The Trouble with Student Loans

Americans owe a total of $1.48 trillion in student loans - $620 billion more than the total credit card debt in our country.

So... why aren't we freaking out?

We’re taught to be nonchalant about our student loans from the moment we submit our applications. Find out what your passive payoff strategy is really costing you (and how to ramp up your repayment plan through the finish line).

Student Loans: The cost of avoidance

With so many young adults taking out loans to attend college, it can seem like an easy solution to earning a degree despite rising college tuition costs. However, by the time college graduates realize the importance of financial wellness, they’ve already paid thousands and thousands of dollars in interest accumulated on the original amount of their student loans. As the first financial experience of many Americans, the way we repay student loans is often a catalyst for an unhealthy money mindset long after the graduation cap comes off: avoidance.

Americans avoid taking on their student loans head-on for a few reasons: 1) everybody has them; 2) setting up a low monthly payment is easy to establish and even easier to forget about; and 3) the real cost of the loan isn’t included in budget decisions. Sure, student loan debt doesn’t negatively impact your credit score as much as credit card debt and it most likely accrues interest at a lower rate than the balance leftover from your latest shopping spree, but that doesn’t mean the real cost of prolonging the repayment of your college debt isn’t important.

In 2017, the average student loan amount was $39,400 with an average monthly payment of $351 per month (more stats here). Assuming an annual interest rate of 6.5%, the average borrower can expect to pay roughly $21,000 on top of the original loan amount, which will take approximately 14 years to pay off. If you’ve been making automatic payments on your student loans for years without thinking about the real cost of that debt, no one is judging you and you’re definitely not alone. The financial impact of student loan debt doesn’t have to carry into other areas of your life, either. Let’s dive in to how you got into this situation in the first place so you know the warning signs of a potentially costly financing option in the future.

Avoidance mindset #1: Everybody has them 

“How do I lower my monthly student loans payment?” “How can I lower my interest rate?” “Can I switch to an income-based repayment plan?” These questions all have one thing in common: they focus on the problems associated with student loan debt, like interest accrual and high monthly payments, rather than the actual loan balance. We’re so used to our friends and relatives making regular student loan payments that it can be easy to forget the end goal: getting rid of the student loan balance itself. My response? “What can we do to pay off your debt faster?”

Avoidance mindset #2: Low monthly payments

It’s so frustrating to land your first job and your first apartment only to have those pesky student loans lower the amount of money you have to spend on FUN. Many graduates want to get rid of that payment the simple way: by lowering it. Sitting on a minimum monthly payment program for years may make you feel like you’re making good progress on your loans while making room in your budget for the better things in life, but paying more towards your loan balance each month is the only way to make that payment go away as fast as possible (and for good).

Avoidance mindset #3: Ignoring the real cost

Graduating college is an exciting time. With so much information about the real world at once, it can be impossible to find time to read through those boring details in that student loan repayment packet. And budgeting? We want to figure out how much rent we can afford and what kind of car we can get – not how fast we can pay off our loans. The real cost of student loan debt – thousands and thousands of dollars in accrued interest – gets lost in the shuffle. That perfect apartment should come with some extra $$$ on the bill to account for what you’ll lose in interest over the life of your loan.

Great, I learned my lesson: student loans = more costly than they seem (thanks, interest).

 So, what can I do about my current student loans???

STEP 1: GET ORGANIZED

I know – it’s not an earth-shattering tip. But getting organized with your student loans is definitely the first step to figuring out how the heck you’re going to pay them off. There are a few pieces of information you need to figure out before you research the best options to get rid of your debt (or before you take your case to someone for help). The type of your loan depends on the lender: the federal government or a private entity. Federal loans include the following: Federal Perkins Loan, Direct Subsidized Loan*, Direct Unsubsidized Loan*, and Direct PLUS Loan. Details on each of these loans can be found here. (*Also called Stafford or Direct Stafford Loans)  You have federal loans if you are making payments through the following servicers: CornerStone, EdFinancial, FedLoan Servicing (PHEAA), Granite State (GSMR), Great Lakes, MOHELA, Navient, Nelnet, OSLA, or VSAC. Contact information for federal loan servicers can be found here. If your loans don’t fall under any of the information above, you likely have private loans. Common lenders include Sallie Mae, Citizens Bank, Wells Fargo, and Discover (to name a few). Not sure? Your best bet is to pull your credit report, which will have all of your loans listed, from annualcreditreport.com (DON’T pay for your credit report unless you absolutely have to – you can get it here once a year for FREE). 

