Students Loans 2023: Experts Give Their 6 Top Tips for Paying Down Debt Quickly

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After being suspended for three years, the student loan payment pause has been extended by the Biden administration through June 2023. However, since the one-time student debt relief program is still blocked due to court orders, many borrowers are gradually preparing to resume payments on their loans. 

For those with federal or private student debt, or a combination of both types of loans, what can borrowers do to pay off the debt in full? Experts join GOBankingRates to share their top tips for paying down student debt quickly.

Prioritize Debt With the Highest Interest Rate

One of the first steps to paying off student debt is to review loans with the highest interest rates and pay them down first. 

What is less discussed, however, is the difference between effective interest rate and stated interest rate with student debt. Zack Geist, founder of Student Loan Tutor, said borrowers can easily determine how high the effective interest rate is on private student loans since it is just like any other debt. If the stated interest rate says 7% on a private loan, it is the same as the effective interest rate. The exception, Geist said, is private loans with a variable interest rate. This can increase when interest rates rise. Geist recommends borrowers check with their private lender to determine the terms. 

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What about federal student loans? Geist said the stated interest rate is not necessarily the same as the effective interest rate. 

“Effective interest rate means what interest rate you will actually have paid which can only be projected while you are still in repayment,” Geist said. “The actual effective interest rate can only be calculated once the loan is paid off or forgiven. Any tax implication is also calculated in the total amount.” 

To know which student loan should be paid down first or last, Geist recommends knowing your effective interest rate. Knowing this will also determine whether you should plan to seek loan forgiveness. 

Review Refinancing or Consolidation Options

Refinancing or consolidating student debt are options that will depend on every borrower’s unique financial situation. 

For those with private loans, Michael MacLaverty, co-founder and CEO of Highway Benefits, said this may be a great option for those seeking a better interest rate and loan terms. However, MacLaverty said borrowers who refinance their federal loans may no longer qualify for income-driven repayment plans or loan forgiveness options. 

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Borrowers with multiple federal student loans may consider consolidating these loans into a single federal student loan to lower their total monthly payments. Consolidating these loans, MacLaverty said, will give borrowers a new interest rate which is the weighted average of their current rates. However, it may also extend how long it takes borrowers to repay their loans. MacLaverty said those with any unpaid interest at the time of consolidation could have this unpaid interest added to their principal. This would increase the total outstanding principal balance for borrowers. 

Learn More About Income-Driven Repayment Plans

Geist recommends borrowers get a thorough understanding of income-driven repayment plans. The best way to learn more is to work with a student loan professional. 

“If you are in income-driven repayment, do not miss your annual recertification deadlines,” Geist said. “This can cause interest to capitalize and to accrue interest on interest ballooning your loans quite quickly.”

Meet With a Tax Advisor

Borrowers may also meet with their tax advisor and see if they can save more by filing married filing separately on their taxes. Geist said it may cost borrowers a bit more in taxes but can help save a lot of money on student loans. 

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Evaluate Whether Debt Avalanche or Snowball Is Right for You

Borrowers who choose to pay off their student loans using the debt avalanche method will begin by paying off the most expensive debt with the highest interest. Those who choose debt snowball will pay off loans with the smallest balances and put minimum payments to other debts. This helps the borrower “snowball” their way up to the debt with the biggest balance. 

Picking debt avalanche or debt snowball will depend on every borrower’s financial situation. MacLaverty said it’s also important to be aware that sometimes your loan servicer may decide how to allocate your overpayments for you. 

Talk To Your Employer About Any Student Loan Repayment Benefits

“Many borrowers may be unaware their employers can contribute up to $5,250 per employee per year to their employees’ student loans, federal or private,” MacLaverty said. 

Don’t be afraid to ask your employer to offer student loan repayment as a benefit! “The best part is these contributions are tax-free,” MacLaverty said. “This means employees will not have to pay any income taxes on contributions made to their loans.”

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