8 Steps To Take Now if You Owe Significant Interest on Student Loans
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Jordan Rosenfeld
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Sean Fisher
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Student loan debt can be one of the more persistent debts to pay down, especially if you engaged in any kind of deferral period. The average federal student loan debt held by Americans runs a significant $37,850, and one in five of these borrowers is 50 or older, meaning they’ve probably held this debt for a long time, reported BestColleges.
The Biden Administration has made several attempts to offer federal student loan relief, only to be blocked by the Supreme Court. The latest attempt, a more targeted approach, may not be decided until October, 2024, and there are no guarantees.
As federal student loan relief hangs in the balance, student loans continue to accrue interest and lenders continue to expect their money. Rather than waiting for relief, financial experts suggest some steps to take to pay down your loans now.
Also find out what a Trump presidency would mean for student loans.
Explore Income-driven Repayment Plans
There are other more generous repayment options that the Biden Administration has introduced, like the SAVE Plan that bases your monthly payments on your income and family size, according to Darian Shimy, founder and CEO of FutureFund.
“By lowering your bills, more of what you pay can go directly towards interest and principal over time. It’s always worth examining the most up-to-date income-driven options available to find the best fit,” he said.
Check Out: I’m A Self-Made Millionaire: 6 Steps I Took To Become Rich On an Average Salary
Leverage Side Gig or Windfall Money
If you are able to earn or receive extra money from side jobs, bonuses, or tax refunds, Shimy recommended you commit it all to loan repayment, at least long enough to get ahead of interest accrual.
“Using one-time money especially for high-interest balances will help to quickly accomplish significant paydowns. To create money for this, some students have set up fundraising sales and donations via web sites. If focused correctly, even a few hundred dollars will gradually reduce what you owe.”
Public Service Loan Forgiveness
Find out if you qualify for public service loan forgiveness, Shimy said. “This program promises debt wipeout after 120 qualifying monthly payments for borrowers,” he explained.
This applies to jobs in the government and non-profit sectors if the repayment schedule fits.
Although the application process is thorough, it’s worth it if you’re eligible. Just be sure to certify your employment yearly and complete the required paperwork to keep on target toward forgiveness.
“The secret is to look at every choice to maximize your efforts. Using income-based plans to keep expenses low and focusing on additional funds and long-term forgiveness programs will help significantly lower loan debt over time,” Shimy said.
Engage the Debt Avalanche Approach
Abid Salahi, co-founder of FinlyWealth, said he’s had clients slash their repayment timelines by up to five years through aggressive budgeting and income reallocation.
“One particularly effective strategy is the debt avalanche method, where borrowers focus on high-interest loans first. This approach can reduce the total interest paid by 20% to 30% compared to making minimum payments across all loans.”
One such client, whom he called Sarah, a recent graduate with $50,000 in student loans at an average 6% interest rate, reduced her three-year repayment term by cutting non-essential expenses and allocating an extra $200 monthly towards her highest-interest loan. She saved over $8,000 in interest.
Refinance Your Loan
Another tool is loan refinancing, potentially lowering interest rates by one to two percentage points, Salahi said.
“However, it’s crucial to weigh the pros and cons carefully, as refinancing federal loans to private ones means forfeiting certain protections and forgiveness options.”
Exploring income-driven repayment plans is also vital. These plans can significantly lower monthly payments, freeing cash flow for targeted debt reduction. However, lower payments may extend the life of the loan and increase the total interest paid.
Increase Your Income
You can also try to increase your income, Salahi suggested. From side hustles to asking for a raise, even a modest $100 increase in monthly payments can trim years off your repayment timeline and save thousands in interest, he said.
Negotiate With Your Lender
One thing people may not realize is that sometimes it’s possible to negotiate with your lenders, especially if you’re facing financial hardship according to Bill Boersma, an independent life insurance consultant with OC Consulting Group.
“They may work with you, especially if you’ve paid on time. I have seen interest drop 3% for loyal customers. It never hurts to ask, and the worst they’ll say is no,” he said.
He recommended you come prepared with a reasonable request and your payment history.
Consolidate Your Loans
If you have the chance to get a lower rate by consolidating multiple loans into one, this might be a great option, Boersma said.
“A single new loan with a lower fixed rate may cut your payment in half, giving you decades to repay. Ensure any new rate is measurably lower than existing rates.”
From a psychological point of view, as well, making only one payment might make it easier to pay down the loan sooner.
By being proactive you’ll get ahead of significant interest and, should any federal student loan debt relief pass, you’ll be well poised to take advantage of it, too.
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