Americans have a collective $1.71 trillion in student loan debt, and many are struggling under the burden. Though college is generally seen as a good investment (a bachelor’s degree is worth an average of $2.8 million over the course of a graduate’s lifetime), some adults don’t earn enough to cover student loan repayment. In 2019, about 17 percent of student loan borrowers were behind on their payments, according to the Federal Reserve.
Americans are now about 27 percent more likely to live paycheck to paycheck, leaving little room for debt repayment, than before the crisis began. And one third of Americans now say they plan to work longer past retirement age because the pandemic interfered with their savings.
If you’re struggling to make ends meet right now, you might be curious about your options for reducing student loan debt. Here are three things you can do to lessen the burden.
Apply for Forgiveness
With student loan forgiveness programs, it’s possible to have a portion of your debt forgiven or the remainder of your debt wiped away once you’ve made a certain number of payments on your federal student loans. However, the eligibility requirements for these programs are generally pretty strict, and these programs won’t help with private student loan debt. Programs for the following are available:
Teachers
If you teach full-time, five years in a row, in a school that serves low-income students, you may be eligible for up to $17,500 in total forgiveness for federal student loan debt. The actual amount will depend on what subject you teach. Check out the teacher loan forgiveness program for more details. There may also be state-specific programs available for teachers, so research teacher loan forgiveness in your state.
Healthcare Workers
Most states have programs for healthcare workers designed to encourage employment in areas where there is a shortage of qualified staff. In addition, you may be eligible for the following programs:
- The Faculty Loan Repayment Program, available to healthcare professionals from disadvantaged backgrounds who teach at certain health profession schools, which can forgive up to $40,000 in student loan debt
- The Indian Health Services Loan Repayment Program, designed to encourage work at program sites serving the Alaska Native and American Indian communities, which forgives up to $20,000 per year for a two-year period of service
- The NURSE Corps Loan Repayment Program, which can forgive up to 60 percent of debt after a two-year commitment or up to 85 percent of debt after a three-year commitment for eligible nurses working in high-need areas or as faculty members at nursing schools
- The National Health Service Corps has programs available to certain professionals working in critical shortage areas, which forgive up to $60,000 in debt for two years of service
- The National Institutes of Health Loan Forgiveness Program, which provides up to $35,000 per year in student loan forgiveness for eligible researchers
Lawyers
In addition to numerous state programs for attorneys working in the public sector, the following programs may be able to help:
- The Department of Justice Attorney Student Loan Repayment Program, which offers up to $6,000 per year in forgiveness (up to $60,000 total) in exchange for a three-year commitment to serve the Department of Justice
- The John R. Justice Student Loan Repayment Program, which provides up to $10,000 per year in forgiveness for attorneys working as public defenders for at least three years
Nonprofit and Government Employees
After ten years of repayment through an income-driven repayment plan, certain government and nonprofit employees are eligible to have the remainder of their debt forgiven through the Public Service Loan Forgiveness Program. Even if you weren’t making payments under a qualifying repayment plan, you could still qualify for Temporary Expanded Public Service Loan Forgiveness.
Military Programs
Each branch of the military has their own forgiveness programs, and there are programs for health professionals who served in the military as well. For example, the Active Duty Health Professions Loan Repayment Program allows U.S. Army physicians to receive up to $120,000 to pay for medical school loans, according to Go Army.
Community Service Programs
After at least a year of service with AmeriCorps, you could qualify for the Segal AmeriCorps Education Award, which can be used to pay off eligible student loan debt. The value of the award is equal to the maximum Pell Grant amount for that year, and the total amount of forgiveness you’re eligible for varies depending on how long you serve.
Apply for an Income-Driven Repayment Plan
With an income-driven repayment plan, you’ll make student loan payments based on a percentage of your current income. Your payments may fluctuate year-to-year, but they’ll always be proportional to your earnings. If you’re a low-income earner, you’ll likely get a lower monthly payment from an income-driven repayment plan, and some of your balance may be forgiven. Congress has also temporarily exempt the forgiven amount from taxation through 2026, which is likely to be extended.
Depending on your income and family size, you may qualify for $0 monthly payments. You can use the loan simulator to determine if an income-driven repayment plan is appropriate for you.
The following programs can help to lower your monthly payment:
REPAYE
The Revised Pay As You Earn (REPAYE) Plan caps your student loan payments at 10 percent of your discretionary income for federal direct loans and forgives the balance after 20 years (25 years if the loans are used for graduate study).
