Paying off a student loan balance can seem overwhelming, but you may have options for changing your repayment schedule or the amount you pay each month. It all depends on the kinds of loans you have.
Repayment options for federal vs. private loans
- Private. These loans come from a bank, credit union, or other lender. Their interest rates are usually higher than federal student loans. Some have fixed interest rates. Others have variable interest rates, which can increase or decrease over the life of the loan. Their repayment terms are much less flexible.
- Federal. These loans come from the government. Their interest rates are relatively low. And the rates are fixed for the life of the loan. These loans offer flexible repayment terms based on your financial situation. A quick word about student loan forgiveness programs. While it's true that the government sometimes will clear the balance of a federal student loan, these cases are far and few, and you need to be on a specific repayment plan in order to qualify for forgiveness.
Sacrifice more now (if you can) to owe less later
You don't even have to make formal changes to the loan agreement. Just put extra money toward the loan with the highest interest rate. Be sure to specify to the provider that you want the payment to be applied toward the principal—your remaining balance. With this approach, you can pay off the loan early and save money on interest payments. The higher the interest rate, the greater the potential savings. If you have additional student debt, once you pay off that loan, you'll have more financial flexibility to prioritize the loan with the second-highest interest rate, and so on, until you're student loan debt–free.
If you can't, don't worry—there are other (income-based) options
Specific to federal student loans, if your income makes it hard to pay off your debt, you can apply for an income-driven repayment plan at studentaid.gov (under the "Manage Loans" menu, click "Lower My Payments"). Most federal student loans have at least 1 income-driven repayment plan. If you qualify, you can reduce your monthly payment, maybe even to 0.
But what if my loans are private?
You can contact your lender directly. They may be willing to work with you to help you avoid falling behind on your payments.
Hit pause with forbearance and deferment
Forbearance or deferment is a temporary pause in payments on your student loans. Technically, forbearance means interest will continue to build up while your payments are paused, meaning your student loan debt is growing while you're taking some time off from making payments. Deferment, on the other hand, may pause interest, depending on the kind of loan you have. Many lenders use the 2 terms interchangeably. So if you're looking for a break from making payments, ask how interest will be handled during that time.
Different lenders have criteria for deferment and forbearance
Here are some of the most common ways to qualify:
- Financial problems, like a job loss
- Serious medical issues
- Active military duty
- Attending school at least half-time
Federal student loans are far more flexible when it comes to deferment and forbearance than are private lenders. For instance, with some federal loans, interest won't pile up while your payments are on hold. That's not an option with private loans.
Refinancing and consolidating: Replace old debt with new debt
- Refinancing: When you refinance, you pay off an existing loan with a new loan—hopefully with better terms.
- Federal student loans are not great candidates for refinancing. Their interest rates are already relatively low, so it would be hard to find a lower rate. Plus, federal student loans make it much easier to lower or postpone your monthly payments to suit your financial situation.
- Private student loans might warrant refinancing if you can get better terms with a new loan.
- Consolidation: When you consolidate, you combine several loans into one. This can simplify your monthly payments, but it won't get you a better interest rate. Consolidation does reset the loan term, so you may end up with a lower monthly payment. If you do consolidate, tackle federal and private loans separately. That way, you can keep those federal loan benefits.