How to Get out of Student Loan Debt?
Since the beginning of this financial year, we’ve written various loan-related articles, namely; How to Get out of Debt With the Debt Snowball Method, Student Loan Forgiveness for Nurses, and How to Pay off Debt Fast With a Low Income. But in this piece, we’re going to tackle debt from a whole different perspective.
I have gathered a lot of great information based on my recent personal experience when I had to refinance my student loans just a few months back.
What Is The Quickest Way to Get Out Of Debt?
People often confuse the word ‘smart’ for a cheat or illegal way, but that’s not the case here. A good example is an idea of paying off student loans with a personal loan: of course, it is a quick route, but it’s not necessarily a smart one.
This article helps you pay off your student loan without hurting your account balance in the future.
Another ‘quick but not so smart’ way people adopt is doing shady business, to pay off a student loan debt. They might get away with it, but what if they don’t? Then, you know what’s next — jail!
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How to Get Rid of Student Loan Payments Fast
Best Debt Relief Solutions
1. The Debt Avalanche Method To Pay Student Debt
The debt avalanche method is one of the smart ways to pay off student loan debt. The debt avalanche method aka accelerated debt repayment plan places debts with high-interest rates over the smaller ones. The debtor is required to allocate funds to settle the least payment on individual debts, then dedicate the remaining debt-repayment money to the debt with the maximum interest rate.
Once the current debt with the maximum interest rate is paid off, the second highest is paid off with the debt avalanche method until all debts are fully paid.
For the debt avalanche method to work, an unused part of the debtor’s income must be allocated for paying off debt. This fund doesn’t include the necessary living expenses, like groceries, rent, daycare or transportation fees.
Below is a hypothetical case of how debtors can pay off debt through a debt avalanche method;
Let’s say Alex has $500 extra funds per month after settling his essential needs. And his current loans are;
- $1,000 on a credit card debt with a yearly interest rate of 20%
- $1,550 monthly car payment at a 10% interest rate
- $5,200 line of credit (LOC), with a 7% interest rate
If each debt has a minimum monthly payment of fifty bucks ($50), Alex would have to designate $100 to the second and third debts. Thereby devoting the remaining $400 to the first loan with a 20% interest rate, which appears to be the highest.
Why Debt To Income Is Important
How to get out of debt with the debt snowball method
With consistency, Alex would pay off the first loan at the end of the fourth month, he pays 450 bucks each month. Once he’s done with the first debt, he’d have to proceed to the second-highest debt, which is the second loan.
Note: Opposite to what many bloggers portray, the order of preference of the debt avalanche method isn’t about the amount of debt, but the percentage of the interest rate.
To read more about the debt avalanche method and its benefits, check out this guide.
2. Discipline Yourself Financially or Contact a Debt Manager
Understand this: the creditor is not at fault, you are. If you’ve got enough money in the first place, you won’t be indebted to the bank. Though it’s a painful process, taking responsibility is the first leap towards financial discipline.
We’ve written a ton of practical and therapeutic tips, as regards financial discipline. This guide would help you become better financial-wise:
Find a repayment plan that suits you
- Most federal student loans qualify for a standard repayment plan, which spreads payment over a 10-year duration. For instance, if an average student debt of $37,000 and 5% is divided through 10 years, the monthly payment would be $392 for 10 years.
For those who can’t afford a standard repayment loan due to their responsibilities or lifestyle, there are two other repayment plans you could opt-in for, namely;
- Extended payment program: The duration for an extended payment program is 25 years. Though it makes your monthly payment lesser, you’d pay more interest in the long run.
- Graduate Repayment Program: The duration is still 10 years, but the initial monthly payments are lower and it gets bigger over time. This program works for those, whose salaries increase with time. The monthly payments are expected to increase by 20% bi-annually (every two years) and the highest payment you’d ever make throughout the program won’t be more than three times the initial payment.
Note: repayment plans don’t cancel your debts. The best you could get from these programs is a manageable extension, which is fair enough for people who are not in a haste to pay off their debts.
3. Seek for a Loan Forgiveness Program
United States citizens, who opted for federal college loans are eligible for student loan debt relief forgiveness plans. There is four student loan debt forgiveness and in addition, there is a student loan debt relief plan for each state.
These plans were structured to pardon your debts after 20 years of public service and they’re suitable for those with large debts. To qualify for this program, you must have paid parts of your debts.
For the sake of brevity, we’d limit the scope of this guide to the four federal loan forgiveness programs available. If you wanna read the full list, check out this guide.
Below Are the Four Federal Student Loan Forgiveness;
- Public Service Loan Forgiveness: This program pardons the loan balance of qualified applicants after making 120 qualifying payments, and the good news is that PSLF disbursements are tax-free. PSLF was created under the College Cost Reduction and Access Act of 2007, in a bid to help qualified public workers pay off their debts. To qualify for this loan forgiveness program, you must be willing to work for the federal government for a specified amount of time.
- Teacher Loan Forgiveness: are you a public elementary school or high school teacher struggling to pay your loans? TLF is one of the best student loan forgiveness for you. It’s worth mentioning that only teachers who took out loans after Oct 1, 1998, are eligible for this offer.
