If you're struggling to pay down your student loan debt, it can feel like there's no end in sight. The average student loan debt for a bachelor's degree is $29,400, according to a recent CollegeBoard study. And if you pursue a graduate degree, your student debt can jump to three figures quickly.
Student loan debt can be a major drag on your finances, but there are ways to pay less on your debt. From qualifying for interest rate discounts to preventing interest capitalization, here are nine steps you can take to save money and potentially pay your student loans faster.
1. Make payments while you're in school
Most student loans let you postpone payments while you're in school and then for six months after you graduate. Depending on your loan type, you may accrue interest while you're in school, leaving you with more debt than you borrowed once you graduate.
"Get in the habit of paying the accrued interest while in school," says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. "Not only will that reduce total borrowing costs, but it will get you in the habit of making payments on these loans."
If you can afford it, you could also start making bigger monthly payments on your loans right away to pay them off faster.
Tip: The exception to this rule is federal Direct Subsidized Loans, which are available to undergraduate students with financial need. The government covers interest charges on these loans while you're in school, during your grace period and during other periods of deferment.
2. Sign up for interest rate discounts
Student loans are expensive as is, but the interest rates on your loan can cause them to grow exponentially. Lowering your interest rate can help you save money on your student loan debt. Many student loan servicers, including federal servicers, offer a 0.25 percentage point reduction on your rate if you sign up for autopay.
"[This] small interest rate reduction can add up over time," says Sarah Austin, policy analyst at the National Association of Student Financial Aid Administrators.
Some private lenders also offer rate discounts for other reasons. Online lender SoFi, for example, provides a 0.125% discount if you've already borrowed a SoFi loan in the past. Citizens offers a 0.25% discount to existing banking customers as a loyalty perk.
3. Pursue loan forgiveness and repayment assistance
Student loan forgiveness is a confusing topic right now, but check to see if you're eligible for any debt relief and repayment assistance programs. If you're a teacher, nurse or other public service worker with federal student loans, you may qualify for forgiveness after 10 years of payments through the Public Service Loan Forgiveness program. You might also qualify for relief through the Teacher Loan Forgiveness plan.
If you qualify for permanent disability, you might qualify to have your student loans discharged. You could also see your student loan balance wiped clean if you attended a school that was found to have defrauded students.
Many states also offer loan repayment assistance programs called LRAPs to professionals in shortage or high-need areas. California, Maine and Minnesota, for example, all have programs for healthcare professionals that offer thousands of dollars toward federal or private loan repayment.
Finally, some companies help their employees pay off student loans with a payment-matching benefit. Employers can offer up to $5,250 per year in student loan assistance tax-free and might offer this benefit to attract new talent. Check with your current employer about this benefit. If you're looking for a job, consider applying to companies that offer student loan repayment assistance.
4. Make extra payments on your debt
The longer you're in debt, the more interest you'll pay. Making extra student loan payments or paying more than the minimum could help you save thousands in interest.
Let's say, for example, that you owe $29,400 at a 5% interest rate. On a 10-year repayment plan, you'd make monthly payments of $312 and pay $8,020 in total interest charges. But if you increase your monthly payment by $100 per month, you'd get out of debt nearly three years sooner and save $2,453 on interest.
You can also sneak in an extra payment each year by making half-payments on your monthly balance every two weeks. By doing this, you'd end up making 26 half-payments or 13 total full payments each year. That's one more than the 12 full payments you'd make on a monthly schedule.
Using the previous example, if you make payments every two weeks, you'll pay your loans off a year ahead of schedule and save $935 on interest.
To afford extra payments, revisit your budget to see if there are areas of spending where you can cut back temporarily. You might also put gifts or an unexpected windfall toward your debt.
"Ask friends and family to give cash gifts for birthdays and holidays and apply it to the loans with the highest interest rates," suggests financial aid expert Mark Kantrowitz.
If you make extra payments on your loans, instruct your loan servicer to apply the payment right away. Otherwise, your servicer might save it for the following month's payment, which wouldn't help you repay your loans faster.
5. Switch to an income-driven repayment plan
Although paying off student loans faster may sound appealing, it's not realistic for many borrowers. If you need to save money on your student loan monthly payments, consider switching to an income-driven repayment (IDR) plan.
Income-driven plans, which include SAVE, PAYE, Income-Based Repayment and Income-Contingent Repayment, adjust your monthly payments to a percentage of your discretionary income.
Depending on your income and family size, you could qualify for a monthly payment as low as $0. Income-driven plans stretch out your payments over a longer timeframe, so you could pay more interest in the long run. However, your remaining balance can be forgiven at the end of your repayment term on an IDR plan.
SAVE is currently on hold, pending legal resolution. If you're currently enrolled in SAVE, your monthly payments have been paused. New applicants can't enroll in SAVE while the plan's legality is being weighed. Online applications for IDRs have been taken down for the time being, so if you want to switch from SAVE to another IDR, you'll need to fill out a paper application.
6. Watch out for interest capitalization
Interest capitalization is a sneaky event that can make your student loans cost more. If the interest on your loan is capitalized, it means that your unpaid interest charges are added to your principal loan balance. This can make your loans more expensive since you'll begin paying interest on a new, higher balance.
For example, let's say you take out a $75,000 student loan and accrue $500 in interest charges. If your interest is capitalized, you'd start accruing new interest on the total amount of $75,500, increasing the overall interest you'd pay.
Interest capitalization isn't common for federal student loans. However, it can happen after a deferment or grace period ends or if you move your loans out of an income-driven repayment plan. On private student loans, interest could capitalize after a deferment, forbearance or grace period ends.
To prevent interest capitalization, try to:
- Pay off interest charges while you're in school and during your grace period
- Avoid deferment or forbearance, if you can
- Recertify your income-driven repayment plan every year, if applicable
7. Claim the student loan interest tax deduction
If you're paying off student loans, you can claim a tax deduction for the interest you paid during the year for up to $2,500. To claim the full deduction, your modified adjusted gross income must be less than $75,000 as a single filer or $155,000 as a joint filer. The amount you can deduct starts to phase out above those income levels and disappears at $90,000 for single filers and $185,000 for joint filers.
8. Explore refinancing for lower interest rates
Refinancing private student loans could save you hundreds or thousands of dollars if you qualify for a lower interest rate than you have now. You'll need good credit and a stable income to qualify, or you'll have to apply with a creditworthy cosigner.
For example, let's say you have a $50,000 loan at a 10% interest rate on a 10-year term. If you can refinance at a 7% rate, your monthly payment would go down by $80, and you'd save $9,625 on interest charges over the life of your loan.
Through refinancing, you also have the opportunity to combine multiple loans into one and choose new repayment terms. You can refinance a private student loan with a private lender, but you cannot refinance a private loan into a federal student loan.
If you have federal student loans, you can refinance them with a private lender, but experts warn against this move, even if you can lock in a lower interest rate.
"If borrowers refinance federal student loans with a private lender, they lose many consumer protections and benefits that come with federal loans," warns Austin.
Some of the benefits you can miss out on include income-driven repayment plans, payment pauses, forgiveness programs and more. The process is not reversible, so avoid refinancing federal student loans if you're relying on any of those perks now or may need to in the future.
