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How to Get Out of Student Loan Debt
By Peter Burns MONEY RESEARCH COLLECTIVE
Over the last decade, more people have been attending college and earning degrees. As the value of a college degree has increased, so has the cost of a university education. Taking out loans to pursue higher education has made it increasingly challenging for graduates to buy a house, start a business or save for retirement. In this article, we look at how to get out of student loan debt and other ways to ease the burden on borrowers.
Ways to reduce or eliminate student debt
Student loan debt is common among college graduates in the U.S. According to the Education Data Initiative, the average federal student loan debt is $37,574 per borrower, while the average debt for private student loans is $54,921 per borrower.
Some ways to get rid of student loans include federal and non-federal debt forgiveness programs. Other strategies may also be effective for getting out of student debt, depending on your financial situation.
Federal student loan forgiveness programs
One way to reduce or eliminate student debt is through student loan forgiveness programs. Federal programs vary but will let you forego paying back some or all of your student loans if you’re eligible. Two common types of federal loan forgiveness programs are Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness.
Public Service Loan Forgiveness (PSLF)
PSLF is a federal program for full-time employees that work for U.S. federal, state, local or tribal governments, U.S. military service or nonprofit organizations. You can also qualify by working part-time for multiple qualifying employers, as long as your work week totals 30 hours or more.
To be eligible for PSLF, you must make 120 qualifying monthly loan payments through an income-driven repayment (IDR) plan. Eligible loans include those under the Direct Loan Program. If you meet these criteria, you may be eligible to have your remaining federal student loan balance forgiven.
Teacher Loan Forgiveness
The Teacher Loan Forgiveness program assists teachers at low-income schools or educational service agencies working full-time for five consecutive years. You must meet the Federal Student Aid (FSA) standards as a highly qualified teacher to be eligible. The FSA’s requirements vary depending on whether you teach elementary or secondary school, as well as your level of teaching experience.
The basic requirements to be considered a highly qualified teacher include the following:
- A bachelor’s degree
- A state teaching certification
- No certification or licensure requirements waived
If you meet these requirements, you can have some or all of your federal direct or Stafford loans discharged. Full-time math and science teachers at secondary schools and special education teachers at elementary or secondary schools can get up to $17,500 discharged. If you qualify but teach another subject, you can get up to $5,000 of your loans discharged.
Non-federal student loan repayment options
If you don’t qualify for federal student loan forgiveness programs but still want to learn how to pay off your student loans fast, try a non-federal option. These non-federal programs will not forgive your remaining debt but can provide faster and more convenient ways to repay your loans.
Forbearance
Student loan forbearance may help if you’re overwhelmed by your loan payments. Forbearance lets you suspend your student loans or make payments that are smaller than your monthly minimum for a set period of time. Forbearance on federal student loans usually lasts 12 months, and you can renew for up to three years. However, forbearance on private loans is up to the lender — they can last up to 12 months but are not always renewable.
While forbearance can help you manage your student loan payments, it’s not a long-term solution. Forbearance is just a pause on payments while you complete school, an internship or a medical residency, or you may use it during financial hardship. Your loans will still accrue interest, even though you won’t need to make payments until the forbearance period is over.
You can apply for forbearance online or by calling your loan servicer. To qualify, you may need to submit proof of financial hardship.
Refinancing
Refinancing your student loans involves taking out a single loan from a private lender to pay off all of your existing loans. Your new loan will be the sole source of your debt, so instead of making multiple monthly payments, you’ll only have one.
Ideally, you should find a lender that offers a lower interest rate on your new loan, reducing your total cost over time. Lenders will determine your interest rate based on your credit history, debt-to-income (DTI) ratio, loan amount and repayment terms. Good credit and a low DTI will increase the likelihood of a lender offering you a lower interest rate.
Deferment
Deferment is similar to forbearance — it exempts you from making payments toward your student loans during economic difficulty. The main difference is that your loans may not accrue interest with deferment, depending on your student loan type. You can qualify for deferment in several ways, including unemployment, military service, economic hardship and cancer treatment. The period of deferment usually lasts up to three years.
The following types of loans will generally not accrue interest during deferment:
- Subsidized Federal Stafford Loans
- Federal Perkins Loans
- Direct Subsidized Loans
- The subsidized percentage of Family Federal Education Loan Program (FFELP) Consolidation Loans
Not all loans are exempt from accruing interest during the period of deferment. Loans that will gain interest during deferment are:
- Direct Parent Loans for Undergraduate Students (PLUS)
- Unsubsidized Federal Stafford Loans
- Direct Unsubsidized Loans
- The unsubsidized portion of FFELP Consolidation Loans
- The unsubsidized portion of Direct Consolidation Loans
Before applying for deferment, check your loan terms to understand if you’ll accrue interest.
