Did you know more than 46 million Americans have student loan debt? College costs have steadily risen over the last three decades. Increased demand for higher education is the primary cost driver. Today’s college student owes an average debt of $30,000.
The USA has an accumulated student debt of about $1.75 trillion. This loan balance encompasses private and federal loans. The latter accounts for around 92% of the total outstanding student loans. Private student loans occupy the remaining 8%.
This debt crisis impacts both public and private four-year institutions. More than 50% of their learners have an outstanding education debt. The weight of these debts can hinder financial progress and delay life’s milestones.
Repaying student debts can feel like a never-ending cycle and strain your budget. The most profound repayment challenge is high interest rates.
Many students also complain of complex repayment terms. For others, balancing loan repayment and other financial obligations is a headache.
The inability to manage these debts can cause long-term financial strain. The good news? You don’t have to be a prisoner of debt.
You can implement proactive strategies to overcome debt and attain financial freedom. Consider budgeting, refinancing, and consolidation.
Discover how these top strategies help you overcome the student debt burden.
Understanding student loans
Student loans are either federal or private. Each has its unique eligibility criteria, application process, and terms.
Federal student loans
Federal loans originate from the government through the US Department of Education (ED).
These loans typically attract lower interest rates than private loans. They also usually boast more flexible repayment plans. The lender bases the loan amount on the applicant’s financial need.
You must fill out the Free Application for Federal Student Aid (FAFSA) form to qualify for a federal loan. Below are the two main types of federal student loans.
Direct subsidized loans
Direct subsidized loans suit undergraduate students with proven financial needs. The information you feed into the FAFSA determines the formula for your loan amount. The ED covers your loan interests:
- While you’re still in school, at least part-time
- During the first six months after you exit school
- During your deferment periods
Subsidized loans come with amount limits that you can receive each academic year. The sum usually varies based on what year you are in college. It also matters whether you’re dependent or independent.
Direct unsubsidized loans
Direct unsubsidized loans don’t depend on your financial need. Your school determines the borrowing amount based on your expenses, like tuition. The college can also base this amount on your pre-existing financial aid.
The loan interest accumulates while you attend school. It later features in the repayment amount post-college.
Private student loans
Private student loan debt comes from credit unions, banks, and other financial institutions. It’s not so much calendar-bound as you can apply any time. There are no restrictions to how you use the money either.
Most private loans aren’t need-based like their federal counterparts. Some lenders make it mandatory to pass a credit check as the bare minimum. Proving your creditworthiness speaks to your loan repayment capacity.
The beauty of these loans is their higher borrowing limits than federal loans. Their repayment periods also differ. Some lenders may allow repayment post-graduation. Others require payments while in school.
Remember, interest rates on federal loans could differ from year to year. They only become fixed once you receive the loan funds. The US Congress determines these rates annually per the 10-year Treasury note yield. The current rates stand at:
- 5% for direct subsidized loans
- 5% for direct unsubsidized loans (undergraduate)
- 05% for direct unsubsidized loans (graduate)
Repayment terms vary based on the specific type of loan. The standard repayment period for most federal loans is ten years. You also have the option to select a different plan if this one doesn’t fit your budget. Some borrowers base the repayment pace on their income.
Loan forgiveness options are available to federal loan borrowers. They forgive part or all of your debt balance under specific conditions. Most of these solutions forgive debt after a 20–25 year repayment period.
Federal student loan borrowers can also qualify for forbearance or deferment. These two options suspend your loan payment for a while. They only apply in hardship situations like losing a job or a health crisis.
Remember, interest continues to accrue during forbearance but not for deferment. Defaulting on a student loan can attract severe consequences like:
- Damaged credit
- Lost eligibility for forbearance and deferment
- Denied access to additional federal student aid
- Withheld tax refunds
- Wage garnishment
Budgeting and financial planning
Budgeting and financial planning are must-have skills to manage your student debt. Developing a well-reasoned budget keeps your expenses in check. Financial stability can become elusive without this strategic approach.
Besides controlling expenses, a budget ensures timely loan repayments. You can allocate enough funds to debt repayment as you track your bills accurately. It’s easier to achieve your monthly savings goals by sticking to a budget. This extra cash pays down your student loans.
A budget also helps you plan and understand your monthly cash flow. It becomes easier to identify areas of cutting back. You can spend the spare cash to reduce your student loan debt.
Ready to embrace frugality and work toward a debt-free life? You don’t have to sacrifice everything you enjoy, just the excesses. Here are a few tips:
- Reevaluate your needs and wants. Be honest with yourself in determining what you want vs. what you need.
- Cook at home. Do you dine out regularly or order takeout? It can eat into your budget substantially. Why not just prepare a nice meal at home and save up over time?
- Shop smart. Purchase groceries and household items in bulk. Take advantage of discounts and coupons to cut expenses.
- Lower energy expenses. Start by turning off lights and appliances when not in use. Install energy-efficient bulbs and adjust thermostat settings to lower power consumption.
- Cancel unnecessary subscriptions. Reassess your monthly subscriptions and cancel the unessential ones to save money.