PAYE
The Pay As You Earn (PAYE) Plan limits payments to 10 percent of your discretionary income and will never result in a higher payment than what you would pay for a standard plan. The remaining balance is forgiven after 20 years of repayment.
IBR
Depending on when you took out your student loans, Income-Based Repayment (IBR) monthly payments are capped at either 10 or 15 percent of your discretionary income, and the remaining balance is forgiven after 20 or 25 years.
ICR
Income-Contingent Repayment (ICR) caps your student loan payments at 20 percent of your discretionary income and will never result in a higher payment than you would be charged on a standard plan. The remaining balance is forgiven after 25 years of repayment. One advantage of the ICR is that Parent PLUS loans are eligible under the plan.
Refinance Your Student Loan Debt
Student loan refinancing involves taking out a new loan from a private lender to pay off your student debt. This can help you achieve a lower interest rate, which means you’ll pay less each month and over time. Refinancing also allows you to change the terms of the loan, so you can either achieve a lower monthly payment or get out of debt sooner.
Refinancing is different from a federal direct consolidation loan, which allows you to combine multiple loans into one and select new repayment terms, according to the U.S. Department of Education. Federal consolidation doesn’t change your interest rate, so you’ll only save money if you can contribute a higher monthly payment and pay off the loan early.
The main drawback of refinancing is that it means your loans will become private. That means you won’t be eligible for federal programs such as Public Service Loan Forgiveness or income-driven repayment plans. You’re also not likely to receive relief during an economic downturn — while federal student loan borrowers can pause their payments right now due to the coronavirus crisis, private student loan borrowers are out of luck.
Another consideration is that not everyone will be eligible for student loan refinancing. You’ll need to meet the lender’s credit score requirements. Typically, a score of 650 or higher is needed to get a low interest rate, and the higher your credit score is, the less you’ll pay in interest. You’ll also likely need a debt-to-income ratio below 50 percent, which means your monthly debt payments can take up no more than half of your gross monthly income. Again, the lower your DTI, the better chance you’ll have of getting a lower interest rate.
How to Refinance Your Student Loans
- Check your credit score: You can access your free credit report at AnnualCreditReport.com. Check for any errors, such as old debts or accounts that aren’t yours, so you can dispute any negative marks that may be affecting your score.
- Make sure refinancing is right for you: Make sure your credit score is above 650 and your debt-to-income ratio is less than 50 percent. You should also make sure you won’t need to utilize any federal programs in the future, since refinancing will mean replacing your federal loans with private student loans.
- Compare rates across lenders: Most lenders will allow you to check your interest rate without impacting your credit score. It may not be exact, but checking your rates will give you an idea of which lenders can offer you the best deal. Most lender websites allow you to check your rate for free, and you can also use a loan comparison tool to compare rates from multiple lenders in one place.
- Choose a loan: Narrow down your options to the loans with the lowest APRs and favorable terms, and then do your research into each lender. Make your decision based on factors like customer service reviews, penalties, terms, and fees, and any rate discount programs such as those for automatic payments.
- Pull together the required documents: You’ll typically need to provide photo identification, such as a driver’s license or passport, along with your social security number, proof of income, and official statements from your current loan servicers. You’ll also need to supply information about your co-signer, if applicable.
- Apply and wait for approval: Be sure to continue making on-time payments on your current student loans until they’re refinanced. Then, set up automatic payments with your new lender to ensure you don’t miss any due dates.
How to Choose the Right Option
The right option for you will depend on your current financial situation. For example, if you have bad credit, you may not qualify for refinancing, but you may be eligible for an income-driven repayment plan. A good place to start is to check your eligibility for state and federal student loan forgiveness programs. If you’re eligible for Public Service Student Loan forgiveness, you’ll need to get on an income-driven repayment plan, according to the U.S. Department of Education.
If you’re not eligible for any type of forgiveness, use the loan simulator to estimate your savings on an income-driven repayment plan and evaluate your credit score to see if you could save by refinancing. If you’re in financial distress, you can choose the option with the lowest monthly payment. If you’re looking to save money over the life of your loans, you can choose new repayment terms that reduce your overall interest.
The information contained herein is provided for free and is to be used for educational and informational purposes only. Consult a financial professional for specific help with your situation.