Student loan debt is a fact of life for many. But if you take a few simple steps, like prepayment and paying high-interest loans first, you can pay those loans off sooner than you think.
- Why you may want to pay more then your minimum payment.
- Pros and cons of consolidation.
So you’re out of school, living on your own for the first time, and entering a job market that’s shaky at best. On top of all that, you’ve got student loans to pay back—and that grace period is nearly up. Starting your professional life with a long-term debt hanging over your head can be stressful, but take a deep breath.
For better or worse, most of us start our careers with student loans to pay back, so you’re not alone. And there are several ways you can pay down your student loan ahead of schedule.
Overpay To Reduce Your Principal
One of the easiest ways to reduce the life of your loan is to overpay—that is, to send extra money on top of your minimum payment. This may sound impossible when you’re already strapped for cash, but this is a case where a little bit truly goes a long way.
At the beginning of most loan repayment schedules, your initial payments (i.e., for the first few years) are almost all interest (if not ALL interest), with only a fraction going toward your principal (the amount you actually owe). However, if you pay anything above your minimum payment, that extra money may be applied to your principal. Some loan holders do this automatically, and some apply the extra money to your next payment, which really doesn’t cut down on the interest that you’re accruing. Be sure to check with your loan holder to request that any extra money goes toward your principal balance, if it isn’t already.
Here’s an example: If your monthly payment is $100, and you pay $115, that extra $15 may go toward your principal. If you’re able to overpay with any regularity, you will knock down your principal much faster than if you only make the minimum payments—and you will significantly decrease the amount of interest that you accrue and the length you repay your loan.
You’re always allowed to prepay your federal student loans without penalty; however, private student loans are a different story. These sometimes feature a “repayment fee,” which is just what it sounds like: a fee for repaying your loans early (crazy, right?). Check your loan’s paperwork to see if this applies to you.
Prioritizing loan payments
If you have more than one student loan, prioritize your payments. You want to make sure that you are more aggressive in paying the loans with the highest interest rates first because those cost you the most. You want to make sure that you are more aggressive in paying down the loans with the highest interest rates first. Using the prepayment strategy outlined above, you can overpay on your high-interest rate loans while making the minimum payment on your low-interest rate loans.
Once the high-interest rate loans are paid off, you can increase the amount you pay toward your other loans. This way, you spend less money on interest overall and get out of debt quicker.
Switch Repayment Plans
Sometimes, it’s a struggle just to make your minimum payments, much less pay more than you owe. If this is the case, making any payment will still be better for reducing your long-term debt than making no payment. Look into your different repayment options. You may be eligible for plans that decrease your monthly payments based on your income and family size.
You can also consider consolidating your loans. This option has its pros and cons. When you consolidate, you and your lender look at all the different loans—with their various principals, interest rates, and repayment schedules—and combine them into one new loan, which will have a weighted average of the interest rates of the individual loans. When you consolidate, you often start the repayment schedule over again. So, even if you’re 3 years into your 15-year loan repayment schedule, you’d still have 15 more years to go.
Increasing your repayment period can also often increase the amount you have to repay. However, if the immediate goal is to reduce your monthly payments so you can avoid the consequences of default, then paying more over the lifetime of your loan may be worth it for you.
Tax and wage Garnishments on Defaulted Loans
If you don’t make payments on your student loans, they enter default. At that point, the lender will have more power to collect, including the ability to take some of your money before you ever see it. There are two ways that can happen.Wage garnishment takes the money out of your paycheck, and offset takes it out of income tax refunds or other government payments.
You may be able to avoid having your wages garnished or tax refund or other federal or state benefits seized if you set up a satisfactory repayment arrangement and begin making payments. Payments made under a voluntary payment plan are often lower than the amount taken through garnishment and can lead to resolving the default altogether through rehabilitation or consolidation.
Contact Us to consolidate or rehabilitate your federal student loans
Getting Out of Default
There are many options for repayment relief for borrowers who are having trouble repaying their education loans. These include deferments and forbearances that suspend the monthly payment obligation, alternate repayment plans that reduce the monthly payments by increasing the loan term, and forgiveness and discharge programs that cancel the loans entirely. Which options are appropriate for you depends in part on whether your financial difficulty is short-term or long-term?
These solutions are mainly for borrowers of federal education loans, as options for borrowers of private student loans are more limited. Contact Us today and we will help you find YOUR solution.
Forbearance / Deferment
When your federal student loans are in default, the options are not particularly attractive.
Both choices, rehabilitation and consolidation, have downsides. However, both options are far better than letting your federal loans stay in default.
What is the difference?
Rehabilitation and consolidation both accomplish the same goal… getting your federal student loan or loans out of default.
When you rehabilitate your loans, you work with your loan servicers on a monthly payment plan to get your loan current. Rehabilitation requires the borrower to make nine payments in a ten month period to bring the loan out of default. This has to be done for each loan that is in default.
Consolidation requires the borrower to go through federal direct consolidation. Consolidating your loans means that your old loans will be paid off and that you will be left with a new larger consolidated loan.
The best part about getting your federal loans out of default is that you can remain on one of the many great federal repayment plans. Income based repayment plans, such as PAYE, ensure that even if you are unemployed, you can keep your loans current and your credit back on track.
EDUCATION ADVISORY GROUP “EAG” is a for-profit business that for a fee assists in compiling, preparing and processing paperwork for people seeking consolidation, restructuring and/or forgiveness of their federal student loans through the U.S. Department of Education’s (“DOE”) programs. · EAG is not affiliated with and has no special relationship with the DOE or any other academic or governmental entity. · This site and is not affiliated with or endorsed by the DOE, and the content or any information posted on this site is not endorsed by and does not reflect the views of the DOE. · You can apply for loan consolidation or alternative repayment programs on your own without paid assistance through the DOE at Studentloans.gov. EAG is not a loan servicer and does not renegotiate, settle, or in any way alter the terms of any payment or debt.