The American student debt crisis stands close to $1.8 trillion in the year 2023.
The cost of higher education is astronomically high in the U.S., which forces students to take out loans. The cost of living is increasing exponentially, while the minimum wage remains stagnant. This gap is what leads students into a debt trap.
But, we’re here to help to steer clear of student debt.
Here are the 6 best ways to go about paying off student debt:
1. Take any discount that comes your way
Most banks offer a discount if you set up autopayment for your loan. Keep in mind this will not be a huge discount, but more in the likes of 0.25% – 0.5%.
Even if it seems like a paltry amount, take the discount if you’re confident you can make the monthly payment.
Setting up an autopayment will also ensure you don’t forget to make payments. This will prevent loan default.
2. Pay biweekly as opposed to monthly
No, paying twice a month isn’t a miracle solution to avoiding student debt, and no, you don’t have to double the amount you pay monthly. Just split the money you pay in a month into two. There is a secret benefit to this.
Making payments once in two weeks means you pay 26 times in a year. That is 26 half payments as opposed to 12 full payments. That is 13 full payments as opposed to just 12.
So, if you manage to keep up with biweekly payments, you would’ve made a month’s worth of extra payment in a year. Since this extra money will be spent in small amounts, you won’t even miss it from your regular finances.
3. Look for loan forgiveness opportunities
If you go into certain professions, like public service, you can apply for loan forgiveness. If you’re a lawyer, you can win grants to pay off student loans. But, be advised, this is easier on paper.
You have to meet some requirements to qualify for loan forgiveness. This includes working for an eligible employer, or making qualifying loan payments.
Before getting into the profession, see what those requirements are and assess if you can commit to them. Lots of people choose professions banking on loan forgiveness, only to not qualify for the program.
Another way to have a portion of your loan forgiven is through an income-driven repayment plan. Depending on the program, you’ll have a 20 or 25-year repayment term. If you hit that term making proper payments, the balance is forgiven.
Read the fine print before you commit to a repayment plan.
4. Consider loan refinancing
Loan refinancing is when you take out another loan, which has more favorable terms, to pay your outstanding loans. This is only a win if the newer loan has better terms than the last one. This includes a lower interest rate and a shorter or longer repayment term (depending on your income status).
By refinancing multiple loans into one, you can help avoid missing out on payments and landing in loan default.
5. Dedicate extra money towards loan payment
If you didn’t know already, you earn tax refunds by paying student loans. When your refund amount gets credited, hold back on the shopping spree. Dedicate the amount towards your loan repayment.
Similarly, if you get a pay raise, manage your monthly spending with your previous paycheck amount. Commit the raise percentage to the loan.
Making such bulk payments is the best method to pay off student loans faster.
6. Work on your budget
Write down all of your expenses, and sort them into two categories: Necessary for survival and necessary for entertainment. Food, rent, and other nonnegotiable expenses go into the first category. Dinners with friends, impulse buys, and similar expenses go in the second.
From the second category, try to make at least one cut per month. You can pledge to give up on alcohol or forego your Netflix subscription and put that money into your loan repayment. Doing so can easily net you an extra $70 per month.
Here are some other creative methods to save money:
Learn to cook
Eating out, on average, costs about $13. If you order in, then you’ll have to factor in delivery charges as well. On the contrary, cooking your own meals costs about $4, so that’s a $9 savings. Granted, you will have to dedicate time and effort to prepare the meal, but that’s a compromise worth making.
Even switching one meal a day from eating out to cooking yourself can save you $270 per month. It’s a big amount that can likely cover a lot of your loan payment.
Travel by bikes
Gas prices are on a steady rise. If your city does not offer a good public transportation system, a bike is the next best thing. Having a bike is a three-in-one solution to getting around, getting exercise, and saving a fortune on gas and parking.
Think about it. As of March, 2022, the average price of a gallon of gas is around $4.00 per gallon, and the average car gets 24MPG. If you have a 6-mile commute to work each day, you’ll be spending about $10 a week on fuel, or $520 per year. And that doesn’t take into account driving other places, oil changes, taxes, insurance, etc. It’s easy to save upwards of $1,000 per year by switching to a bike.
How to dig yourself out of loan default?
The abovementioned student loan repayment methods should work if you stick to the plan. But, if you’ve somehow gone down the cliff of student debt, don’t panic, you can still claw your way out.
If you’ve taken out multiple student loans, it’s important to stay on top of them. If not, your loan can default without you even realizing it.
One of the worst consequences of student loan default is getting a bad credit score. Without a good credit score, you will not be able to make down payments towards a car or a house. So, getting yourself out of debt quickly is crucial.
Here are some ways to get student loans out of default:
1. Student loan rehabilitation
This is arguably the best way to get out of loan default. Student loan rehabilitation is the only method that removes the default from your credit report.
Loan rehabilitation is always possible on federal loans, but it is allowed only once in the repayment process. On private loans, it may not always be possible. Ensure that you check with your agency when you apply for the loan.
If you’ve applied for loan rehabilitation, you will have to agree to make 9 consecutive payments in 10 months. The amount to be paid is determined by your annual income. Once you make the 9 payments, your loan will not be a default. To keep it that way, sign up for a repayment plan.
2. Student loan consolidation
This is a quicker way out of default than rehabilitation. You need to apply for a direct consolidation loan. Then, you can either sign up for an income-based repayment plan, or 3 consecutive and on-time monthly payments.
Once your loan gets out of default, you have eligibility for benefits like student loan forgiveness. But, with consolidation, the default isn’t removed from your credit report.
3. Repay in full
Paying off student loans in full is the third, most unrealistic way to get out of loan default. But, if you chance upon a pot of gold or win a big-money lottery, then this is the quickest way to recover from student loan debt.
Once you get out of a loan default, it is essential to keep yourself that way. Then, your next order of business should be to bring your credit score back up. Student loans and debt are scary prospects, but if it is managed properly, loans aren’t the end of the world.