Once you’ve maximized budget cuts, consider boosting your income. There are various strategies for increasing earnings, like part-time jobs or side hustles.
The beauty of part-time jobs is that you get to do them while still attending college. They help you lower your borrowing limit while boosting loan repayments. Check if your college offers any on-campus gigs. You can also opt for summer jobs or online work.
Don’t underestimate the power of legitimate side hustles. They favor students as you can do them during your free time. They don’t run on an employer’s fixed schedule. Most such jobs also allow you to set your rate. Popular side hustles with college students include:
- Freelance writing
- Pet sitting
- Dog walking
- Social media management
- Online tutoring
Loan repayment options
Did you know the average student borrower repays their debt fully within 20 years? But why should you be bound for two whole decades when you can be free? Why not shorten this timeline with trusted loan repayment options?
There are various loan repayment plans, but they don’t work the same. Below are the most popular options.
Standard loan repayment
The standard plan is the most basic of all options. It divides your loan balance into 120 standard payments. You pay a similar amount each month for 10 years.
Note that payments can’t drop below $50 with this plan. Check out ED’s loan simulator to estimate your repayment amount.
The standard plan favors those who want to take the shortest repayment time. A shorter duration usually minimizes interest charges.
This loan repayment boasts several pros, including:|
- Simplicity
- Predictable payment schedule
- Potential for faster payoff
- Lesser interest payments than lengthier repayment options
The main downsides of a standard repayment plan are:
- Potential for higher monthly payments based on the loan amount
- Limited flexibility in case of fluctuating income
Income-driven loan repayment
Income-driven repayment (IDR) plan ties loan payments to a portion of your income. It allows you a repayment duration of 20–25 years. Once this term ends, you may qualify for loan forgiveness for the debt balance.
An income-driven plan is ideal if you strain to meet your monthly payments. It translates to a more manageable obligation. An IDR plan comes in four varieties:
- Income-based repayment (IBR)
- Pay As You Earn (PAYE)
- Saving on a valuable education (SAVE), formerly REPAYE
- Income-contingent repayment (ICR)
These four plans share a few similarities. They cap payments to 5–20% of your discretionary income. They may also forgive your loan balance after 10–25 years of monthly payments.
Tip: Choose the IDR plan that offers the lowest monthly payment.
The pros of an IDR plan for student loan debt include:
- Flexible, with up to four repayment options
- More affordable for borrowers with limited income, thanks to capped percentages
- Possibility of loan forgiveness
Some drawbacks of IDR plans are:
- Longer repayment term than a standard plan
- Potential for higher overall interest
Graduated loan repayment
A graduated loan repayment plan offers lower initial payments that increase gradually. The amount you pay rises every two years for ten years. This option suits those who expect their income to grow over time. They gain leverage for speedy repayment.
Note: While your repayment amount grows, it can’t be more than triple any past payments.
The main upsides of graduated loan repayment are:
- Flexibility for borrowers with increasing income
- Lower initial payments than a standard plan
Its main downsides include:
- Potential for higher overall interest
- Unsuitable for those with stagnant or decreasing income
Only federal loan student borrowers qualify for loan forgiveness. The eligibility criteria vary based on the specific program but may depend on the:
- Loan type
- Repayment plan
- Employment type
- Payment history
The typical loan forgiveness process flows as follows:
- Identify your loan types.
- Choose your repayment plan.
- Make timely qualifying payments.
- Verify your employment status.
- Submit your loan forgiveness application.
Refinancing and consolidation
Loan refinancing and consolidation are two popular solutions for managing student debt. They can mean the same thing for personal and credit card debts. But they’re different in the context of student loans.
Student debt refinancing replaces one or more existing loans with a new single debt. Think of it as converting all your current loans into one simplified payment. It typically occurs through a private lender.
Why refinance your student loans? You could get lower interest rates and better repayment terms. It’s the fastest way to streamline all your student loan payments. It eases the pressure on your monthly financial obligations.
Note that both private and federal student loans qualify for refinancing.
Student debt consolidation only applies to federal loans. It runs through ED’s Direct Loan Consolidation program. It functions almost like refinancing with the exclusion of private loans. You convert one or more existing student loans into a single new one.
The main benefits of student loan debt refinancing include:
- Money savings. Your new loan may carry a lower interest rate than the previous one. You end up paying less interest charges over the life of the student debt.
- Manageable monthly obligations. A longer repayment duration can result in reduced monthly payments. It lightens your immediate financial burden, simplifying your budgeting.
- Streamlined finances. Ever dealt with multiple lenders? The pressure to track every payment differently can overwhelm you. The beauty of one monthly payment is that it’s easier to manage.
Refinancing student loans can also carry some drawbacks, like:
- Loss of federal benefits and protections. Federal student loans typically boast repayment benefits like forgiveness. Refinancing them equates to swapping them for private loans. You may lose some federal programs and privileges.
- No guarantee of better terms. Landing a favorable lender may be tricky with a lower income or credit score. Most companies demand proof of steady income to prequalify you for refinancing.
Before refinancing or consolidating your student loan debt, consider factors like:
- Personal financial goals. Why do you prefer refinancing? Do you want a lower interest rate or to simplify repayment?