• NOT SURE IF YOU HAVE FEDERAL STUDENT LOANS? CHECK ONLINE WITH THE FEDERAL STUDENT AID OFFICE.
• NOT SURE IF YOU HAVE PRIVATE LOANS? GET YOUR FREE CREDIT REPORT AND FIND OUT.

After you’ve used the information above to find all of your loans, you’ll want to log into the loan servicer websites (or create an account) to find out details about your current payment plan and what repayment options are available for you. Repayment options for federal loans should be provided on your loan servicer’s website but you can find details about options for all federal loans (including which loans are eligible) here. You’ll likely have to contact your private loan servicer to get details on your available repayment options for private loans.  

STEP 2: KNOW YOUR OPTIONS

Repayment options for federal loans generally give you more options if you can’t meet the minimum monthly payment or if you work in a certain industry. For example, you can apply for an Income-Driven Repayment Optionthat will cap your monthly payment at a percentage of your pay. After 20 or 25 years (based on the program), your remaining student loan debt will be completely forgiven. If you work in public service, you may be eligible for Public Service Loan Forgiveness (PSLF), in which your remaining debt is forgiven after ten years of payments.

In addition to payment options, you may also be eligible to change the characteristics of your federal student loan debt. Multiple federal loans can be consolidated into a Federal Direct Consolidation Loan that gives you one monthly payment and a single interest rate. Direct Loan Consolidation makes you eligible for Income-Driven Repayment Options, including PSLF. However, if you are already making payments under an Income-Driven Repayment Option for your current loans and you consolidate them, you will lose the payment credits associated with those loans. Additionally, federal loan consolidation extends your payment period, meaning you’ll likely pay more over the life of your loan repayment than you would before consolidating.

Federal and private loans can be refinanced, in which a bank pays off your current loan amounts and starts a new, single loan under a new, lower (or you wouldn’t refinance in the first place) interest rate. The benefits of refinancing your student loans focus on simplification and paying lower interest: many college graduates enter the workforce with multiple federal and private loans with interest rates ranging from 4% to 11% and quickly become mentally exhausted from keeping track of all those payment due dates. If you have federal loans, you need to be extra careful about refinancing because you will become ineligible for any income-based repayment options, including PSLF. For some borrowers, it may make sense to refinance only their private loans and leave their federal loans be.

• STANDARD REPAYMENT: Repay the principal balance plus interest over a set period of time, likely ten years.
• INCOME-DRIVEN REPAYMENT: Your monthly payment is capped at a percentage of your discretionary income. After 20 or 25 years, any remaining debt is “forgiven” (discharged). If you work in public service, you may be eligible for Public Service Loan Forgiveness (PSLF), in which your remaining debt is forgiven after ten years of payments.
• CONSOLIDATING YOUR LOANS: Multiple federal loans are consolidated into one Federal Direct Consolidation loan so you only have one monthly payment. You’ll gain access to income-driven repayment options but could lose access to programs available to you under your current loan schedule.
• REFINANCING YOUR LOANS: You open a single loan with a new lender and use it to pay off multiple federal or private loans. Your new loan has one monthly payment at a new (lower) interest rate, which is good because you can pay off your balance faster and accrue less interest over the life of the loan, but you will lose eligibility for any federal loan income-driven repayment or forgiveness programs.

STEP 3: DO THE MATH (KIND OF)

If your loan servicer doesn’t offer free consulting on which student loan options are the best for your specific situation, you’ll have to do some math to figure out what your current payment plan looks like and what you need to change to get on a payment plan that is the best for you (or at least a little easier to stomach). Your best bet is using an Excel spreadsheet to at least list out all of your loan balances, interest rates, and minimum monthly payments. From there, you can use a payment calculator (like this one from Student Loan Hero) to figure out how much interest you can save by adding extra money to your monthly payments. You can also use Excel to calculate expected interest paid over the life of your loan (GET MY FREE TRACKING SHEET HERE). Once you have all of your loans in the same sheet, you can see which ones are going to be the most expensive (i.e. accrue the most interest) and which ones are going to take the longest to pay off in your current payment plan.

