Here at the Wallet Wise Guy, our hope would be that you would be able to graduate with no student loans. That’s why we’ve prepared our extensive guide on how to do just that. However, we realize that for many of our readers that ship has long since sailed. What you need to know is how to get OUT of student loan debt.
You are not alone. The statistics show that student loans are crushing an enormous number of Americans today in a major way:
- Americans owe over $1.6 trillion in student loans.
- Average student loan debt for 2018 bachelor’s degree graduates was $29,900.
- Over 44 million Americans have student loan debt.
- Even with a multitude of repayment methods available, 1.1 million borrowers defaulted on their student loans in 2016, up 17% from 2015.
These numbers are startling. They show that the student loan train in America is racing completely out of control. Student loan debt is now second only to mortgages as the highest source of household debt. And it’s only a matter of time before it takes over the top spot if student loan costs continue to rise at such ridiculous rates. So suffice it to say that student loans are a REAL problem for countless Americans today.
But there is hope! You can overcome the student loan monster that may be hiding in your OWN financial closet. Below, we explain how in our “Complete Guide to Getting Out of Student Loan Debt.”
1. Recognize that Student Loan Debt Is…DEBT.
I’ve often fielded questions from guys and girls around my age who are eager to start reaching their financial goals. They will ask me questions similar to the ones you see below.
“Hey, Clint, I’m debt free except for my student loans. Now is it ok for me to buy my first home?”
Or…
“So now that I’m debt free except for my student loans, would you recommend that I start investing each month?”
Do you see the point? Many Americans today don’t view students loans the same way they do credit card debt or their car loan. Why? I think a major reason for this is because so many former students are enrolled in federal repayment programs with payback timelines of 20 or 25 years. With payoff dates that far into the future, student loans begin to feel like another mortgage in our lives. And it’s ok to invest in the stock market when you have a mortgage, so why not when you still have student loan debt?
But mortgage debt is different than virtually all other debt because you receive an actual, physical asset that nearly always goes up in value over a long enough period of time. In other words, in 5 or 10 years you could almost always sell the home and pay off the debt, plus hopefully make a profit.
NEWS FLASH: You don’t receive any actual physical asset with your student loans and you can’t sell them.
What this means is that you need to stop viewing your student loans like mortgages and you need to view them more like credit cards and auto loans. Every month that you let them hang around by paying minimum payments you are paying more and more in interest.
Now you may be thinking, “But aren’t there student loan forgiveness programs for people in certain situations?” Yes, there are, and we will certainly discuss them in this guide. But the truth is many of us will not qualify for those programs. And if you are one of the ones who don’t, your student loan needs to be added to your debt snowball and you need to start attacking it.
2. Federal vs. Private Loans
The first place to begin when you decide to start knocking out your student loans is to first identify if they are federal, private, or a combination of the two. Federal and private loans have some key differences, as shown below.
Private Student Loans
- Funded by a bank, credit union, or school
- Typically have higher, variable interest rates
- Payments can start while the student is still in school
- More inflexible with repayment plans
Federal Student Loans
- Funded by the federal government
- Will typically have a lower, fixed interest rate
- Have payments that begin several months after graduating or leaving school.
- Offers a variety of repayment options, including several that are income-based.
At first glance, it would appear that it’s a no-brainer that you are in a better situation if your student loans are federally funded rather than private. However, before you jump and down with joy there is a major caveat that you need to be aware of: federal student loan collectors have a level of ungoverned power and control as is not seen in any other area of consumer debt. Let me explain.
Federal Student Loan Collectors Can:
- Garnish wages without a court order! (up to 15% of disposable pay)
- Seize tax returns
- Deny grants and student loans
- Even take a portion of social security payments!
Oh yeah, and one more thing: there is NO statute of limitations with federal student loans. And since both private and federal student loans are not dischargeable in bankruptcy proceedings, this essentially means one thing:
Federal student loans NEVER go away.
I say this not to sound harsh, but because you need to know the truth. If you have a federal student loan you NEED to start paying on it. Trying to hide away is the worst thing that you can do. You need to face this thing head on and start making a plan to slay this beast.
