Millennials are still sitting on a mountain of college debt.
Student loan debt has steadily increased over the past decade, with total debt reaching as high as $1.4 trillion in 2017, ballooning into the country’s second-largest source of consumer debt behind housing.
A report from the Brookings Institute shows that a trend is developing among these debt holders: They’re taking longer to repay loans, if they’re repaying them at all.
While paying off college loans are difficult enough, the interest on them is what prolongs the repayment process because it takes longer to pay off the original loan amount.
Minimizing the interest-paid on student loans can be the decision one makes today that will lead to long-term wealth building as Nathan Greene, certified financial planner for Shoemaker Financial, puts it.
Greene and other financial planners pinpointed the top three strategies that will reduce the headaches of paying off interest on student loans.
Debt Snowballing
Debt snowballing is a debt-reduction strategy that is well suited for millennials with multiple student loans because of its simplicity.
“Once that loan has been aggressively repaid, its payments can then be rolled to the next loan, and so-on down the line,” Greene says.
Financial planners suggest this strategy:
- Order your loans from the smallest to the largest.
- Pay the minimum amount on all loans, except the smallest one.
- Devote as much money as you can to the smallest loan until it is completely paid off.
- Repeat steps 2-3, each time with the smallest debt until all debts are paid in full.
Greene stresses that with student loans, paying off the smallest debt is not always the best option. Mathematically speaking, the debt with the higher interest should be paid off first so you don’t end up paying more money on a loan.
However, you might find that paying off a smaller loan is better for you to build momentum in knocking out one chunk of debt at a time.
“Many student loan holders don’t have a spending problem, but it is still psychologically a more successful approach than dropping money into a large balance,” Roy Janse, a certified financial planner for DeHollander and Janse Financial Group, explains.
Keep in mind that student loans will have different interest rates, minimum payments and payment schedules so Greene suggests looking into a repayment plan that best fits your needs.
For direct loans from the government, the Federal Student Aid Office lists out the repayment plans it offers and provides information on each’s eligibility requirements and monthly payment structure.
Repayment plans that are configured based on your income such as the Pay As You Earn plan provide more flexibility to choose how much you pay and when. It does have some drawbacks. You have to update the government on your financial standing every year, so Greene advises people go with the 25-year extended repayment program because it can be less of a hassle.
Refinancing
Refinancing your loans is another popular choice for those who don’t qualify for loan forgiveness programs because this option usually leads to you saving more money down the road.
This alternative involves taking your loans to a lending agency, which in turn will issue you a loan contract with a new interest rate (usually in the 4%-7% range) and repayment schedule that is determined by a combination of your income, credit-worthiness and debt-to-income margin, among other criteria.
You can also look into a shorter repayment timeframe because you will usually get a lower interest rate. On the flip-side, a longer repayment timeframe might be more helpful to those who can only devote a small amount of money each month, but it will take longer to pay off the principal balance.
The tradeoff of refinancing your loans comes when it’s time to pay. You’re locked into a more rigid repayment plan and also sacrifice some loan forgiveness benefits, Greene says.
Refinancing is attractive because you’ll get objectively lower interest rates than from the federal government thanks to competition among lenders, Greene notes.
Loan Forgiveness Programs
Qualifying for a loan forgiveness program can make you feel like you’ve won the lottery.
A wave of relief washes over you because this means that part or even all of your debt is gone. It vanishes. Goodbye, see you never. You will never have to pay that money back.
Unfortunately for those who refinanced their loans, they do not qualify for these programs, but those on one of the repayment plans from the government this might work for you.
You’ll have to check to see if you qualify for any of these programs and what their requirements are as some have very specific nuances.
One of the more popular options is the Public Service Loan Forgiveness program. All you have to do is make 120 on-time payments, be on one of the income-based repayment plans and work for a non-profit or government entity. After that, 100% of your remaining debt will be forgiven.
How to Play Today’s Risky Markets. Click here and register for free to watch what top experts from Bank of America, Fisher Investments, Invesco and Wells Fargo say smart investors should do now.
