Surviving Student Loans: Seven Tips to Freedom
Student loans are destroying the financial lives of millions of Americans, preventing them from buying a house, car, or relegating them nearly into the poverty zone. Odds are that you know someone who is engaged in this battle.
But if you’re like one of the millions of Americans with student loan debt, just where do you start? That in itself can be the most challenging question.
Usually people hit some sort of rock bottom with student loans affecting their lives and then begin frantically searching for ways to soothe the suffering. The reality is there are no magic bullets outside of winning the lottery or having a friendly rich uncle, but I hope to provide you with some tips on how to pay off or set your student loans up in the best possible way.
Let me start by saying I am far from an expert but I can pass along what has worked for me personally and also for several people that I have helped with student loans. Like many visitors to this site, I’m a millennial and I started with about $40,000 in student loan debt after I graduated college. I was personally able to get rid of all of that and have helped other friends set up their student loan attack plans, with some I know carrying as much as $150,000 in debt. I’ve found there aren’t a lot of places where you can read about what works for student loans without them trying to sell you something or making your head spin. I will avoid both of those for you.
Here are seven steps you can take to attack and eliminate your student loans
Step 1 – Look in the mirror
Before you take action and set up a plan, you need to know what the damages are. Maybe this is easy for you and I truly hope it is but if you are like many student loan sufferers, you probably have a number of loans from many different providers. I worked with a friend that had seven different student loan companies, all carrying balances.
Okay back to the exercise, let’s start by getting a sheet of paper or use the notes section on your phone, and I want you to write down each company you owe money to, the total amount of the loan, the interest rate, and whether they are federal or private student loans (very important to know).
Next, add the balances all together and find out your total amount of student loan debt……maybe pause here for a bourbon and step away from sharp objects……then from that total number, break out how much of those are federal student loans versus how many are private student loans. Still with me? If so, you’ve done a great job of looking your student loans in the mirror. This is a critical first step if you ever want to make progress on your loans.
Step 2 – Mentally visualize the day that your loan balance will be zero
This seems cheesy but your end goal has to be getting rid of student loans in order for your efforts to work. I’m not saying you need to work three jobs and slash all expenses immediately, but you do need to imagine a world where these balances don’t exist and make that your motivation and end goal.
Step 3 – Find out if you currently work for a non-profit
Many people do not work for a non-profit but you might be surprised. Schools, some hospitals, government positions, the list goes on, can all be non-profits. Ask your employer if you are not sure.
Why is this important? If you have a large balance on the federal loan side from your step 1 analysis, and you work full time at a non-profit, then you may be a great candidate to file for Public Student Loan Forgiveness (more on how to do this in step 5).
Step 4 – Consolidate or refinance
One huge distinction here before we get too deep into the workings of loan consolidation. If you do plan to try the public student loan forgiveness or an income driven forgiveness path for federal loans then you must be very careful not to consolidate private student loans with federal student loans. Many people make this tremendous mistake.
Long story short, if you consolidate federal and private student loans together, you lose the opportunity to file for those federal forgiveness programs that we’ll cover in step 5, and your newly consolidated loan will be classified private and therefore will be permanently ineligible. Very important to keep in mind because once it is done it cannot be reversed.
Back to consolidation, which at its most basic level, is rolling several loans into just one loan. Oftentimes it gets you a lower payment and interest rate and makes it easy for you to pay only one company. And depending on if you plan to take advantage of any federal student loan forgiveness programs, you can consolidate and refinance for each bucket of student loans, both federal and private.
As an example, let’s take your federal student loans. Say that you had $50,000 total in federal student loans with five different companies you pay each month, and the average interest rate on all of these is around 8%. Now, I don’t know about you, but I would rather just pay one company than five, especially if I can lower my interest rate and payment levels. In this case, a federal student loan consolidation provider like FedLoan Servicing might make sense if those payment and interest rate levels were lower. If you have an interest rate of anything above 5-6% on student loans, it is worth your time to investigate consolidations and refinances if your credit is in decent shape or you have a cosigner.
If you have private student loans on the other hand, usually from multiple banks like Wells Fargo, Chase, PNC, etc, you can simply consolidate those loans into one loan and payment. I personally have used SoFi for this and have found them to be easy to work with and navigate (**2nd warning** Do not consolidate federal student loans with private ones unless you are 100% sure. You permanently lose federal forgiveness options).
I’ll note that interest rates on private student loans are oftentimes outrageous, sometimes in the 10-12% rate. You can have companies like Sofi run your numbers and calculate monthly payments and interest rates. If both of those beat what you currently pay for private student loans, why not save yourself some money? It’s all about the interest rate!
Maybe you only pay one company for your student loans. If so, that is awesome, however, I would challenge you to find out your current interest rate. Like we said before anything above 5-6% is worth investigating for refinance purposes.
