How to Manage Student Loan Debt

Posted December 22 2014
by PenFed Team
Image of hand holding small graduation hat in front of jar of money

If you’ve taken out student loans, you’ve probably resigned yourself to years of payments … and interest … and more payments … and more interest … But sometimes doubling down on your repayment plan isn’t the smartest strategy. You may need to regroup, rethink, and renegotiate your student loan for either the short or the long term.

If you’re still a student, of course, you’re still in the thick of things. Even so, you can seize the moment by making a student budget you can live with now. Stick to that budget through thick and thin; it’ll keep you out of trouble at a time when your rainy day fund might only handle one raindrop or two

Keep Calm and Make a Plan

Once you’ve graduated and find yourself staring down the barrel of student loan repayment, don’t panic—and don’t fall for repayment plan and counseling scams. You don’t need to pay for advice you can figure out yourself.

If you’re unsure about the details of your repayment plan, check your loan paperwork and compare the information against the details at the U.S. Department of Education’s Federal Student Aid site. One thing to keep in mind: You don’t have to stick with the repayment plan you originally chose or were assigned. Compare the plans to see if your current repayment plan still works best for you. And if you still need help sorting things out, turn to a reputable organization like the nonprofit StudentLoanHelp.org.

Not feeling like you really need to review the situation? A look at the cold, hard numbers might change your mind. Try your hand at this student loan calculator to see how long it will take to pay off your loan based on your current payments, and find out how much you’ll be paying in interest. For example, if you borrowed $40,000 at 4.66% (the recent rate for Direct Unsubsidized Loans) and pay $250 per month, you’ll be making payments for 20 years and 11 months—and paying more than $22,000 in interest on top of your total loan amount.

Payment Alternatives

You might want to investigate refinancing your loan. Refinancing might give you access to better interest rates, lower monthly payments, or the ability to consolidate your student loan with other debt. Evaluate the advantages and disadvantages of refinancing thoroughly, and don’t get taken in by offers from shady companies offering student loan refinancing that sounds too good to be true. It undoubtedly is.

Military personnel could be eligible for loan deferment. Deferment allows you to postpone or lower your payments if you’re back in school again, serving on active duty in the military, or experiencing financial hardships or other extenuating circumstances. Your loan could even be completely forgiven through a process called forbearance if you become permanently disabled, file for bankruptcy (although this isn’t an automatic route to forbearance), begin teaching in a low-income school, volunteer for the Peace Corps, or fall under other specific circumstances. Find out more about student loan deferment and forbearance.

There’s one more alternative exit strategy if you’ve already made a good chunk of payments on your loan. You might be eligible for student loan forgiveness if you work full time in the public sector and have made at least 120 qualifying student loan payments.

One final strategy: Don’t forget to claim qualified student loan debt on your federal income taxes. You could reduce your taxable income as much as $2,500.

No matter what you end up paying on what plan, making your payments on time every month remains the single smartest thing you can do for your student loan and your financial security. Long months and years of on-time payments will build a robust credit score, while missing payments can collapse your credit score. Defaulting on your student loan leaves a stain on your financial record that persists for years.