The smartest way to repay student loans depends on your income and expenses both now and in the future. We're looking at all the options for paying off student loans – from deferment to consolidation, and more.

Student loans and student debt; tuition averages have risen over the last 30 years and continue to rise. And Millennials are burdened left and right with this debt.

Whether you’re just beginning to repay your student debt or have been slogging through payments for several years, you’ve probably wondered “Am I going about this right?” Could I save money on my student loans by consolidating or refinancing?

Alternately, if your monthly student loan payments are making it hard to get by, maybe you’ve wondered if deferment, forbearance, or an income-based repayment plan could help with your monthly cash flow.

Recently, I was talking with Andrew Josuweit about the best way for graduates to go about repaying their student loans. Josuweit is the CEO of Student Loan Hero, a free website that helps graduates manage student loans. He’s also no stranger to being overwhelmed with student debt.

“I graduated in 2009 with about $100,000 in student debt from 16 separate loans and three different servicers,” Josuweit says. “The websites servicing the loans were from like 1995 and it was a terrible customer experience.”

As if staring down $100K in debt wasn’t bad enough, trying to keep track of 16 different loan balances, interest rates, and monthly payments is a headache and a half.

With Josuweit’s input, here’s a quick guide to help you determine the smartest way to pay off your student loans.

If you’re having trouble making payments

If your grace period is ending and you haven’t found a job yet, or you’ve been making payments on schedule but recently lost your job, you should consider options to reduce or defer your monthly student loan payments until you have an income again.

With federal student loans, you can request a deferment or forbearance to temporarily stop making student loan payments.

Federal student loan deferment

If you meet eligibility requirements, a deferment will delay the repayment of both principal and interest of your federal student loan. If you are unemployed, you may be eligible for a deferment for up to three years.

Other situations in which you may be granted a deferment are if you are enrolled at least half-time in college, during active duty military service, or in an approved graduate fellowship or period of service (e.g., Peace Corps).

Federal student loan forbearance

If you do not qualify for a deferment, you can apply for forbearance. A forbearance will delay your federal student loan payment for up to 12 months. Your lender is required to grant you a forbearance if you meet certain criteria. For example, if you are in a medical residency, an approved teaching program, or the total amount you owe on your federal student loans is more than 20 percent of your gross monthly income.

If you don’t meet the criteria for a mandatory forbearance, your lender may still grant you a voluntary forbearance.

Keep in mind that with forbearance, interest continues to accrue. You can choose to pay the interest each month or make no payments at all, but doing so will significantly increase the total amount you’ll owe on your loan.

Federal income-based repayment programs

If you have a job and want to continue to make progress paying down your student loans but are still having trouble making your full payments, you might consider income-driven repayment options on federal student loans.

There are several income-based repayment options available that range from 10 to 20 percent of your discretionary income. For the most generous income-based repayment plans, eligibility depends on your actual income and other monthly expenses, but if your total loan balance exceeds your annual income, you may be eligible.

Private student loan interest-only payments

If you have private student loans, deferment and forbearance are not an option. Although you may be able to negotiate a short-term deferment of sorts with a private lender, they are under no obligation to grant one.

If you are having trouble making student loan payments with a private lender, you should contact them right away. Most likely, the private lender will offer you an interest-only repayment plan for a certain period of time. This will significantly reduce your monthly payment, but you’ll end up paying more for the loan in the long run.

If you want to reduce the cost of your loans

Let’s say you’ve got a good job and are comfortable making your student loan payments. But, you’ve got a dozen different loans at different interest rates, and some of those rates are higher than you’d like.

This is where you might consider consolidating or refinancing your student loans.

Consolidation

If you just have federal student loans, consolidation is the way to go.

You can consolidate all of your federal student loans into a Direct Consolidation Loan. This will simplify your loans and give you one monthly payment. You can also extend the term of your consolidation loan up to 30 years, which may cost you more, but can reduce your monthly payment.

Your Direct Consolidation Loan has a fixed interest rate for the life of the loan. Depending on the prevailing interest rate on the consolidation loan and the rates of your existing loan, you may or may not save money by consolidating. Additionally, you’ll want to carefully examine if any of your original loans have benefits that will be lost upon consolidating.

If you have private student loans, you won’t be able to consolidate them using a federal Direct Consolidation Loan. You may, however, be able to refinance your private loans with another private lender.

Refinancing

Refinancing student loans used to be tricky, but as the economy improves the refinancing market has opened up in the last six months, Josuweit says.

Student loan refinancing might make sense if you have:

  • A high percentage of private student loans
  • Federal loans with high-interest rates (eight to 12 percent)

You’ll want to be very careful before refinancing federal student loans with a private lender. If you do, you’ll lose the benefits of federal loans such as deferment and forbearance, income-based repayment plans, and loan forgiveness if you would have qualified.

By refinancing, however, you can adjust the term of your loan between 10 and 25 years and may get a lower interest rate that might save you thousands over the long run.

“You can cherry pick loans with the highest interest rates [for refinancing], Josuweit says. Selective refinancing can save on interest while retaining some of the perks of federal loans.

To qualify for student loan refinancing you’ll need:

  • Good credit. Most lenders require at least a 700 FICO score; some will look at scores of 660 and up.
  • A debt-to-income (DTI) ratio no higher than 35 percent. Some lenders may stretch to 45 percent. Calculate DTI by dividing the total of your monthly mortgage, student loan and credit card minimum payments by your gross monthly income.
  • Verifiable employment for at least 12 to 24 months.
  • Loans that were used to obtain a degree from an accredited institution.

There are a couple of great resources available to you if you want to go this route.

You can check out individual student loan providers like Earnest or SoFi, or you can check out a company like Credible, which scours through their lending partners and presents you with the best refinancing option available based on your personal needs.

If you want to repay your loans as fast as possible

“Paying down student loans early is a borrower-by-borrower decision,” Andrew says. He notes that although you may be able to beat your loan’s interest rates with long-term stock market investing, “maybe you just want to be free of your debt.”

Before you decide to put extra cash towards your student loans, make sure you have enough cash saved in an emergency fund to cover six months’ living expenses. It won’t matter that you’ve paid off your student loans if you lose your job and have no savings to pay for rent and food.

If you do decide to move forward making extra student loan payments, the first thing you’ll want to do is to ensure you’re making bigger payments on the loans with the highest interest rates first. (This is where a tool like Student Loan Hero can help you organize and prioritize payments).

You’ll also want to prioritize paying off loans with cosigners (if you have them). When a parent or a spouse cosigns your student loan it affects his or her credit, too. And it’s a morbid thought, but if you become disabled or die, the cosigner is on the hook for repaying the loan in full.

Summary

Repaying your student loans can get complicated, and your plan will likely evolve as your situation changes. Take medical students, for example. They have large student loans and several years of a residency before they begin earning enough to make full loan payments. A smart medical student will take advantage of many of the above options—deferment and interest-only payments while in residency, for example, and consolidation or refinancing once they start earning more.

Even big student loans don’t have to sentence you to eternal poverty if work with your lenders to reduce your payments while you’re earning less and then increase payments when you can afford it.

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About the author

David Weliver
Total Articles: 296
David Weliver is the founder of Money Under 30. He's a cited authority on personal finance and the unique money issues he faced during his first two decades as an adult. He lives in Maine with his wife and two children.