What's the Best Way to Pay Off Student Loans?

There's no one-size-fits-all solution when it comes to paying off your student loan debt. It depends on several factors that are unique to you.

Fortunately, there are some simple ways you can help ensure your student loan repayment strategy aligns with your goals.

Student loan payoff factors

Whether you have federal or private student loans, the best way to pay off student loans depends on the specific loan payoff factors affecting you. There are several to consider.

Your balance

It's important to have a clear picture of how much and to whom you owe. In general, you can expect a higher balance to translate to a higher monthly payment.

Some of your student loans may have changed hands in recent years, so confirm that your payments are still going to the correct institutions. If you have automatic payments, also confirm which account they're drawing from. If you've changed banks, started a new checking or savings account or made other financial changes over the past few years, you may need to update your information with your lender.

Your interest rate

It's also a good idea to review not only the interest rate on each of your student loans but also the national average student loan interest rate to get a sense of where you stand. Like other types of loans, student loans can have either fixed or variable interest rates. Federal student loan interest rates are fixed, while private student loans offer both fixed and variable rates.

Although variable rates may seem lower at first glance, fixed rates are generally safer because a variable interest rate can unexpectedly change your required payment amount. Also, because your interest rate determines how much the debt will ultimately cost, you can't accurately predict the total cost of your loan with a variable rate.

Your income

Ideally, your monthly income should leave more than enough room for your minimum monthly student loan payment. But if you face a period of unemployment or other economic hardship, it can be difficult to make these payments.

While missing payments or going into default can have serious consequences for your repayment plan and overall credit, federal student loans have a few options available if your income takes a major hit: deferment and forbearance.

• Deferment: Deferment pauses payments for varying lengths depending on the type you apply for. There must be a triggering event—such as unemployment, military deployment or at least half-time enrollment in school—to be eligible. If you have a subsidized federal student loan or Perkins loan, it won't accrue interest during deferment.
• Forbearance: With forbearance, you can apply for a pause of up to 12 months at a time, and there's no requirement for a qualifying special event to be eligible. However, interest will continue to accrue while your loan is in forbearance—meaning your balance will increase while payments are paused.

Your life stage

The changes in your life—like marriage or a new job—can impact how you approach repaying your student loans.

If you're married, you and your spouse may be able to consolidate your separate student loans through a private lender, which could potentially give you a lower interest rate or simplified repayment terms. Similarly, if you've been on an income-based repayment plan, changes in your work status and pay may impact your repayment strategy.

Ways to pay off student loans

The best way to pay off student loans starts with an understanding of your monthly income and expenses. Then you can figure out how to tackle your loan. Here's how to get started.

Make a budget

Create a budget to see how much money you can afford to dedicate to loan repayment each month. Add up your living expenses, including:

• Rent
• Utilities
• Car payments or transportation
• Food
• Healthcare
• Necessary clothing
• Any debt payments you're already making, including the current payment toward your student loans

Next, compare the total with your monthly take-home pay. The portion of your income that's left over after you've covered expenses is your discretionary income—what you'd otherwise use as spending money. Instead of spending it all or putting it into savings, you can take some of it and put it toward your loans.

It's also a good idea to set up automatic payments for your student loans. Federal student loan borrowers get a 0.25% interest rate reduction after enrolling in automatic payments, and many private lenders offer similar incentives for automatic payment enrollment.

Pay off your loans faster

If your budget leaves you with more than enough to pay the minimum amount, you can pay off more than you need to each month by making extra payments or making a larger payment than you owe. This could help you pay off your loans sooner and save on interest that would accrue over time, meaning you'll pay less in total. Just confirm with your lender that the additional money you pay goes toward reducing your balance instead of next month's payment.

Choose the right repayment plan

Federal student loans offer various repayment plans that can work with many career paths, income situations and long-term financial goals.

• Standard repayment: Although the payments under this plan might be higher than other plans, you'll save more in interest because of the shorter repayment term and the fact that there are fixed payments over a fixed term—usually 10 years.
• Graduated repayment: Your payments will start off lower and increase every 2 years. The payment amount will always equal at least the amount of interest accrued since your last payment. Graduated repayment plans are usually for 10 years unless you have a federal consolidation loan.
• Extended repayment: If you have a student loan balance of more than $30,000 and need lower payments over a longer term than the standard repayment plan, an extended repayment offers you a fixed term of 25 years and lets you determine whether your payments are fixed or graduated.
• Income-based repayment: With this type of repayment plan, you’re required to make payments for a maximum of 20 to 25 years, depending on whether you choose a pay-as-you-earn or income-contingent type of plan. After this time, any outstanding balance is forgiven, but you’ll have to pay income tax on the forgiven loan amount.

Ask about employer matching

Some employers will match your student loan payments up to a certain amount. Others offer a monthly payment or will reimburse you for part of your payments. This job perk can help you afford your monthly loan payment while also speeding up your repayment timeline.

With the additional funds your employer provides, you can pay down your loan principal, shaving time off your repayment term and thereby lowering the overall amount you'll pay for your loan.

Refinance or consolidate

Refinancing your student loan involves taking out a new loan with a new lender. With this strategy, you'd use the new loan to pay off your student loans and then make payments to the new lender.

Your new loan may give you a lower interest rate, lower monthly payment or more time to pay off your loan. However, you may need a solid credit score to qualify for a favorable refinancing offer. Also keep in mind that if you refinance federal student loans, income-based repayment options are no longer available.

You may also be able to consolidate the outstanding balance from multiple student loans into a single one, which would give you one loan with a single interest rate and monthly payment.

It's also important to note that federal student loan consolidation doesn't necessarily lower your interest rate, but it can switch you from a variable to a fixed interest rate and potentially reduce your monthly payment by extending your repayment term.

If you qualify to refinance based on your credit history, employment status, income, cash flow and the amount on your student loan debt, there's no limit to how many times you can refinance. However, keep in mind that refinancing may involve fees, could impact your credit score and might make repayment take longer.

Consider federal loan forgiveness

You may be able to get part of your student loans forgiven through the Public Service Loan Forgiveness program if you're working for a government agency or eligible nonprofit organization—or you may have it forgiven entirely after a period of time if you start a career in public service.

You may also qualify for partial loan forgiveness if you're volunteering through the Peace Corps or AmeriCorps government programs. There are loan-forgiveness and loan-cancellation programs for teachers at the federal level and in certain states as well.

The bottom line

There are many paths you can take to pay off your student debt. The best solution for you will be the one that reduces your monthly costs, overall expenses and financial worries while increasing your options for financial planning and wealth building.

Ultimately, finding the right path for you means knowing your options and making savvy financial choices along the way.