With private student loans, the situation is much different. The lender must receive a court order before it can begin to garnish wages (and some states have banned wage garnishment altogether on private loans).
Also, with private student loans, it’s a bit of a toss-up whether or not the lender will decide to pursue a judgment or not. “When it comes to enforcement, a private loan is no different from credit card debt. Some lenders are suing, some aren’t and they have to win [to collect],” says Joshua R.I. Cohen, an attorney who advises people on student loan repayment options (Credit.com).
Finally, there IS a statute of limitations with private student loans and it varies from state to state. In short: federal loans are the better deal unless you end up in default on your student loans – in which case they become the MUCH worse deal.
3. Beware of Student Loan Scams
If you are feeling overwhelmed by your student loans, it can seem like a godsend when you see an ad on Facebook or Google for a company that can “negotiate” with the government to get you student debt relief.
They will spend a great deal of time establishing themselves as “insiders” and “experts,” and convincing you that because they know all the tricks and loopholes they can lower your monthly payment or consolidate your loans.
For a small fee, of course.
Paying for Free Services
According to NerdWallet, the average borrower who pays for loan helps ends up paying around $613. But here’s the thing: borrowers are paying these companies for services that are available to everyone for FREE. To apply for a federal loan income-based repayment plan or consolidation, all you have to do is visit studentloans.gov.
Now, in fairness, it’s not actually illegal to charge for a service that people could do themselves for free. At its best, using these services is just a big waste of money for you, the borrower. However, there are many of these student loan relief businesses that do act unscrupulously.
Tell-Tale Signs of a Student Loan Scam
Here are some of the most common dirty tactics that scam companies will try to pull:
- Asking for payment over the phone. This is illegal. By law, they cannot accept payment until after they have lowered or settled your loan.
- Asking for personal information. If they ask for an FSA ID or Social Security number or to sign a power of attorney agreement, run the other way!
- Acting like you have a short time to make a decision: Student loan relief options are not like mortgage interest rates. You don’t need to get “locked in before it’s too late.” There are NO student loan options that are only available for a short time. Don’t let someone pressure you into using their services by manufacturing a sense of urgency.
- Promising to get your loans forgiven now: There are real federal student loan forgiveness programs, as we will explore below, but none of these programs offer immediate forgiveness. Each program has a different number of years of on-time payments that must elapse before you can become eligible for forgiveness – ranging from 5-25 years. And if they tout “Obama Student Loan Forgiveness,” hang up the phone. There is no such thing,
If you do feel like you would like to talk to someone about your student loan situation, then I would recommend that you find someone from a National Foundation for Credit Counseling agency near you. If they charge at all, it will be a much more affordable fee, and you can be sure that they will truly be giving you advice that is in your best interest.
4. Income-Driven Repayment (IDR)
As mentioned above, if you have a private loan, your repayment options are rather limited. Federal student loans, however, offer income-driven repayment (IDR).
With income-driven repayment plans, your payment will generally be 10% of your discretionary income. And if you have a balance remaining at the end of your repayment period, it will be forgiven.
To learn more, read our guide to income-driven repayment.
5. Student Loan Forgiveness
While it may seem wonderful that the government offers such flexible repayment options, you have to keep in mind that the longer you don’t pay off your student loans, the more interest you will pay. But I know what many of you may be thinking: “But I won’t have to pay all that interest because I only plan to pay my student loans until I qualify for student loan forgiveness.” Well, let’s talk about that.
If you want to see a list of every possible student loan forgiveness program, Student Loan Hero put together an exhaustive list on their site. We are going to look at 5 of the most common student loan forgiveness options:
Income-Driven Repayment Plan Forgiveness
As mentioned above, federal income-driven payment plans offer forgiveness for the remaining balance on your loan once you have reached the end of your payment plan period.
For example, with IBR, after making consistent payments for 20 or 25 years (depending on when you borrowed), any remaining loan balance will be forgiven.
However, if you end up increasing your income during that time (which you hopefully will) your monthly payments will go up. In some circumstances, this may cause you to have no balance remaining at the end of your payment plan.
