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The Smart Way to Pay Off Student Loans

When it comes to paying off your student loan debt, you may have more options than you realize.

If you’re anxious about paying off your student loans, you’re not alone – there are more than 45 million in the United States, including 7 million people in default. That amounts to a federal student loan debt of $1.6 trillion. Here are seven tips on how you can keep from sinking:

Tip One: Know your debt.

The first step is making the time and space to take stock of where you are. How much student debt do you have? Do you have private student loans, federal loans, or both? If you have one or more federal loan, your first stop should be the National Student Loan Data System, which allows you to look at all of your federal student loans, all in one place. For private student loans, there is not a one-stop-shop to look up your private student loans. You will have to reach out to each of your loan servicers or providers to determine your loan balance.

Tip Two: Understand your repayment options.

Once you have a firm grasp on the kind and amount of debt you have, you can begin to figure out which repayment plan is best for you. There are eight types of federal loan repayment plans:

  • A standard repayment plan, where your loan servicing company divides how much you owe into 120 monthly payments. You pay the same amount every month, and after 10 years, your loans are paid off. If you don’t choose a plan, this is the one you will be placed into by default after your grace period expires. You will usually pay less over time than under other plans.
  • A graduated repayment plan,where you still pay off your debt in 10 years, but you start with low payments that increase every two years. This option’s beginning payments are lower than what you’d pay in the standard plan, but as time goes on, the payments increase gradually until they become higher than the standard plan’s. You’ll pay more over time than the 10-year standard repayment plan.
  • An extended repayment plan,where you pay a lower amount but over a longer period of time. Payments may be fixed or graduated. The lower monthly payment is often more realistic for recent college grads, but you end up paying more in overall interest for up to 25 years. Your monthly payments will be lower than under the 10-year standard repayment plan or the graduated repayment plan.
  • Income-driven repayment plans,where your monthly payments are based on what you can afford to pay. There are four income-driven repayment plans:

    1. Revised Pay As You Earn Repayment Plan (REPAYE)
    2. Pay as You Earn Repayment (PAYE)
    3. Income-Based Repayment Plan (IBR)
    4. Income-Contingent Repayment Plan (ICR)
    This option has two major benefits: (1) affordable monthly payments based on your income instead of your loan balance, and (2) a loan forgiveness feature after 20 or 25 years, depending on the particulars of your plan. Note that for this plan, you have to certify your income every year or risk losing its benefits.
  • Income-Sensitive Repayment Plan Available only for Federal Family Education Loan (FFEL) Program*, which are not eligible for the Public Service Loan Forgiveness (PSLF). Your monthly payment is based on annual income, but your loan will be paid in full within 15 years.

Tip Three: See if you qualify for loan forgiveness.

In addition to the repayment plans, there are loan forgiveness programs. Here are three common programs:

  • Public Service Loan Forgiveness (PSLF) where applicants who are employed by a federal, state, local or tribal government or nonprofit organization can be eligible for loan forgiveness after making 120 qualifying monthly payments while working full time for a qualifying employer. Be careful, though: There have been many instances where people who thought they were in the PSLF program found out they were not, many years and thousands of dollars later. Submitting an employment certification form signals to the loan servicer and the Department of Education that you’re intending to pursue this program, and you will be sent a letter if you risk falling out of compliance. PSLF applicants should resubmit this form annually and any time they change jobs.
  • Teacher Loan Forgiveness Program for applicants that teach full-time for five complete and consecutive academic years in a low-income elementary school, secondary school or educational service agency. Applicants may be eligible for forgiveness of up to $17,500. This is available for Direct Loans and FFEL Program Loans.*
  • Student Loan Debt Relief Plan Due to the August 24, 2022 announcement on the Biden-Harris Administration’s Student Debt Relief Plan, there may be additional loan forgiveness opportunities if you are eligible. To be eligible, your annual income must be below $125,000 (for individuals) or $250,000 (for married couples or heads of households). If you received a Pell Grant in college and meet the income threshold, you may be eligible for up to $20,000. If you did not receive a Pell Grant in college and meet the income threshold you may be eligible for up to $10,000. To receive any loan forgiveness the borrower must complete an application – you can sign up for notifications for when the application is open on the Department of Education subscription page.

    Additionally as part of the Student Loan Debt Relief Plan the goal is to improve the federal student loan process for current and future borrowers. For more information and for current updates and progress related to the announcement, visit this studentaid.gov page.  

Note that while you will not pay federal taxes on loan forgiveness, some states treat forgiveness as ordinary income and is considered taxable. When applying for forgiveness, you will want to plan accordingly for tax time by reviewing your state’s tax laws. We can work with your tax advisor to evaluate if any loan forgiveness you receive would be taxable.

Tip Four: Be your own advocate.

While your loan servicer is an important point of contact, understand that they are serving as your loan institution’s advocate, not yours. Do your own research and ask for confirmation in writing that you’re in the right plan and the right program.

A good example of this dynamic can be seen in what is known as forbearance. If you are struggling to make your payments and call your loan servicer about your options, they might want to place you in forbearance, which allows you to skip payments for a few months. While that might seem like a helpful option, it carries with it several disadvantages: Not only is it easy to let three months turn into six or 12 (pushing you that much farther away from paying off your debt or achieving debt forgiveness), but when forbearance ends, you often have a higher interest rate, monthly payments and total debt than you had before accepting forbearance. That’s why it’s important to do your own research and understand your repayment options.

Tip Five: Keep your contact information current.

Ten, 20, 25 years can be a long time, and a lot can happen while you’re paying back your student loans – you might move, change jobs, get married or change phone numbers. In the hustle and bustle of daily life, it’s easy to forget to keep your loan providers up to date with your most recent contact information. Many people become unaware of problems with their loans simply because their loan providers’ warnings are delivered to old addresses and phone numbers.

Tip Six: Maintain your budget.

When you’re talking about thousands or tens of thousands of dollars of debt, you might be tempted to throw your budget out the window – when actually you need your budget now more than ever. Keeping a realistic budget lets you make smart financial decisions on how much to spend, how much to save in an emergency fund, how much to put in a 401(k) or IRA and how much to put toward your loans. It can also help you establish a strategy to paying down debt in a way that works for you, without resorting to credit cards.

Tip Seven: Carefully weigh the pros and cons of debt consolidation and refinancing.

Whether you’re rolling up multiple federal loans into one federal loan (consolidation) or into a private loan at a lower interest rate (refinancing), there can be significant risks and benefits to combining your student debt. Perhaps the biggest danger to consolidating or refinancing is that you may lose some of the protections and benefits that you get with your original loans, such as eligibility into the PSLF program, forgiveness or an income-driven repayment plan.

One final word of advice: Watch out for scammers. You might get approached by seemingly legitimate companies offering you better terms and convenience if you send your loan payments directly to them. If you’re looking for help navigating your payments and ensuring you’re making smart decisions regarding your student loans, reach out to our team.

The information reflected on this page are Baird expert opinions today and are subject to change. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.

Editor’s Note: This article was originally published April 2020 and was updated August 2022 with more current information.

The websites listed are not owned or associated with Robert W. Baird & Co. We have provided the links as a convenience and do not endorse any of the sites.

*No new FFEL Program loans have been made since July 1, 2010, but you may have an FFEL if you were attending school before that date.

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