10 Tips for Managing Your Student Loan Debt

The burden of student loans can make it more difficult for college graduates to buy a home, spurring much political debate about the problem. Meanwhile, Americans must develop a plan to pay their student loans, which is critical to their long-term financial health.

1. Calculate Your Total Debt

As with any type of debt, the first thing you should know is the total amount that you owe. Students often graduate with several loans, potentially both federally sponsored and private, having arranged for new financing each year they were in school.

Only by knowing the amount of your total debt can you develop a plan to pay it down, consolidate it, or possibly apply for and receive forgiveness.

2. Know the Terms

As you sum up the size of your debt, become familiar with the terms of each loan. Each may have a different interest rate and different repayment rules. You’ll need this information to develop a payback plan that avoids extra interest, fees, and penalties.

3. Review the Grace Periods

As you pull together the specifics, you will notice that each loan has a grace period. This is the length of time that you have after graduation before you need to start paying back your loans.

Grace periods will differ depending on what type of loan you have. For example, Direct Subsidized, Direct Unsubsidized, and Federal Family Education Loans (FFELs) have a six-month grace period, while Perkins Loans give you nine months before you have to start making payments.

4. Explore Loan Forgiveness

In some extreme circumstances, you may be able to apply for debt forgiveness or the discharge of your student loan. You could be eligible if your school closed before you finished your degree, you become totally and permanently disabled, or if you’ve declared bankruptcy.

Another less drastic but more specific option for student loan forgiveness is if you have been working as a teacher or in another public service profession.

In June 2023, the U.S. Supreme Court ruled that the Biden administration’s plan to forgive student loan debt was unconstitutional, but President Joe Biden responded to that ruling by announcing that the U.S. Department of Education would pursue an alternative plan to provide student debt relief, this time using the Higher Education Act as its basis.

5. Explore Alternative Repayment Plans

If you have a federal student loan, you may be able to call your loan servicer and work out an alternative repayment plan. Some of the options include:

• Graduated repayment: This increases your monthly payments every two years over the 10-year life of the loan. This plan allows for low payments early on, accommodating entry-level salaries. It also assumes you will get raises or move on to better-paying jobs as the decade progresses.
• Extended repayment: This allows you to stretch out your loan over a longer period of time, such as 25 years rather than 10 years, which will result in a lower monthly payment.
• Income-contingent repayment (ICR): This calculates payments based on your adjusted gross income (AGI) at no more than 20% of your income for up to 25 years. At the end of 25 years, any balance on your debt will be forgiven.
• Pay as you earn (PAYE): This caps monthly payments at 10% of your monthly income for up to 20 years if you can prove financial hardship. The criteria can be tough, but once you’ve qualified, you may continue to make payments under the plan even if you no longer have the hardship.

While these plans and other repayment options may lower your monthly payments, bear in mind that they also may mean you’ll be paying interest for a longer period. Additionally, keep in mind that these options are for federal student loans and not private ones.

6. Consider Consolidation

Once you have the details, you may want to look into the option of consolidating all your loans. The big plus of consolidation is that it often reduces the burden of your monthly payments. It also may lengthen your payoff period, which is a mixed blessing, as this will mean more interest payments.

What’s more, the interest rate on the consolidated loan may be higher than what you’re paying on some of your current loans. Be sure to compare loan terms before you sign up for consolidation.

There is another crucial factor to keep in mind before consolidating: You may lose some benefits from Direct PLUS (Parent Loan for Undergraduate Students) loans, such as rebates and discounts.

7. Use the Debt Avalanche Strategy

As with any debt payoff strategy, it is always best to pay off the loans with the highest interest rates first. One common method is to budget a certain amount above the monthly required payments, then allocate the overage to the loan with the biggest interest bite.

Once that loan is paid off, apply the total monthly amount on that loan (the regular payment plus the overage) to the loan with the second-highest interest rate, then the third-highest, and so on until you’re free of debt. This is a version of the technique known as a debt avalanche.

Example of a Debt Avalanche Strategy

Suppose you owe $300 per month in student loans. Of that, a $100 payment is due on a loan with a 4% rate, $100 is due on a loan with a 5% rate, and $100 is due on a loan with a 6% rate.

Instead of budgeting $300 to pay your student loans, you would budget $350, applying the extra $50 first to the 6% loan. Once that loan is paid off, you would allocate the $150 you used to pay it to the 5% loan, now paying $250 each month for that loan. After you wipe out the 5% loan, the final loan at 4% would be paid at the rate of $350 per month until all of your student debt is paid in full.

8. Pay Down Principal

Another common debt payoff strategy is to pay extra principal whenever you can. The faster you reduce the principal, the less interest you pay over the life of the loan.

Since interest is calculated based on the principal monthly, less principal translates to a lower interest payment.

In rare cases, you may have excess student loan funds left over after your education. For example, perhaps you received a scholarship that you hadn’t planned on. While you could use those funds for something else, the ethical and financially sound approach is to apply the funds back to your debt. Also, in the case of government-subsidized loans, you could face legal action if you misuse the funds.

9. Pay Automatically

Federal student loans and many private lenders offer a discount on the interest rate if you agree to set up your payments to be automatically withdrawn from your checking account each month. For example, participants in the Federal Direct Loan Program get a 0.25% discount.

10. Defer Payments

If you are not yet employed, you can ask your student loan lender to defer payments. If you have a federal student loan and you qualify for deferment, the federal government may or may not charge you interest during the approved deferment period, depending on your loan type.

If you don’t qualify for deferment, you may be able to ask your lender for forbearance, which allows you to temporarily stop paying the loan for a certain period. With forbearance, any interest due during the forbearance period will be added to the principal of the loan.

The Bottom Line

Not all these tips may bear fruit for you. But there’s really only one bad option if you are having difficulty paying your student loans: Do nothing and hope for the best.

Your debt problem won’t go away, but your creditworthiness will. To help you decide on the best repayment plan, the Department of Education offers an online resource designed to help students review repayment plans and manage their loans.