying your student loans. The bad news is it’s pretty tough to walk away from student loan debt, even in bankruptcy court. Thankfully, there are options, including government programs, you can explore to ease your burden when you are struggling with paying off student loan debt.
Income-Driven Repayment Programs
To stem the tide of delinquencies, the government has created numerous repayment programs that tie your monthly payment to what you earn – usually 10 or 15 percent of your discretionary income. If you’re not earning anything, you don’t have to pay anything.
The problem with these government “income-driven repayment” programs is that the way they reduce your monthly payments is by stretching them out over many years. That means you’ll end up paying a lot more interest.
If you make 20-25 years of payments and still haven’t paid off your debt, you’ll qualify for loan forgiveness. But the government will tax the amount forgiven as income. Nevertheless, income-driven repayment programs are often the best option for people who are struggling to make their monthly payments. At the end of 2015, the Department of Education had enrolled more than 4.5 million borrowers in one of these plans.
There is a danger to be aware of when you are considering income-driven repayment programs. The programs are so popular, and people with student loan debt are often so desperate, that scammers sprung up left and right, charging people to help them enroll. The government’s student loan repayment programs are free, and easy to enroll in. Never let student loan debt relief companies charge you money.
Refinancing your loans at a lower interest rate
If you’re making your monthly student loan payments without straining your personal finances, there’s another option that could save you thousands of dollars. It’s an option that many people haven’t even considered: refinancing your loans with a private lender at a lower interest rate.
If you refinance your federal student loans with a private lender, you’ll lose some of the borrower benefits that come with government loans – like access to income-driven repayment plans, and loan forgiveness. But for many people, the opportunity to save significant money is more than worth the trade-off.
There are numerous private lenders will refinance student loans, and the rates they offer are often considerably lower than rates on federal loans. This is especially the case if you have an older federal PLUS loans taken out to attend graduate school, which can exceed 8 percent. Unfortunately, the only way to lower the interest rate on your student loans is by refinancing them with a private lender. Although the Department of Education will let you consolidate multiple loans into a single loan to simplify your loan payments, you’ll still pay a weighted average of the interest rates on your old loans.
Private lenders offer many different loans at different rates and terms, so you’ll want to shop around. A good place to do that is Credible.com as they’re a multi-lender marketplace that vets all the lenders on the site. In essence, this provides you a one-stop shop to find the best possible savings opportunity.
Thanks to the relationships Credible has with its partner lenders you can see the actual rates you’ll qualify for in minutes, without sharing your personal information with lenders or affecting your credit score. As of April, 2016, lenders on the Credible platform were offering variable-rate student loan refinance loans staring at 2.13 percent APR, and fixed-rate loans starting at 3.5 percent.
Private Lender Options for lowering Student Loan Debt
When you refinance with a private lender, you can take several different approaches. One is to reduce your loan term. That, along with a lower rate, will reduce the total interest you pay over the life of the loan.
If you’re more interested in lowering your monthly payment, you can refinance into a private loan at a lower interest rate that also extends your loan term. Since you’ll be making payments for a longer period of time, those taking this approach will end up paying a little more in total interest over the long run.
While you will pay more, in the long run, to just lower the monthly payment it will still be significantly less that what you’d pay without a refinance – as is the case in one of the government’s repayment programs.
A recent Citizens Bank survey found that less than half of millennials have looked into refinancing, consolidation or other options to improve their loan terms. That’s plenty of savings being left on the table. If you have student loans and want to see how much you can save by refinancing, you can check your rate for free using Credible in about 90 seconds.
Refinancing with a private lender isn’t for everyone but if you are struggling under the weight of student loan debt and looking for a way to pay it down faster, exploring your options is a worthwhile activity. Look into government loan repayment programs and options through private lenders to give yourself the best chance to pay your student loan debt down as quickly as possible.
What are your concerns when it comes to paying down student loan debt? What options have you tried and found successful? What scams or dangers have you come across in your effort to pay off your student loans?