To find out how long it will take you to pay off your loan and whether or not you will likely have any balance remaining to be forgiven at the end of your term, use the StudentLoans.gov repayment estimator.
Public Service Loan Forgiveness (PSLF)
As the name indicates, Public Service Loan Forgiveness (PSLF) is designed for people who those serving in some area of public service. For those who work at qualifying jobs, you need to make 120 on-time payments to qualify for 100% loan forgiveness.
One key point to note is that payments do not have to be consecutive. Let’s say you make 60 payments while working for a qualifying employer, you change jobs to a non-qualified employer, but then a year later began working for a qualified employer once again. In this situation, you would only need to make 60 more payments in order to qualify for PSLF.
How to Qualify for PSLF
Which jobs qualify? All federal, state, or local government agency positions and jobs at not-for-profit 501(c)(3) organizations.
One bummer for all you pastors out there though: religious positions do not qualify for PSLF unless your main job is NOT spent on religious instruction or worship services. A couple of examples of church jobs that would qualify would be maintenance or groundskeeping positions.
To learn more, read our Public Service Loan Forgiveness guide.
Military Loan Forgiveness
Not only does the military offer tuition assistance, but it also offers loan repayment assistance at the rate of one-third of the loan for each year of full-time duty served. The maximum loan repayment is $65,000!
Teacher Loan Forgiveness
In order to qualify for teacher forgiveness, you must teach at a qualifying low-income school for 5 years. For this program, the 5 years DO have to be consecutive. To see a list of qualifying schools, check out the Teacher Cancellation Low Income (TCLI) Directory.
Unfortunately, there are only two loan types that are eligible for this program:
- Subsidized and Unsubsidized Direct Loans
- Subsidized and Unsubsidized Federal Stafford Loans
To apply for Teacher Loan Forgiveness, you must complete the Teacher Loan Forgiveness Application.
Nurse Loan Forgiveness
The NURSE Corps offers loan repayment to nurses who work in an eligible Critical Shortage Facility in a high need area, or in an accredited school of nursing.
They will pay for 60% of your unpaid nursing education debt over two years, with an option to extend to a third year for an additional 25% of the original balance.
So, in total, you could receive a maximum of 85% of loan repayment! Check out the NURSE Corp’s loan repayment page for more information.
6. Refinancing
If you have private student loans, there’s a good chance you could lower your cost by refinancing.
Here’s why. When you first applied for your loans as a young college student, you were likely given a high credit risk rating. Now, if you have several years of responsible credit history under your belt, you may qualify for much better interest rates.
What about federal student loans? You can’t refinance them directly, but you can, however, move federal student loans into private student loans with lower rates.
This could land you a much better interest rate, but there are a couple of things you need to be aware of before making this move:
- When you move a federal student loan into a private loan you lose all of the repayment and forgiveness options that are offered with federal loans.
- Federal loans have a fixed interest rate, while private loans often have variable interest rates. This means your interest rate could rise over time.
These drawbacks would also apply if you consolidated a few federal and private loans together into one consolidated private loan. We discuss loan consolidations in greater depth below.
Related: 6 Critical Questions to Ask Before Refinancing Your Student Loans
7. Loan Consolidation
If you have more than one student loan, you may be wondering if it would be a good idea to get all of your loans consolidated. In general, I’m not a huge fan of loan consolidations because it can cause borrowers to feel like something was accomplished when, in reality, money was just being moved around.
However, there are times when it can be a wise move. Here are some things to keep in mind if you are considering this as part of your student loan payoff strategy:
Are You Getting a Lower Interest Rate?
Believe it or not, if you are someone who has a good history of making on-time payments on private loans, some private loans companies will offer you a lower interest rate if you choose to consolidate your loans with them. This would technically be considered a refinance and is my favorite reason for consolidating student loans.
If your total interest rate is going up after the consolidation, I would not recommend it.
NOTE: You cannot lower your interest rate when consolidating federal loans.
Will it Impact Your Eligibility for PSLF?