STEP 4: THE DECISION

You’ve organized all of your student loans in one spreadsheet with important characteristics highlighted (like interest rate and forgiveness eligibility). You’ve learned about your options for repayment plans, including forgiveness options, and refinancing. With your college debt clearly laid out in front of you, do you feel ready to make decisions about what to do to get rid of them fast without breaking the bank? Here are some tips that should help guide you in the right direction.

• Pay more than you need to: Your minimum monthly payment should be different than the one you’re required to pay. The lowest possible payment you should make each month is the one your budget can afford – aka where can you reduce spending to have more room for higher student loan payments? It might seem miserable and awful to have to give up some fun purchases every month to pay down your loans faster, but you will thank yourself in the long run. Just think of how much better life will be once those loans are GONE!
• Make bi-weekly payments Get paid bi-weekly? Make a payment on your student loans each paycheck (you can make bi-weekly payments if you get paid monthly, too). Split your normal monthly student loan payment (which should be as high as you can afford) in half and make that your new bi-weekly payment amount. By doing this, you’ll pay off your loan faster and pay less interest over the life of your loan. Learn more here.
• Make sure extra payments go towards principalWhen you make extra payments towards the principal balance of your loan, you reduce the amount that can accrue interest. This is good! But, sometimes your loan servicer will apply extra payments towards the interest and fees that accrued since the last time you made a payment and THEN apply it towards the principal balance. This might not seem like a huge deal, but overtime you miss out on saving on interest that could have been avoided if the extra payments had gone solely to the principal balance. It’s a good idea to find out how your extra payments are being applied and ask what you need to do to have them go towards principal only (sometimes you have to send a formal letter – here’s a sample). If your lender won’t (or can’t) change the way extra payments are applied, make your extra payment at the same time as your monthly payment. This way, you are covering any interest accrued and any fees for the month and then all of your remaining payment goes towards principal. Sidenote – sometimes there are fees for extra payments (I’ve never personally experienced this but it does happen) so make sure you ask about that, too. 
• Get interested in interestPay attention to what interest rates are doing. When you consolidate your federal loans, the fixed interest rate on your new loan is the weighted average of the interest rates on the loans being consolidated. Private lenders offering refinancing options using interest rates that are based on market trends. A lender who advertises a low 2.0% interest rate for student loan refinancing probably gives that interest rate to, like, no one. Getting a refinancing quote is free and doesn’t impact your credit score (but you will receive A LOT of marketing emails from the lender who gave you a quote). If you aren’t worried about losing out on federal loan benefits like income-based repayment programs that lead to loan forgiveness, you may be able to get a lower interest rate if you refinance your federal loans through a private lender than if you consolidate them, but only if the market interest rates are low and your credit score and payment history are favorable enough to award you said low interest rate. Nerdwallet is a great resource for tracking student loan interest rates – they update this page monthly to show you what to expect when refinancing your loans.
• Look at the big picture: I graduated college in 2011 with 8 different loans. I had no idea what any of them meant (Stafford? Unsubsidized? Smart Option?) so I took the advice of a family friend and refinanced. All of them. Without looking at the characteristics of each loan individually. Then, when interest rates lowered, I did it again. I looked at ONE indicator (interest rates) instead of taking the time to look at the big picture. I could probably have paid off some of the smaller loans with high interest rates MUCH faster than I did after refinancing. I made plenty of money and could have chosen a less expensive apartment and prioritized student loan debt repayment instead of my lifestyle expenses. Lesson learned: ALWAYS look at the big picture when weighing your debt repayment options instead of making a rash decision based on what someone else did. Your situation is unique (and important) and only you can really decide what is right for you!
• Go easy on yourself: As you just read, I made mistakes. We ALL make mistakes. If you feel like you messed up your student loan repayment plan, go easy on yourself. Now that you’re coming up for air, be proud of the fact that you are taking steps to get back on track! It’s not your fault that none of us were prepared for the misery that is student loan debt and you don’t have to recover from it alone. In fact, there are 44 million Americans right there with you.