You’re told to reach for the stars and pursue your dreams, but when it comes to enrolling in college, it seems that the cost of a quality education is doing the same.
The average cost of college has steadily increased over the last 20 years, and today, students can expect to spend around $50,900 a year for a four-year private education or $25,290 annually for a four-year in-state school. Out-of-state students enrolling in a public university can expect to pay around $40,940 a year.
If you’re like most students, the price tag attached to a year of college is one that requires financial assistance, specifically in the form of a student loan. Today, student loan debt is one of the most common forms of debt in the United States, and though escaping it may not be a reasonable expectation, there are ways to make it more affordable.
What does affordable look like?
For some, it may be decreasing the interest rate and hopefully minimizing the total cost of their loan. Others struggling to manage their budget may simply be looking for a way to decrease their monthly payments. Regardless of what camp you fall into, here are a few options available to help you save money on student loans.
How to Save Money on Student Loans:
- Choose the Lowest-Cost Options
- Make Loan Payments While in School
- Make Extra Payments When You Get Extra Money
- Make More Than the Minimum Payments
- Apply for Loan Forgiveness
- Refinance Your Student Loans
- Look for Other Alternatives
Choose the Lowest-Cost Options
When we talk about how much a loan costs, it’s often the interest rate that takes center stage, and rightfully so. The interest rate is essentially how much the lender charges you to use their money. This rate is applied to the total loan amount, or the principal, on a regular basis.
Interest accrues over the life of a loan, and therefore the longer you take out a loan, the more expensive your student loan becomes.
Federal Student Loans
One way to increase affordability is to seek out loans with the lowest interest rates possible. For many students, federal student loans will meet this condition.
Private Student Loans
Other student borrowers, particularly those who have exhausted or are not eligible for federal student loans, will need to review the various options provided by private student loan companies. Private lenders can set their own interest rates and borrowers can compare the rates of numerous lenders before selecting one.
Additionally, since private lenders typically base at least a portion of their rate decisions on the applicant’s credit score, it’s important to note that this can and often does impact your access to lower rates. In some cases, adding a cosigner with excellent credit can help you obtain a lower interest rate.
State-Based & Local Options
Still, student borrowers also may find more affordable student loans by turning to state-based loans or loans offered by organizations, some of which extend zero or extremely low interest rates. These are often highly specialized or driven by very specific requirements, like living in a certain location or pursuing a specific area of study.
In other words, before you take out your loan or make an effort to refinance or consolidate a loan, review all your options to find lenders that offer the best interest rates for your current situation.
Make Loan Payments While in School
Many lenders, including the federal government and numerous private lenders, allow students to defer payments while in school. For some students, this allows them to focus solely on their academics without worrying about what can be a substantial monthly bill.
However, students who choose to make even small payments can end up saving big in the end. Over the course of your college career, every payment can help you pay down a significant portion of your loan before it officially moves into repayment status. This is particularly true for federal student loans, some of which do not accrue interest while you’re in school.
If this sounds like an attractive option, here are a few steps you can take to get started.
There are a variety of free apps that can help you do this, including Mint and PocketGuard, or you can go the old-fashioned route and use a simple Excel sheet or a paper ledger. Once you account for all your necessary financial obligations, determine how much you can afford to part with for a monthly loan payment.
In order to make a payment, you must know who to pay, and in the student loan world, this is your loan servicer. If you have federal loans, you can visit the National Student Loan Data System (NSLDS) using your FSA ID to log in.
Once logged in, you should be able to access a summary of your loans. Simply select a loan to find information about your interest rate, loan status (e.g., in repayment, grace period, originated, etc.), and the loan servicer.
If you have a private student loan, you can typically find this information on a recent loan statement. Today, many private student loan servicers also contact students via email, so you may want to check your inbox or spam box if you don’t believe you received any correspondence in the mail. If you don’t have a statement, you can also find this information out by pulling your credit report.
Once you determine who services your loan, you can register for an account and access payment features.
If you have more than one loan, repayment is simple, but if you have several, as many students do, it helps to determine which one(s) are worthy of your payment. To gather this information, you can look to the NSLDS and/or your loan servicer user account.
If you have a loan(s) that is accruing interest while you’re in school, it may be helpful to make payments on that loan(s), as it can prevent your loan from growing while you complete your degree.
If you have loans that do accrue interest while you’re in school, the next thing you’ll want to consider is the interest rate applied to each loan. In this case, you may find that you save more money by paying down the loan with the largest interest rate.
Still not sure? Consider using a student loan repayment calculator to look at different repayment scenarios.
If you’re confident that you can regularly keep the required funds in your bank account, then establishing automatic payments may be the best way to manage your student loans and ensure that you stick to your payment plan.
However, if you struggle with overdraft fees or keeping the required amount in your account, then you may want to set up a reminder and make a manual payment each month to avoid costly overdrafts fees, which can counteract your efforts.
