Meet the Expert
Melanie LockertFounder, DearDebt.comRead More
Written by
Jeff OstrowskiRead More
Top 10 Student Loan Repayment Strategies
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An unexpected bonus, a tax refund or an inheritance might seem like a great excuse to splurge on a vacation. Keep this in mind however: A Caribbean cruise lasts a few days, but a student loan repayment schedule drags on for 10 years. If you get a windfall, devote the after-tax portion to reducing the amount of your student loan. It's a move that will slash your lifetime interest costs and shorten your amortization schedule.
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Working as a public defender, a public health physician or a teacher? You might be eligible to walk away from some of your debt. The most generous student loan forgiveness program is offered by the federal government, but states also let qualifying borrowers out of outstanding balances. These programs allow debtors to continue making minimum payments for lower amounts. However, the process of winning forgiveness is neither quick nor simple.
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As of September 2018, the U.S. unemployment rate was at a rock-bottom 3.7 percent. That means employers are desperate for workers, especially those with advanced degrees. It's no secret that student loans are a huge burden, and employers increasingly are offering programs to help employees pay down their debt.
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If you took out low-rate government loans to pay for grad school, you probably can't do much to improve your interest rate. However, if you borrowed privately, there's a chance you could get a lower rate by refinancing with a lender such as Earnest or SoFi. You'll need to have solid credit and a good job to make this option work.
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When the balance of your student loan is larger than your annual salary, it's easy to get discouraged about your progress. The snowball method seeks to build momentum by creating small victories. It works like this: You scrimp and save to pay off your smallest loan while still making minimum payments on your other student debt. Upon retiring one loan, you'll feel a burst of accomplishment that hopefully motivates you to move on to the next smallest loan in your portfolio and focus on retiring that debt. The downside to this method is that if your small loans also carry low interest rates, you may not be making as much of a dent as you think.
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We get it. You didn't hone your intellect in grad school so you could perform tasks like walking dogs, waiting tables or ferrying middle managers to the airport. Alas, if you find yourself overeducated, underemployed and choking on student debt, you might need to swallow your pride and bust your butt for a while. Don't settle for low-wage side hustles right away. Presumably, your time in graduate school left you with marketable skills, so figure out a way to parlay your above-average education into well-compensated consulting assignments or freelance gigs. Your graduate degree also might qualify you to work as an adjunct professor. If that doesn't work out, take the low-wage temp gigs, and remind yourself you're doing it for your financial health.
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Anger isn't always the most productive emotion, but if you can channel it as motivation to pay down your student debt, maybe sheer rage can work in your favor. When Melanie Lockert finished a master's degree in 2011, she found herself with $58,000 in new debt and no job. After feeling embarrassed, Lockert got mad. She started a blog about her debt and harnessed her resentment, working as many part-time gigs as she could to retire her hefty student loans.
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Student loans don't have prepayment penalties, so it makes sense to apply extra payments if possible. If you decide to make more than 12 payments a year, contact your lender in writing with instructions to apply the additional payment to your principal, rather than next month's balance, so that your overall interest tab is reduced.
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Say you borrow $20,000 at 7 percent interest. After 10 years of monthly payments of $232, your debt will be extinguished. But paying more than the minimum will accelerate your repayment schedule. Add an extra $70 a month (a coffee a day, if you prefer to think of it that way) to the minimum payment, and you'll be done amortizing your loan a full three years early.
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Psychologically, the snowball method has its advantages. Financially, the avalanche approach might be wiser. In this strategy, you tackle your highest rate debt first and pay it down as quickly as possible. This strategy requires you to face your biggest, ugliest loan head-on, and the reward is that, over months and years, you can make a significant reduction in your overall interest payments, even if you let a few smaller, lower interest loans linger on your personal balance sheet.
8 Lifestyle Changes to Tackle Your Debt
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Don't carry a credit card balance.
Yes, the amount of interest you're paying on student loans is dizzying. The glimmer of good news is that your interest rate on grad school debt is almost certainly in the single digits. Interest rates on credit cards, by contrast, are almost always in the double digits. That means even a small debt can balloon quickly. For now, pay with cash. If you must charge, make sure to pay off your balance in full every month.
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Find ways to be a cheapskate.
Keep in mind that seemingly small expenses add up. If you buy a $4 latte at Starbucks every day, you'll spend more than $1,400 over the course of a year. Drop $12.50 on lunch four days a week, and your tab will reach $2,500 over the course of a year. You can still drink coffee and eat lunch of course, but you can prepare food at home for a fraction of the cost.
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Keep score.
Retiring debt is a long, slow slog, and it's easy to lose focus. To stay motivated, try this trick: Post the amount of your debt on your fridge, or use an erasable marker to note the total on your bathroom mirror. Next month, update it with the new, and hopefully lower, number.
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Know your place.
If you recently finished grad school, chances are you're working with older, higher-paid colleagues who earned degrees when education cost much less. They have more money to spend on cars, clothes and happy hours. Don't try to keep pace with them. Instead, you might consider confiding in a coworker about your financial struggles and goals because he or she may be able to offer support, encouragement or advice.
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Learn to cook.
Of course the ramen and poke bowls from the food hall are really tasty, but for a cash-strapped consumer, dropping $15 every day for lunch is untenable. Go to the grocery store, and get comfortable in the kitchen. Cook dinner, and take leftovers for lunch. You could also prepare a big dish on Sunday and eat it throughout the week. If baking and broiling are a bridge too far, pack sandwiches, salads or homemade smoothies.
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Make a budget.