Income-driven repayment plans
If you’re struggling to make your current payments, you qualify for PSLF or have a large amount of student loan debt with a low income or unemployed status, you might look into an income-driven repayment (IDR) plan. There are four different types of IDR plans depending on your federal student loans:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
An IDR plan will lower your monthly payments depending on your family size and income. You will pay 10% to 20% of your monthly discretionary income. Once you’ve paid into your IDR plan for 20 to 25 years, the government will discharge the remaining debt.
Each type of IDR plan differs slightly. With an IBR plan, you will pay 10% to 15% of your discretionary income, depending on when you took out your loan. If you took out your loan before July 1, 2014, you would pay 15%, but if you took out your loan on or after that date, you would only pay 10%. With an ICR plan, you will pay the lesser option of either 20% of your discretionary income or a fixed payment over 12 years, tailored to your income.
A PAYE plan usually requires you to make payments of 10% of your discretionary income for a repayment term of 20 years. The REPAYE plan is similar but specifies a term of 20 years for undergraduate loans and 25 years for graduate or professional study loans.
Perkins Loan cancellation
The Perkins Loan Program offered federal low-interest loans to students in severe need of financial aid. The government ended the Perkins Loan Program in September 2017, but if you have a Perkins Loan and continue to make payments, you may qualify for Perkins Loan forgiveness.
This forgiveness program offers partial or full loan cancellation based on your employment or volunteer service. The following positions may qualify you for Perkins Loan cancellation:
- Teacher in a school that caters to low-income students
- Special education teacher
- Math, science or foreign language teacher
- Bilingual education teacher
- Early childhood education provider
- Child or family services agency employee
- Title 1 school librarian
- Title 1 school speech pathologist
- Firefighter
- Public defender
- Nurse or medical technician
- Law enforcement officer
- Military service
- Volunteer for AmeriCorps or the Peace Corps
Perkins loans will also be discharged under certain situations, including:
- Death
- Bankruptcy
- School closure
- Military service-connected disability
- Total or permanent disability
- If you are the spouse of a 9/11 victim
Student loan debt consolidation
Consolidating your student loans is similar to refinancing, but there are some key differences. Federal loan consolidation only applies to federal loans, not private loans. You generally can’t consolidate private student loans with federal ones.
Unlike refinancing, you cannot reduce the interest rate on your student loans through consolidation. Instead, you will have a fixed interest rate that’s the average of all the loans you consolidate.
Disability loan discharge
If you are disabled, you may be eligible for Total and Permanent Disability (TPD) discharge if you took out a loan from the William D. Ford Federal Direct Loan Program (Direct Loans), the Federal Family Education Loan Program (FFELP) or Federal Perkins Loans. To qualify, you must complete a TPD discharge application and provide documentation showing that you are totally or permanently disabled.
Additional ways you can get rid of student debt
Other strategies for getting rid of student debt include paying off your loan’s principal faster to minimize accruing interest and filing for bankruptcy.
Double your monthly student loan payments for a quicker pay-off
Consider allocating more of your monthly budget to pay off your student loans. Paying only the monthly minimum takes the longest to pay off your debt. Your loans would accrue the most interest possible. Even though you’re paying less each month than if you increased your payments, the total amount you pay throughout the life of your student loans will be much larger.
Paying more than the monthly minimum is an excellent strategy for shrinking your principal debt balance and cutting down on long-term interest. A lower principal balance means less money spent on interest over time, resulting in a fast, legal path to eliminating your student loans.
Before taking this approach, communicate with your loan servicer to ensure your extra payments go toward your loan’s principal instead of future payments.
Consider bankruptcy
Bankruptcy is a last resort if you are overwhelmed with student loan debt. Consider bankruptcy only if you can’t make your loan payments on time, have defaulted on your loans and have pursued all other options. Filing for bankruptcy will negatively affect your credit score for seven to 10 years.
Chapters 7 and 13 are the most common bankruptcy options for individuals. Chapter 7 bankruptcy allows you to have your debts discharged after a court-appointed trustee sells your eligible assets to pay off as many debts as possible. Chapter 13 bankruptcy lets you retain all your assets, but you must submit and stick to a monthly repayment plan for three to five years.
Find the right option to reduce the student loans you owe
Paying down your student loans is a challenge. Understanding how student loans work and knowing your options for getting out of debt is essential. For some, federal loan forgiveness programs are available to help. Other non-federal options may be available, depending on your financial situation and your type of student loan.
Paying off your loan principal faster is a good strategy for all student loan borrowers. Finally, the worst-case scenario is filing for bankruptcy. Finding an effective method to tackle your student loans is the best way to secure a better financial future.