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Weighed down by student loans? You’re not alone: Approximately 16 percent of all adults are carrying some sort of debt for their education, according to the Federal Reserve.
“Student loan debt is an almost-universal American experience,” said Reyna Gobel, author of “Graduation Debt and Parents' Guide to Paying for College”.
And it’s an unwelcome experience given the severe personal and professional consequences — from the inability to make large purchases (such as homes to cars), to career paths not taken, delayed marriages and decisions to start a family, to the difficulty saving for retirement or other investments, for example.
“This debt is an emotional burden that weighs heavily on nearly every decision borrowers make,” said Gobel during an interview.
So, how to lighten the load as quickly — and as painlessly — as possible so that you can begin living your post-graduate life the way you envisioned?
You may want to investigate these options.
1. Pick the right student loan repayment plan
Despite the variety of student loan repayment options — from income-based repayment plans to repayment assistance plans to more traditional standard, graduated, and extended repayment plans — there’s very little thought that goes into the decision-making process.
“Most people just go with the option that has the smallest monthly payment, and that’s the costliest in terms of interest paid over the loan’s lifespan,” said Lauren Asher, president of the Institute for College Access & Success, a nonprofit organization that works to make college more affordable, in an interview. While “everyone has their own priorities and resources in terms of how they spend and save money, the best option is the standard 10-year repayment plan.”
This plan breaks down your student loan balance into fixed monthly payments of at least $50 for up to 10 years. Compared to other plans, it is going to cost you the most per month (so make sure it’s budgeted for), but you’ll pay off your student loan faster, and save more in interest, too.
Not sure if this is the right choice for you? If you think you may qualify for other repayment options, size them up and compare monthly payments using the Federal Student Aid’s Repayment Estimator tool. (By the way, you’ll be automatically enrolled in the standard repayment plan if you don’t choose another one).
If you're tempted to refinance, keep in mind that moving federal loans into a private loan means giving up federal protections like income-driven repayment and forgiveness. (Related: Refinancing student loans)
If even the standard plan feels out of reach, deferment, forbearance, and income-driven options can buy you breathing room. (Learn more: Seeking relief when student loans are unaffordable)
Choosing the repayment plan is a decision that will have implications for years. Some people opt to talk with a financial professional to thoroughly consider the options.
Connect with a MassMutual financial professional
2. Make one extra student loan payment a year
Have you considered making bi-weekly payments instead of monthly? Forget about it. There are often too many obstacles, said Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, a free website that connects students with colleges and scholarships.
“You may have to provide a letter of instruction with each payment, there may be fees charged by a third party that facilitates the payment schedule, or your lender may not even be set up to do this,” he said in an interview.
It’s much easier to just make an extra payment a year – 13 instead of 12. You won’t pay down your balance as quickly, but it’ll still shave time off the repayment term, and save you interest.
For example, a borrower who owes $35,000 when entering repayment and repays it over 10 years at 6 percent interest will make 120 payments of $388.57 per month, a total of $46,628.69 (including $11,628.69 in interest). If this borrower makes one extra payment of $388.57 a year in addition to the 12 regular monthly payments, the borrower will make 109 regular payments totaling $41,984.39 and nine extra payments totaling $3,497.13, an overall total of $45,481.52 (including $10,481.52 in interest), saving $1,147.17 and 11 months.
Before you throw every spare dollar at your loans, though, weigh the payoff against retirement saving — especially if you'd be leaving an employer 401(k) match on the table. (Related: Paying off student loan debt vs. saving for retirement)
3. Enroll in auto-debit
Enroll in auto-debit, where your student loan servicer automatically deducts your payment from your bank account each month — and you’re not only less likely to be late with a payment (providing you have sufficient funds in your account), but you’ll also be rewarded with an interest rate reduction, typically a quarter of a percentage point, or 0.25 percent. Is this a big deal? It can be, particularly if the lender doesn’t use the interest rate reduction to reduce the monthly payment and instead allows more of the monthly payment to be applied to the principal balance of the loan.
“This leads to a quicker repayment of the loan and can eliminate the last few payments, potentially saving the borrower hundreds of dollars in interest over the life of the loan,” said Kantrowitz. For example, a 0.25 percent interest rate reduction might eliminate the last two payments on a 10-year term and the last 10 payments on a 20-year term.
4. Deduct your student loan interest
What’s the one silver lining of having student loan debt? The interest is tax deductible — even if you don’t itemize your deductions. Yes, there is an income limit to this deduction, but if you make less than $85,000 a year or $170,000 if you’re married and filing jointly, you can claim the full deduction of $2,500 or the amount of interest you actually paid over the year, whichever is less.
This will save you over $600 annually, assuming you fall into the 24 percent federal income tax bracket, said tax expert, Bob Meighan, vice president of TurboTax, in an interview. “You can claim this deduction as long as the loan is in your name (or your spouse's if filing jointly) even if somebody else paid the interest — regardless of who that is.”
5. Get help from your employer
As employers look to attract and retain top talent, more and more companies are either exploring or offering one of the hottest things in benefits right now: student loan repayment assistance programs.
Consider this: if an employer offered an employee $10,000 in assistance (which is within the ballpark of the current industry standard), spread out in monthly payments throughout five years, the employee could shave three years off the time it takes to pay off the student loans, and save roughly $4,100 in interest. This example assumes the borrower has approximately $30,000 in student loan debt and is paying the loan off on a 10-year standard repayment plan.
And under recent federal law, up to $5,250 a year in employer student loan repayment help can now be provided tax-free to workers. This makes it “a meaningful perk for someone with a bachelor’s degree,” said senior data analyst, Victoria Simons, who crunched the numbers for NerdWallet.com, a personal finance site, in an interview.
So, what if your employer doesn’t currently offer such a plan? “They may be willing to include repayment as part of your benefits package even if they don’t officially offer it. It never hurts to ask,” said Gobel, “especially if the company is trying to woo you.”
And under the SECURE 2.0 Act, employers can now make 401(k) matching contributions on your behalf when you make student loan payments — so paying down debt doesn't have to mean pausing your retirement saving.
Conclusion
There's no single move that makes student loan debt disappear, but a handful of small, deliberate ones can add up. Picking a repayment plan that fits your budget, squeezing in an extra payment when you can, enrolling in auto-debit, claiming the interest deduction, and tapping any help your employer offers are all ways to shorten your term and pay less interest over the life of the loan.
Which of these makes the most sense for you depends on your loan balance, interest rate, income, and broader financial goals — including retirement. If you're weighing a payoff strategy against other priorities, a financial professional can help you see how student loans fit into the bigger picture.
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Frequently Asked Questions about paying off student loan debt
Q. What is the best student loan repayment plan?
A. The standard 10-year repayment plan costs the most per month but pays off your loan fastest and saves the most interest. If payments are too high, income-driven plans like the new Repayment Assistance Plan can lower them based on your income. (Related: Seeking relief when student loans are unaffordable)
Q. How can I pay off my student loans faster?
A. Making one extra payment a year and enrolling in auto-debit (which often earns a 0.25% rate reduction) are two simple ways to shorten your term and cut interest. Directing extra payments to your highest-interest loan first can accelerate progress even more. (Related: Repaying student loans early, wisely)
Q. Can my employer help pay my student loans?
A. More employers now offer student loan repayment assistance, and under recent law up to $5,250 per year can be provided tax-free. If your employer doesn't advertise it, it's worth asking whether it can be added to your benefits package.
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Discover more from MassMutual …
Seeking relief when student loans are unaffordable
This article was originally published in April 2017. It has been updated.
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