A big fear people have about refinances is that they will have to pay closing costs or out of pocket expenses. With a house you almost surely will but with student loans you won’t. All you need to do is call or submit information for a refinance quote from same company if you want or try another company. They quote you a new payment and interest rate and poof you are done. It is 100 times easier than a house refinance and you start getting savings in the next month or two.
Also, keep in mind, if you are thinking about Public Student Loan Forgiveness for your federal loans then you may just want to consolidate them first (if needed), avoid a refinance and fill out the forgiveness paper work. Here’s how:
Step 5 – Public Student Loan Forgiveness for federal loans
Alright, so let’s say that you now know that your employer is a non-profit and that the total amount of your federal student loans is substantial, and by substantial, I would say that you aren’t likely to pay it off in 10 years, and you’ve already taken the step to consolidate those loans into one federal loan. At this point, you may be able to consider Public Student Loan Forgiveness (PSLF). Here is a link to the detailed info from the government’s website but to save you some time, we’ve provided a more streamlined version is below.
Here are the requirements:
Work full time at a non-profit
Be on an income driven payment plan
Submit your W2’s each year when asked
Make your payments on time (120 payments/10 years)
Where do people go wrong? Most people assume they are already signed up for this just because they have federal student loans. FALSE.
Also, many people, even if they fill out the PSLF application, move on with life immediately and forget about it, assuming all is good. MISTAKE. You have to be on an income driven payment plan or you are ineligible. I can imagine nothing worse than assuming everything is good and 10 years later when you expect to be debt free, you find out that you are ineligible.
You can also jeopardize eligibility if you fail to respond to their requests for income information or you don’t pay your bill on time. There are many ways to go wrong but these are mainly in the qualification and setup.
After verifying that you qualify for PSLF and after your federal loans are consolidated, fill out the public student loan application, get your payment on an income driven basis, and make sure you pay on time. The only other pieces are maintenance related, for example, responding to the W2 request once a year.
Also, the government also has an Employment Certification Form (ECF). This is a fancy form that essentially says they will verify your employment and give you credit for how many months you have paid on time. This is not required but I would recommend filling it out every 6 months. Your HR department or employer simply signs it, you upload it, and the company tells you how many payments you have left before your loan is forgiven. The 120 payments do not have to be consecutive either. Let us say you took a year or two off work to raise a child. You’re payments will start counting towards PSLF once again as soon as you return to your full-time non-profit work, whether that be the same non-profit or a different one.
The best part about this program other than having your loans discharged; is that after the 10 years/120 payments the amount forgiven on your loan does not hit your W2 as income, which it certainly does with the other forgiveness types. A tax haven for broke millennials, who would have thought!?
Step 6 – Have at least $1,000 in savings for an emergency fund
These steps so far have been about setting you up to get the lowest interest rates and lowest payment levels to put you in the driver’s seat. If you plan to truly attack student loan debt not enrolled in Public Student Loan Forgiveness, you will certainly need an emergency fund. Why? Because life happens. If you do not have one of these accounts, you will have a hard time paying down student loan balances because every big household expense becomes traumatic and delays extra payments. This is not just a good student loan tip; it’s a good life tip.
Step 7 Keep track / pay down / follow-up
Now that you’ve got the foundation set on your student loan plan, you must stay engaged. I’m typically not a fan of automatic deductions. I like to personally control what goes out of my bank accounts, however, with student loans this may make sense for you. You can usually lower your interest rate by 0.25% on both private and federal student loans by utilizing automatic payments.
Also, for those student loans you plan to attack with extra payments, select the option that allows your extra payments to go to 100% principal because guess what, if you do not do this, it is by default just going to the interest on the loan which can be deflating. Extra payments hitting 100% of the principal is a spark you will want to have on your journey. Then you need to make extra payments, lots of them. Make as many as you want and the payment amount doesn’t have to be a large number either. It can be $10, $20, $50, $100, whatever and whenever you have extra money. You will start to see results as you establish extra payment habits.
For those with federal loans on Public Student Loan Forgiveness plans, your goal (a bit counterintuitively) is not to pay the loan off yourself unless you win the lottery or just can’t tolerate another day of working for a non-profit.
Rather than extra payments, you need to make sure you have completed the previous steps: consolidation of federal loans only, putting the new loan on an income driven plan, and submitting your PSLF application. After that you need to make sure that you work in a nonprofit for 10 years, you pay your loans on time, respond to income verification once a year, and submit an ECF every 6 months to make sure you are still on track.
No matter how substantial your student loan balances are, creating a plan helps you get to that zero-balance dream or at a bare minimum closer to it. It’s easy to ignore and put off for another day but student loans will never go away by themselves. Death does get rid of them (but we want you around for a long time) and even bankruptcy won’t eliminate them (as of right now). They will follow you wherever you go but I’m here to tell you that it can be done, and you too can break free.