Mark Kantrowitz, publisher of SavingForCollege.com, suggests tracking your daily spending. Track your receipts, record each purchase, and then enter the figures in a Google spreadsheet or on Mint.com. Once you've got a month or two of data, prioritize your budget based on needs and wants. The idea is that being disciplined now will give you financial freedom later.
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Take a hard look at your spending.
Does graduate school debt leave you unable to pay your bills? Kantrowitz says making ends meet starts with strict budgeting that includes a bright line between needs and wants. You won't survive without food or medical care, so those are clearly needs. Perhaps you need a car for your job, but keep in mind it just needs to be reliable, not a status symbol. For example, a used Toyota might fit the bill rather than a new BMW. Other expenses, such as bar tabs and concert tickets, also fall into the want category. Be honest with yourself when deciding what is a real need and what is a want.
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Try a "do-not-buy" list.
Do you find yourself splurging on impulse buys that you later regret? Catalog your weaknesses and compile them in a list of items you need to avoid. It's an exercise that will help keep you on track when you find your willpower waning.
What About Your Undergraduate Loans?
The typical undergraduate student finished school in 2017 owing about $40,000. Presuming that you haven't paid off that debt before you go to grad school, you'll need to figure out how to manage the old debt while taking on new debt. If you have a federal student loan and you go to graduate school or professional school full time, you won't need to make payments. In-School Deferment Requests are available to any full-time grad student with a federal loan according to the U.S. Department of Education. However, if you're going to grad school part time, these same deferment options may not apply to you.
If you're enrolled in grad school at least half time but less than full time, In-School Deferment applies only to Direct Loans, Perkins Loans and Federal PLUS Loans paid out after July 2008. Interest charges will continue to pile atop Direct Loans but not on Perkins Loans, also known as subsidized loans. In other words, even though you won't have to make payments on your loans while you're in grad school, the interest clock keeps ticking, which means the longer you're out of the job market, the bigger your balance will become and the more debt you'll have to deal with once you're done with school. "One alternative is to continue making interest-only payments while you're in grad school," says Rebecca Safier, a loan expert at Student Loan Hero. However, she adds the caveat that students in grueling programs, such as medical school or law school, might not have the time to squeeze work into their schedules.
The federal government also offers a Graduate Fellowship Deferment Request, which waives payments for top scholars who win prizes such as Fulbright grants. If you're in grad school fulltime and you financed your undergraduate education with private student loans rather than federal loans, the rules vary by lender. Private lenders generally allow for deferment of undergrad loans, although on terms and with schedules that might not be as generous as those on federal loans. "It's really up to the discretion of each lender," Safier says.
Your Student Loan Questions Answered
Melanie Lockert
Founder, DearDebt.com
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You borrowed $58,000 to pay for your master's degree. Was it worth it?
If you would have asked me that a couple years ago, I would have said absolutely not. But life is weird. That student debt got me to where I am today. I've turned my pain into my passion. I would say the first year or two after graduation, I regretted taking on that debt. Then, I started a blog at DearDebt.com, and the blog turned into freelance writing assignments and a book, and that turned into speaking engagements and teaching women to handle their debt.
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What advice would you give students about taking on grad school debt?
It's very important to be realistic about what you're going to be doing after graduation. I have a degree in performance studies, which is a weird, esoteric degree. In 2011 when I graduated, I could not find a full-time job in New York. In the first year after graduate school, I made less than I made before I went to grad school. I felt a lot of shame and anxiety for going to this fancy private school and then not being able to pay it back. We've been told this trajectory really works: If you go to good schools and get good grades, everything is going to work out, and you're going to get a good job. Before I went to grad school, I was totally in la-la land. A bunch of people asked me, "Are you sure you want to do this?" Nobody could tell me anything; NYU was my dream school, and I was going to go no matter what. When I graduated, I was paying $11 per day in interest. That drove me bananas. That was like one round-trip ticket a month from New York to LA. That really fueled my anger, and that fueled me to pay off my debt as quickly as I could.
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Some people advise the snowball strategy, but you went for the avalanche approach. Why?
It saved me more money. The difference is the snowball is about motivation, while the avalanche is about math. There's no right answer. I used the avalanche method because, for me, that just made a lot of sense. I had high interest rates on the bigger loans. I had some grad school debt at 7.9 percent and some at 6.8 percent. In my undergraduate loan, I owed like $13,000 at about 2 percent. But if you really need that motivation, the snowball strategy is great. With me, that $11 a day just made me imagine round-trip flights down the toilet every month.
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So how were you able to devote so much money to paying down your debt?
I cut back my budget everywhere possible. I was making $10 to $11 an hour in temp jobs. Then, I got a full-time job, and I was only making $31,000. I realized at some point I had cut back as much as I could. Unless I wanted to starve myself or move back home, there was no more money I could save. I took on all kinds of side gigs, and I doubled my income that first year from $30,000 to $60,000. For some people, earning more can be a slippery slope because you earn more and you spend more. But in my case, I used that money to pay down my debt. I know that not everyone can double their income by becoming self-employed like I did, but everyone can make some money. There's Uber. There's Lyft. You can babysit. You can pet-sit.
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What if I'm struggling to make my monthly loan payments? How can I follow your path toward becoming debt-free?
Don't get discouraged. It's really easy to wallow in depression and anxiety and stress. That will immobilize you. That's easier said than done, I know. Focus on what you can do, and continue to strive for progress, but don't beat yourself up. Debt is very emotional. Pay off the one debt that makes you angry. If your ex-boyfriend saddled you with a lot of debt, pay that off. If you hate your grad school and you owe a big debt, pay that off. Or pay off the debt that keeps you up at night.