Depending on your situation, consolidating your federal student loans could either help you or hurt you in your efforts to qualify for Public Service Loan Forgiveness. Let’s take a look at both situations:
How It Could Help
If you are someone who currently has a Parent PLUS loan or a Perkins Loan, you are not eligible for PSLF. However, if you move either of these loans into a consolidated federal Direct Loan, you would become eligible, and you could begin working on your 120 on-time payments.
How It Could Hurt
When you take out a federal consolidated loan, the clock resets as far as PSLF goes. All previous payments no longer count, and you have to start over again at working towards your 120 on-time payments.
This means, unless you are early on in your repayment process, you should not take out a federal consolidated loan when you are working towards PSLF.
Consider the Overall Cost, Not Just the Lower Monthly Payment
There are a variety of ways that loan consolidations can make your monthly payment lower. One scenario would be having your repayment period moved back.
- Perhaps you would move from a 10-year repayment plan to a 20-year repayment plan, or even longer.
- Another situation where consolidating your loans could lower your monthly payment would be if it made you eligible for an income-driven federal repayment plan.
In both of these situations, your monthly payments would go down, but you will end up paying a lot more in interest over time. In the long run, it will actually save you a lot of money to stick with your current repayment plan if you can afford the monthly payments.
ONE FINAL NOTE: Federal consolidations can only be done ONCE. So be very careful and thoughtful about your timing.
8. What About Forbearance and Deferment?
In some circumstances, you can receive forbearance or deferment which allow you to temporarily stop making your loan payments or to temporarily reduce the amount of your student loan payments.
The biggest difference between the two is that with deferment you may be able to avoid having to pay for the interest that accrues during the deferment period, while this is not possible with forbearance.
In order to receive forbearance, you will need to contact your loan servicer to apply.
- You will also need to be able to prove that you are facing a major financial difficulty, like medical expenses or the loss of a job.
- Unlike deferment, forbearance is typically designed to provide relief for a short period of time.
Deferment is very similar to forbearance but is usually a longer-term option. One of the most common situations in which borrowers qualify for deferment on their student loans is when they go back to school. I personally know someone who went back to school just to avoid having to repay his student loans that were finally requiring payments to be made.
Let me make myself clear: I DO NOT recommend this strategy. Why?
Going back to school should be a business decision alone.
If you truly believe going back to school is a necessary step in order to advance your career, then, by all means, do so. But if you are going back to school only to avoid paying off your student loans…STOP.
Taking out more student loans is NOT a strategy for getting out of student loan debt.
9. Employer Assistance
This is a new trend that it just starting to pick up steam. Last year, Forbes found that student loan assistance was the hottest employee benefits of 2017.
Typically, employees have to pay tax on any assistance that they receive; but even this may change in the future as one company has been allowed by the IRS to make matching 401k contributions for all employees who direct at least 2% of their paycheck toward student loan repayments.
10. State-Level Initiatives
In order to attract young workers, a few states now offer student loan tax credits to state residents. These could land you thousands of dollars of student loan repayment assistance. Some of the credits are even refundable, meaning that if the tax credit is more than what you owe, the government will cut you a check for the difference.
Choosing a new hometown for the sake of student loan benefits is a step few would be willing to take. But if the idea doesn’t scare you, moving to one of these states really could help you pay down your student loans much faster.
Many states also offer various student loan forgiveness programs. These are usually offered to employees who work in industries where the state wants or needs more youth to join the workforce.
For a list of each state’s student loan forgiveness programs, check out this list from TheCollegeInvestor.
Conclusion:
As we discuss in “How to Get Out of Debt,” the two top debt reduction strategies are (1) raise your income and (2) lower your expenses. Then, throw the money that’s left over at your student loans. It’s really that simple. What could you do to raise your income or lower your expenses?
- Could you get some extra hours at your day job?
- How about eating out less?
- Could you get a weekend job?
- Have you shopped your car insurance in a while?
- Could you start an evening side hustle, like driving for Uber/Lyft or delivering pizzas?
- Could you live without cable for awhile?
Think outside the box and do whatever it takes! Here’s the thing:
You don’t have to be in student loan jail for the next 2 decades of your life. You can break free and slay this dragon!
But you have to take action. So get up and start making choices today to kick student loan debt out of your life!