Find the best way to get rid of your student loan debt based on your financial situation

Student loans are now the second largest source of debt in the United States, after mortgages. They are also an endless source of stress for borrowers trying to remove them. The good news is that there are several solutions that can help borrowers pay off student loans more effectively. In fact, a study by the Government Accountability Office (GAO) found that about half of federal student loan borrowers overpay. You just need to figure out how to get out of student loan debt effectively, given your budget and personal credit situation.

The solutions below explain how to get rid of student loan debt more effectively. There are solutions to help lower monthly payments to fit your budget and allow you to qualify for federal loan forgiveness. At the other end of the spectrum, there are also solutions that expedite repayment, so you can get out of debt faster while minimizing total interest.

What factors determine eligibility for different solutions?

The options you choose to get out of debt start by focusing on the outcome you want to achieve:

  • Need lower monthly payments that work better for your budget?
  • Do you want to pay off your loans quickly, which also helps reduce the total interest charges applied to your debt?

Those are basically the two options you have. Lower payments generally mean that the term (duration) of your loans will be extended. You’ll stay in debt longer, but your payments will be more affordable, month after month. On the contrary, if you opt for a faster payment, the monthly payments will be higher. However, since there are fewer months to apply interest charges, you would reduce the total cost.

Beyond your removal goals, there are a few other factors that determine which solutions to choose:

  • The types of loans you have: federal or private
  • The status of your loans (for example, if they are in default)
  • Personal income level and budget
  • credit score
  • Your job

It is important to note that federal repayment solutions only apply to federal loans. You cannot use a federal payment plan for your private debt. You can use private loan solutions for federal loans. However, this is generally not recommended as it turns those loans into private debt.

Employment only matters when it comes to federal student loan forgiveness programs. In most cases, you must be employed in some type of public service profession to qualify.

The best student loan repayment plan if you have limited cash

If you have federal loans and a limited budget, then hardship-based repayment plans are the best solutions. These plans set monthly payments as a percentage of your Adjusted Gross Income (AGI). They also take into account the size of your family. So the lower your income and the more dependents you have, the less you will have to pay.

The cheapest plan is Pay As You Earn (PayE). For the average borrower, monthly payments are usually about 10% of your income. However, if you live below the federal poverty line for your state, your payments may drop to zero. You are even credited for making “qualified payments” during your hardship period. Payments only increase if you improve your situation. So if you are facing extreme difficulties, Pay as You Earn is the way to go.

There are also two other programs that work on a difficulty based system:

  • Income-Based Repayment (IBR) typically sets your monthly payments at about 15% of your AGI.
  • The Income Contingent Payment (ICR) generally establishes monthly payments in the order of 20% of your AGI.

Also, keep in mind that you must enroll in one of these hardship-based programs if you want to qualify for federal loan forgiveness.

How to pay off student loans quickly and minimize total costs

There are two federal payment plans that allow you to pay off your loans faster. They are the standard payment plan and the graduated payment plan. The standard reimbursement is the one you will be automatically enrolled in, in the event that you do not choose another plan. It interrupts the payment and sets it to fixed payments based on your total debt. The term is 10 years.

Gradual amortization begins with slightly lower than standard payments. But they increase by 7% every two years. So at the end of your repayment period, the payments may be higher than standard. This option starts out low to match entry-level salaries, and then grows as you advance in your career.

In both cases, this minimizes interest charges compared to hardship-based programs. Those options generally have terms of 20-30 years. So by paying off your loans faster, there are fewer months to apply interest charges. However, these payment plans do not help you qualify for lower interest rates. The rate will always be a weighted average of your original loans.

The only way to lower interest rates on student loans would be to use private consolidation. This would allow you to qualify for a lower rate based on your credit score. However, keep in mind that federal loans have relatively low rates compared to private loans. Therefore, only borrowers with excellent credit would be able to beat the federal rates.

If you have excellent credit, you may decide to consolidate all of your federal and private loans together. In this case, look for a shorter term that offers monthly payments you can afford. This will allow you to get out of debt faster while minimizing interest charges.