- Perkins Loan Cancellation: Perkins loan cancellation helps eligible nurses pay off their loans faster. To qualify, you must be a public worker and be willing to work in a high-need area.
- Nurse Corps Loan Repayment Program: Nurse Corps LRP settles about 85% of the remaining student loan of eligible nurses. Like Perkins loan cancellation, it’s quite competitive.
4. Income-Driven Repayment Programs With Forgiveness
Loans that were taken since 2009 qualify for income-based repayment, which is the most available income-driven repayment and student loan consolidation plan for federal workers. With payment caps sustained on income, you can pay $0, if your income is that small. Then, after 20-25 years depending on the criteria, your balance would be pardoned.
These are the income-driven repayment plans available in the US:
- Income-Based Repayment: This plan is only applicable to loans taken out after July 1, 2007. You’re expected to devote 10% of your discretionary income and your outstanding balance would be pardoned after 20 years.
- Pay As You earn: PAYE is only applicable to loans taken out after Oct 1, 2007, and disbursed after Oct 1, 2011. Like income-based repayment, you’re required to set aside 10% of your discretionary income for a 20 year period before it’s forgiven.
- Revised Pay As You Earn: unlike the first two income-driven repayment plans we discussed, REPAY has no payment caps and your payment could be larger if you earn more. You’re expected to set aside 10% of your discretionary wage and your outstanding balance would be pardoned after 20 years.
- Income Contingent Repayment: ICR gives you an option: you either pay 20% of your discretionary income or pay a fixed amount for 12 years.
5. Ask Your Employer About Programs The Have In Place
Some private companies or employers may offer their workers student loan disbursement, to get them to stay in the company for a specified duration. Though the concept is kinda new, it’s becoming famous in the corporate world. Make inquiries from your HR department, if your company provides disbursement.
How Much Will You Save? Check if you qualify in two simple steps
- Step 1 – Select your debt amount below to see if you’re eligible
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Frequently Asked Questions on How to Get Rid of Student Loan Debt the Smart Way
Why The Avalanche Method Work?
The debt avalanche method shields the debtor from paying excessive compound interests, which increases with time.
Most lenders use compound interest rates, which increases the interest on your debt over time. Compound interest is the summing up of interest to a bulk of deposit or loan, which is a consequence of keeping interests for a long period instead of paying it off. The interest banks earn is the sum of the principal sum and accumulated interest.
The rate of increase depends on the frequency of compounding and the duration. The higher the duration, the higher the interest. A good percentage of credit card balances compounds daily while others compound monthly, semi-annually, or annually.
The only downside of the debt avalanche method is that it requires discipline and devotion to make it work. People easily settle for the required minimum payment on all debts due to their lifestyle, unforeseen expenses or home, even repairs. That’s the reason we advise people to save up at least six-month emergency funds before applying the debt avalanche method.
How Do I Calculate the Compound Interest on My Loan?
You can calculate the compound interest on your loan using the formula A = P (1 + r/n) (nt), by inserting the starting principal value (P), yearly interest rate (r as a decimal), time factor (t) and the number of compound durations (n). In order to derive the figure of the compound interest only, deduct the principal (P) from the result gotten from the equation.
It’s worth mentioning that the formula above provides you the future amount of loan, which is the addition of the principal (P) and the compound interest.
The formula for compound interest and the principal sum is:
- A = P (1 + r/n) (nt)
- For compounded interest-only = P (1 + r/n) (nt) – P
- A = the potential value of the loan, including interest
- P = the principal loan amount
- r = the yearly interest rate (in decimal)
- n = the no of times the interest was compounded per unit t
- t = the duration the debt was incurred.
Let’s take a look at a hypothetical case study.
Assuming $5,000 was deposited into a savings account with a yearly interest rate of 5%, which is compounded per month, the amount of the investment after a 10-year period is…
- P = 5000.
- r = 5/100 = 0.05 (decimal).
- n = 12.
- t = 10.
If we insert those figures into our formula, the following values show up:
- A = 5000 (1 + 0.05 / 12) (12 * 10) = 8235.05.
So, we get a total value of $8,235.05 after 10 years.
What Is an Emergency Fund?
- An emergency fund is a backup account created in case of occurrences that cause financial instability, for instance, job losses, chronic sickness, or a major house repair. The essence of the emergency fund is to provide financial security in times of need.
What is the Debt Snowball Method?
- The debt snowball method is the opposite of the debt avalanche method. It is a debt reduction strategy, whereby the debtor with multiple loans begins settling the debts from the smallest to the highest. The gimmick is to pay the minimum payment on others while paying off the ones with the least interest first. Immediately the least debt is settled, the individual proceeds to the next debt on the list, in ascending order till the debts are fully paid.
What Is the Average Student Loan Debt?
As of 2016, the average student loan debt for United States citizens, who borrowed student loan was $37,172
How to get rid of student loan debt the smart way: If you follow the six debt solutions provided in this guide, you’ll be able to pay off your debts with no stress. Though these methods require high discipline and commitment, you can also consolidate your federal loans or with the help of a student loan forgiveness program.