Financial Freedom: Paying Off Student Loans
Student loans may feel like a large boulder you have to carry around, weighing you down until you pay them off, but they don’t need to affect you this way. You can feel less stuck by choosing a reasonable payment plan, knowing when to choose income-driven plans with payments as low as, well, $0 and paying down the debt slowly.
Don’t Expect to Pay Off Student Loans in a Day
The biggest and sometimes costliest mistake is trying to pay off student loans immediately. You may not be able to pay off tens of thousands of dollars in the first year or even the first 10 years, and trying to do so anyway is likely to leave you stressed out. Then you might give up on budgeting altogether when getting out of debt feels hopeless.
Instead of choosing difficult plans such as five-year or 10-year repayment plans if you can’t afford them, send in $5 to $25 extra per month while opting for a longer repayment term. There isn’t a penalty for paying off student loans early, whether private or federal. And you can knock a few months to a few years off of your payments this way. Also, if you qualify for some forgiveness, either via a plan based on your income or public service loan forgiveness, you may end up actually giving the government more money than you would have had when you pay off a loan that has a chance to be partially forgiven eventually.
Consolidate to Direct Lending if You Work in Public Service
If you work a public service job and you have federal student loans that weren’t issued by a bank or student loan lender (instead of through the direct loan program), you won’t qualify for public service loan forgiveness no matter how many years of on-time payments you make. And the definition of public service stretches much further than you might think. For instance, the marketing person at a hospital could qualify. Since over one quarter of Americans qualify for public service loan forgiveness, you should fill out the Public Service Loan Forgiveness Employer Certification form if you have any inkling you might qualify.
Save Time and Money with Rewards Programs
Upromise is a free rewards program for getting a percentage back on your online shopping that you can use to repay your student loans. And then you can also use cash back from credit card reward programs.
For example, if you charge $2,000 in expenses each month (and pay off your credit cards each month to avoid interest charges!) and your credit card awards you 1% of your charges ($20 per month), you’d get $240 per year back. Not only is that potentially an entire month’s student loan payment, but you’d also be saving yourself from extra interest accrual.
This process could easily save you one to three payments off the end of your loan. Thus, you can easily knock off years of loan payments without spending an extra cent.
Pay Off Private Loans First
Since federal student loans have more options for payment plans when you’re having financial difficulty, it’s generally better to pay them off last. However, sometimes the interest rate is higher on your federal loans than it is on your private student loans.
For instance, you could have some of your debt as federal PLUS loans with interest rates above 6%, yet your private student loans could have fixed interest rates around 3.5%.
As long you don’t qualify for some form of forgiveness, it’s better to pay off the federal PLUS loans first to save yourself from throwing more money at interest than at principal.
File Education Tax Credits and Student Loan Interest Tax Deductions
Whether it’s federal or private, your loan interest is tax-deductible and can add up to $625 per year to your tax return. The only caveat is the loan has to be in your name, so you can’t deduct payments you’re making for loans others borrowed for you.
Then there are education tax credits. If you went to school recently, you may be able to get back up to $2,500 of your tuition and other qualified expenses per year. Applying these tax return funds to your outstanding student loan debt can save you years off your repayment time. Also, you can amend your returns for up to three years, if you’ve forgotten to declare these tax benefits.
Whatever you do, don’t pay off your student loans using a private loan or credit card: You will no longer be able to claim a deduction for your student loan interest, and these kinds of loans don’t have the same options for breaks from payments in case you have an economic emergency.
What questions do you have about student loan debt? Let us know in the comments below!