Make Extra Payments When You Get Extra Money
Set monthly payments can certainly help you keep your debt under control, but that doesn’t mean you need to limit your efforts to 12 equal payments a year. Paying more can lower your principal balance, which means your loan will accrue less interest. Birthday cards, tax returns, lucky lottery tickets, or a healthier than normal bank balance can all translate to extra loan payments that can lead to big savings in the long run.
Make More Than the Minimum Payments
Much like an extra loan payment can decrease the amount of interest paid over time and help you pay off your loan faster, paying more than the minimum payment can do the same. This is particularly true if you’re enrolled in an interest-only repayment plan, which will help you pay down interest but chip away at your principal balance.
Apply for Loan Forgiveness
For some borrowers, student loan forgiveness is a financial unicorn — something saved for dreams and fantasies. However, for others, particularly those with federal student loan debt, forgiveness may be an option.
One of the most sought-after types of student loan forgiveness is through the Public Service Loan Forgiveness (PSLF) Program, which offers loan forgiveness to eligible borrowers who make 120 qualifying payments on their Direct Loans.
To be eligible, you must meet specific qualifications set by the Department of Education, a list of which can be found on the Student Aid website. However, generally speaking, you must work full-time for a nonprofit or government agency, be enrolled in an income-driven repayment plan, and meet the 120-payment requirement mentioned above.
Federal student loan borrowers who aren’t eligible for the PSLF Program may still be eligible for some type of loan forgiveness, though not in the traditional sense. The federal government offers borrowers numerous income-driven repayment programs, like IBR and REPAYE, many of which currently offer forgiveness after meeting specific requirements. For most, this means making consecutive, on-time payments for 20 to 25 years, depending on the repayment plan.
To find out more about PSLF as well as income-driven repayment programs, you can visit the Federal Student Aid website.
Refinance Your Student Loans
Refinancing your student loans may represent another way to save money — in some cases, several thousand dollars. This is particularly true if you can access lower interest rates through your refinancing efforts.
For some, that lower rate will be the natural product of a competitive or borrower-friendly lending market, while others may find that their financial circumstances, particularly their credit history or income, make them eligible for lower interest rates.
While refinancing may be the right option for some, it’s not a decision to make hastily. In some cases, refinancing your loans will lead to lower monthly payments, but because of extended repayment terms, you may end up paying more. Additionally, federal student loan borrowers cannot refinance through the government and instead, if they wish to refinance, must move those loans to a private lender.
Though this move can certainly result in a lower interest rate, private loans remove many of the repayment protections offered by the federal government, including deferments, loan forgiveness programs, and income-driven repayment plans.
If you are considering refinancing your loans, you can follow these steps:
- Determine what loan to refinance, taking note of the existing interest rates as well as the total loan balance on all applicable loans.
- Research various student loan refinance lenders to determine what interest rate and repayment plans are available. Keep in mind that many of the best student loan refinance companies will base their decision on your credit history. As such, it’s important to determine if rate quotes are based on a hard credit inquiry, which can negatively affect your credit, or a soft credit inquiry, which will not.
- Narrow your decision down to a few lenders by reviewing the impact of each refinancing offer. You can start by working with a student loan calculator to determine how the available interest rates, repayment terms, and any additional fees will impact your monthly payments as well as the total cost of your loan.
In addition to important variables like interest rates and loan terms, it’s also important to evaluate the lender, including the perks they offer (e.g., autopay discounts, repayment plans, etc.) as well as customer reviews.
Look for Other Alternatives
Sometimes saving money means getting creative, and there are a few “out of the box” ways that you can potentially save money on your student loans. For instance, a home equity line of credit with a lower interest rate than your existing student loans may help you indirectly refinance your student loans. The same can potentially be true of a promotional offer on a credit card. However, keep in mind that these options do carry risks.
In some cases, a line of credit or credit card can negatively impact your credit by increasing your credit utilization and therefore impacting your debt-to-income ratio. Similarly, taking advantage of a 0% credit card promotion can save you money, but if you fail to pay off the balance before the end of the promotional period, you may end up paying substantially more in interest.
Another option, particularly for the investment savvy, can be investing in a reliable asset, like a mutual fund, the S&P 500, etc., that earns more interest than that currently accrued by your student loan. In this case, your earnings can be used to repay/offset your student loan interest. Of course, if choosing this path, it’s best to work with a financial advisor who can help you look at the long-term impact of this somewhat risky strategy.
Though you may not be able to avoid taking out a student loan, there are many reasonable ways to effectively decrease the cost of your student loan debt. Student loan payments may represent the largest source of debt for millions of Americans, but recognizing available resources can make it easier to come to terms with and manage this financial burden.
Author: Jennifer Lobb
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