21 ways to crush student loan debt repayment

Follow this 21-point game plan and you can be on track to pay off your student loans faster.

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Follow this 21-point game plan and you can be on track to pay off your student loans faster.

Begin your assessment with these 3 questions:

  1. Do I understand all my student loan options?
  2. What is my student loan repayment game plan?
  3. What specific action have I taken?

If you can't answer all these questions, then it's time to get informed.

Here's what you need to know.

Understand all your student loan options

When it comes to your student loans, do your homework.

Rule #1: "Doing homework" may not be your first choice (particularly if you have graduated long ago), but it can save you thousands of dollars in interest costs.

Rule #2: Stop being another debt statistic.

According to Make Lemonade, there are more than 44 million borrowers with $1.5 trillion in student loan debt in the US alone.* The average student in the Class of 2016 has $37,172 in student loan debt. The average student in the Class of 2017 has almost $40,000 in student loan debt. Approximately 11% of student loan debt is in default or over 90 days delinquent.

Let's focus on 4 primary ways to manage and repay your student loans.

  • Student loan refinancing
  • Federal student loan consolidation
  • Income-driven repayment plans
  • Student loan forgiveness

There are other strategies but you can focus on these 4 to frame your student loan action plan.

Student loan refinancing: Game plan

Rule #3: If your goal is to lower your interest rate and lower your monthly payment, then student loan refinancing is your best option.

Rule #4: How it works. When you refinance student loans, you can replace your current federal student loans, private student loans, or both with a single, new student loan that has a lower interest rate and lower monthly payment.

Rule #5: Eligibility. To qualify for student loan refinance, you'll need a strong to excellent credit profile (typically a 650 credit score or higher; the average approval rate at top lenders is above 700), current employment and good income, and a demonstrated history of financial responsibility, among other characteristics.

Rule #6: Considerations. If you have federal student loans and decide to refinance, you won't have access to federal student loan repayment plans or forbearance.

However, when you refinance your student loans, most high-quality lenders offer unemployment protection for student loan repayment as well as other benefits such as a lower interest rate.

Rule #7: Check your new rate. Remember, you can check your new student loan interest rate in 2 minutes (with no impact to your credit score) for free.

If you are happy with your new interest rate, you can complete an application in about 10-15 minutes.

Take action: Compare monthly payments and calculate your savings with a student loan refinancing calculator.

Federal student loan consolidation: Game plan

Federal student loan consolidation is a tool that enables you to combine your existing direct, federal loans into a single Direct Consolidation Loan.

Rule #8: Consolidation enables you to organize all your separate student loans—each with different loan balances, interest rates, and monthly payments—into a single student loan, interest rate, and monthly payment.

Rule #9: The interest rate for a Direct Consolidation Loan is equal to a weighted average of the interest rates on your current student loans, rounded up to the nearest 1/8%.

Rule #10: Most importantly, this means that a Direct Consolidation Loan will not lower your interest rate or your monthly payment.

Rule #11: Overall, with a Direct Consolidation Loan, you will make the same total monthly payment that you made prior to consolidation.

Rule #12: There will just be fewer payments to make, student loan servicers to manage, and payment due dates to remember.

Rule #13: Therefore, a Direct Consolidation Loan helps you organize your student loans, but does not directly save you any money.

Take action: Federal consolidation is free. So, there is no need to pay a student loan company to consolidate your federal student loans.

Student loan repayment: Game plan

If you have federal student loans, the federal government offers several repayment plans to pay off your student loans. The standard repayment term is 10 years.

Many of these repayment plans are income-driven such as PAYE or REPAYE and enable you to lower your monthly payment based on your income. Plus, with certain federal repayment plans, the remaining balance on your federal student loans can be forgiven after 20 and 25 years.

Rule #14: While a lower monthly payment may seem attractive, remember that interest is still accruing on your student loans. So, be careful when enrolling in an income-driven repayment plan.

Rule #15: Remember that if you don't wait the full 20 or 25 years for student loan forgiveness, you pay more for your student loans.

With an income-driven student loan repayment plan, your monthly payment will be lower and the time period to repay your loans will be extended. However, your total payment will be higher, given the interest that still accrues on your total loan balance.

Rule #16: Therefore, pay attention to your total student loan balance and not just your monthly payment.

Rule #17: Here is a rule of thumb: all things being equal, the longer you take to pay off your student loans, the more interest you are being charged. If you need an income-driven repayment plan, be mindful of how long you use it.

Rule #18: An income-driven repayment plan does not lower your interest rate or your overall payment.

Rule #19: Federal repayment plans are not available for private student loans. If you want to lower the interest rate on your private student loans, you should consider student loan refinance.

Rule #20: If you want to repay your student loans faster, pay a higher monthly payment. While it will cost more in the short term, you can save substantial interest costs.

Take action: Like federal consolidation, enrollment in a federal student loan repayment plan is free. So, there is no need to pay a student loan company to enroll for you.

Student loan forgiveness: Game plan

In addition to student loan forgiveness through income-driven repayment plans, there are 2 primary ways to have your student loans forgiven: Public Service Loan Forgiveness and Teacher Student Loan Forgiveness.

The Public Service Loan Forgiveness Program is a federal program that forgives federal student loans for borrowers who are employed full-time (more than 30 hours per week) in an eligible federal, state, or local public service job or 501(c)(3) non-profit job who make the majority of 120 eligible on-time payments under an income-driven repayment plan.

Currently, there is no private student loan forgiveness (even if you are a teacher or work in public service).

Rule #21: Watch out for student loan scams such as "Obama Student Loan Forgiveness," which doesn't exist.

Take action: If you plan to enroll in Public Service Loan Forgiveness, make sure to complete an Employment Certification Form.

Call to action

Understand all your options. Develop your student loan repayment plan. Take action.

The result: You will be on a clearer path to becoming debt-free and joining the path to financial freedom.

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1., Student Loan Debt Statistics For 2018.
Article copyright 2018 by Forbes. Reprinted from the August 23, 2018 issue with permission from Forbes.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and are not legally affiliated.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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