In 2010, two thirds of bachelor's-degree recipients graduated with education debt, including roughly $25,000 per person in student loans, according to estimates by FinAid.org. On average people take 16 to 18 years to repay this debt, leaving them with less money to save for retirement or to buy a home.
While simply paying down debt faster is the quickest way to make it go away, there are other ways to lessen the burden and pay down those loans.
Save with a payment plan. By setting up a payment plan, you are less likely to miss a payment and could even save on interest.
- Autopay your way. Set up automatic payments with lenders by providing checking account information. Payments will be made each month automatically, which lessens the chances of default.
- Take the discount. Many lenders offer discounts to borrowers who sign up for auto debit and electronic billing (rather than sending the bill in the mail) of up to a 0.25% interest rate reduction on federal loans and up to 0.50% reduction on private loans.
- Test out a plan. Plug in your loan terms in FinAid.org's calculator or find out how much can be saved with an interest rate discount.
Be mindful of interest rates. Interest rates on private student loans are volatile, so borrowers should try to lock in low rates where they can and pay down higher-rate loans first.
- Variable or fixed? Most private student loans, money borrowed through a bank, have variable rates that are often low when rates are low but move as rates move. Federal Stafford loans can have rates up to 6.8% as of 2011. Borrowers who can afford to pay extra on their loans should try to pay down their private loans first. Compare savings when paying down loans in advance with Bankrate's calculator.
- Consolidate if possible. Borrowers who are paying back federal loans with variable rates (those issued before July 1, 2006) might want to consolidate into a fixed-rate loan. That way their monthly payments will remain the same until the loan is paid in full. You can estimate the rate you'll get after consolidating at the Department of Education's web site, and see what payments will look like after consolidating using FinAid.org's consolidation calculator.
Pick a sustainable payment plan that helps you save. Borrowers can select repayment terms that make their monthly required payment more affordable in relation to their income.
- Income matters. If you plan to work in the nonprofit sector, consider signing up for an income-based repayment plan where the monthly payment is based on your income and the federal loan balance is forgiven after 10 years of full-time public service. You can compare student loan payments to their income using this College Board calculator and see what monthly payments look like with an income-based repayment plan using this FinAid.org calculator.
- Defer with care. If you lose your job or have an emergency, you can apply for postponement of payment on federal student loans either through deferment for up to three years or forbearance for up to five years. Interest, however, will accrue except in the case of subsidized federal loans in deferment, where the government pays the interest. Borrowers facing financial difficulties can check this calculator to figure out if they'll qualify for economic hardship deferment.
- Taxes matter. Borrowers paying back federal and private student loans can get a student loan interest deduction of up to $2,500 each year.
What not to do. Certain decisions can throw you off track for years and derail savings.
- Don't put off paying back the loan. By extending a loan's repayment period for too long you'll pay thousands more in interest. With a $25,000 unsubsidized Stafford loan at 6.8% interest, total loan repayments in 10 years are around $34,500 compared to nearly $46,600 if extended for 20 years.
- Don't miss payments. Fall behind on federal student loan payments, and the government can garnish up to 15% of a borrower's wages and Social Security benefit payments and hold onto federal and state income tax refunds.
- Don't use home equity to pay student loans. Student loans are unsecured, but once they're rolled into home equity that education debt is now secured by the house. Miss a payment, and you could lose your home.
For more to read: Read here about the differences between student loans and new options with private student loans. "College Loans 101: New Rules for Borrowers;" "Student Loans Demystified;" "Have Private Student Loans Become Smarter?;" "Paying for Grad School."