Jul 31, 2024
Student loans are a fact of life in America. In 2023, 30% of college attendees borrowed money to help fund their degrees, and the median amount owed among those with debt was between $20,000 and $24,999.
Racking up this kind of debt can be tough — particularly for those who are just starting their careers and may not have their desired salaries yet. It can be an even heavier weight to bear if most of your loans are held by private lenders instead of the U.S. Department of Education.
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Take, for example, a $41,000 private student loan balance with an interest rate of 10.5%. That’s very different from having, say $10,000 in federal student loans at 3%.
Since you can’t escape the price tag of earning an education, the big question becomes: how can you best approach the financial burden you've been left with so you can pay off your student debt faster?
Consider paying off private loans first
When you have both federal and private student loans, paying off your private loan may be your first priority. The more money you can devote to your private student loans, the quicker you can avoid accumulating higher interest.
Federal student loans have lower fixed interest rates and offer generous borrower benefits including:
- Deferment and forbearance (temporary relief from payments)
- Income-driven repayment options that could set your monthly payment as low as $0
If you work in public service or sign up for income-driven repayment, you may even be able to get a portion of that debt forgiven in as little as a decade.
Although a federal court has blocked President Joe Biden's efforts to wipe away student debt as of July 18th, a future congress could potentially take action to eliminate more of what you owe on your federal loans.
To free up as much cash as possible for paying off private student debt, you can see if you qualify for an income-driven plan that caps payments as a percentage of income. This means you’ll likely pay more interest on your federal loans over your lifetime, but since you're likely paying interest at a lower rate on these loans than on your private debts, this move can still leave you better off.
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Look into refinancing private student debt
Paying off high-interest balances is just the first step in dealing with student debt. You may also want to try to reduce the cost of private loans as much as possible.
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Refinancing can be a good way to do that. Unlike federal student loans, your private lender isn't going to let you change your payment terms, offer income-driven options, or forgive a portion of your loan.
The good news is, there are many different lenders offering private student loan refinancing options. If this is something you want to explore, you can always shop around to find the best rate available. And if your credit or income isn't impressive, consider applying with a cosigner to reduce your rate as much as possible.
Remember, you may only want to refinance your private student loans since you'd have to give up federal borrower benefits if you refinanced your federal loans with a private lender. Plus, refinancing only makes sense if you can qualify for a new loan at a lower rate.
Let’s revisit the $41,000 private student loan debt. If you have nine years remaining on your current debt at 10.5% interest and refinance to a new 10-year loan at 7.5%, you'd drop your monthly payment by $101 and save $5,193 over the life of the loan, although you'd be making payments for one year longer.
Of course, you can always pay more than the minimum, so you may want to keep paying the same amount even after refinancing to retire your debt faster.
The bottom line is — there are options when it comes to lightening the load of your student debt. It’s a good idea to look into your refinancing options if your rate is unaffordable and your balance isn’t declining. By lowering your federal loan payment and potentially refinancing your private loans, you may get the breathing room you need and be able to set more attainable repayment goals.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