- Interest rates. Compare your current loan rates with those of the refinancing lender. Are the potential savings worth the risk and associated costs?
- Credit score. This metric shows your refinancing ability. Most lenders typically require a minimum credit score of 620. Higher scores may attract better terms.
- Fees. Evaluate refinancing charges like origination and closing costs. Are they worth the potential savings?
- Loan terms. Your debt repayment duration affects your monthly payments. A lengthier period has lower payments but a higher overall interest.
Seeking financial assistance and resources
Financial assistance programs exist to help individuals with need. They usually encompass government and nonprofit initiatives. Online fundraising platforms like GoFundMe are also reliable options.
Federal and state governments offer these programs in different categories:
- Individuals
- Families
- Businesses
These schemes typically provide food, income, housing, or healthcare services. They target those with low wages to help with basic living expenses.
Some programs go beyond basic needs and offer grants, scholarships, and tuition reimbursement. This educational assistance may also come from nonprofit organizations and learning institutions.
Here are the critical considerations in applying for grants, scholarships, and tuition reimbursement:
- Due diligence. Do a thorough research on the various scholarships and grants available. Narrow them down to government, nonprofit, and school programs.
- Check whether you qualify. Analyze the eligibility criteria for each program that interests you. Review specific requirements like financial need or academic achievement.
- Submit a well-prepared application. Once you find a program whose criteria you meet, prepare your submissions. Gather necessary documentation like academic transcripts and personal statements.
- Be punctual with applications. Be keen on application deadlines and make submissions ahead of time. Most institutions usually reject late applications.
- Apply for multiple scholarships. Many applications can boost your chances of receiving financial aid.
- Seek appropriate guidance. Do you have questions or need assistance during the application process? Don’t hesitate to contact financial aid offices at the concerned institutions.
- Stay positive and determined. Scholarship applications can get competitive. Don’t allow setbacks or rejections to discourage you. Keep seeking new opportunities and refining your application materials.
Where do you get credible financial education and counseling to manage your debt? Here are a few popular resources to leverage:
- Subscribe to a magazine or newspaper. These publications open you to new, dynamic ideas and topics. The Wall Street Journal, Kiplinger, and Barron’s are excellent reads to consider.
- Bookmark relevant websites. There’s a vast amount of online content to hone your financial literacy. Sites like Investor.org or United Financial Network provide you with credible updates.
- Participate in financial education workshops. Most colleges and universities offer seminars on budgeting and managing student loans.
- Student loan counseling. Free counseling services like those by the ED are worth trying. They expose you to the fundamental workings of a loan, its terms and conditions, and how to avoid defaults.
Maintaining a positive mindset and persistence
The road to freedom from student loan debt can be long and daunting. There will be moments of discouragement and frustration. Unwavering persistence and a positive mindset are what keep you going. Staying motivated during the repayment process has benefits, like helping you:
- Keep your eyes on the prize
- Attain financial freedom
- Support emotional well-being
Besides motivation, these strategies can help you overcome discouragement and setbacks:
- Celebrate milestones. Break down your student loan into smaller goals to track and celebrate milestones.
- Find a support system. Keep the company of encouraging and positive people. Motivation comes from them believing in your ability to succeed.
- Anticipate challenges. Unexpected setbacks or expenses are inevitable. Accommodate them in your budget to avoid derailed progress.
- Become flexible. As you expect life’s curveballs, prepare to adjust your plan as needed.
- Reframe and tune out negative thoughts. Negative self-talk can be a distraction, so challenge it. View your debt burden as a temporary obstacle you’re working to overcome.
The good news is that you’re not alone in this student loan debt journey. Many navigate it enduringly and make it out of the woods.
Below are a few success stories to inspire your hope.
Lance Cothern
Lance Cothern’s wife had a total student loan of $80,000. They joined efforts and cleared the debt in under three years. Their top strategies were frugal living and sourcing extra income.
This couple stuck to only basic expenses, shunning any extras. They started with a minimum monthly payment of $700 before advancing to $10,000.
Melanie Lockert
Melanie Lockert had a total student loan debt of $81,000. She resolved to become debt-free within a record four years in 2013. She only made a meager $12 per hour at the time.
Lockert supplemented her event planning business with freelance writing. She doubled her income, helping her clear her student debt faster.
Work with trusted financial experts toward a debt-free future
Student loan debt doesn’t have to be a death sentence. You can overcome its pressure with proactive strategies. These tactics are the first step in financial freedom, as they help lighten your debt load.
Start by understanding your loans and budgeting effectively. From there, navigate repayment options and seek financial assistance.
You can still take systematic steps to become debt-free, even without a high salary. Others have done it and succeeded. Some venture into part-time jobs while schooling whereas others opt for side hustles.
What’s your strategy going to be? Choose a suitable repayment plan whether you’re in federal or private debt. Go further and explore scholarships and grants to help ease your financial burden.
Work with experts from the United Financial Network for a debt-free future. We’re a trusted resource for life-changing financial insights. Contact us today for a personalized assessment of your financial situation.
