According to the Association of American Medical Colleges, 70% of medical degree recipients in 2019 had used student loans to pay for medical school. When it comes to student loans, I have heard just about every question there is. The most common questions that I hear are: how much student loan debt is too much? How to pay off student loan debt? Which student loans should I pay off first? How do I reduce my student loan payment?
How to pay off student loan debt?
There are a variety of ways to pay off your student loan debt. There isn’t one option that is best suited for everyone. Determining which repayment plan is best for you depends on a few different factors. Income, debt balance, and career plans will all play a role in this decision. For those that aren’t aware of the different repayment options, here is a high-level overview of the repayment plans available.
The standard repayment plan has fixed monthly payments that ensures your loans are paid off within 10 years.
Extended Fixed Repayment
The extended repayment plan has fixed or graduated monthly payments that ensure your loans are paid off within 25 years.
Income Based Repayment
Depending on which plan you are on, within the income-based repayment category (PAYE, RePAYE, IBR, ICR, etc.), your monthly payments will be between 10-20% of your discretionary income. Depending on your loan type, employer, and repayment plan, your loans have the potential to be forgiven after 10, 20 or 25 years.
Student loan refinancing is when you apply for a new loan to pay off your current student loans, usually to lower your interest rate or extend your payoff timeline. If you are thinking about refinancing, please move slowly. There is no undo button. If you refinance to a private company, you will no longer be eligible for the Public Student Loan Forgiveness program (PSLF). You are also unable to defer your loans if you were struggling to make payments.
Again, it may not be the easiest decision to select which student loan repayment plan would be best for your situation. To learn a little more about the different student loan plans available, here is a link to the Federal Student Aid Website. Also, Finity Group’s advisors would be happy to connect with you to determine what would be the most appropriate for you based on your loans, debt balance and career goals.
Which student loans to pay off first?
If you have a handful of different student loans at a handful of different interest rates, you have some flexibility on which loans you pay off first. When paying down your student loans, the most important item to focus on is the interest rates of the loans rather than the balances. By the numbers, this will be the quickest way to pay them down and the most efficient dollar wise. You generally want to make the minimum payments on all your lower interest rate debts, but then focus on paying extra disposable income towards your highest interest rate debt.
This will ensure that each extra dollar that you use towards knocking down your debts is getting the best rate of return. We want you to think of the interest rate as a rate of return. The higher the interest rate, the higher return you are receiving on the dollars you allocate towards paying that off.
That being said, if all your student loans have low interest rates, it could make sense to pay the minimum on these loans and use excess dollars elsewhere in your plan that could be a more productive use of those dollars. For example, paying off other debts with higher interest rates or investing in a globally diversified portfolio.
In a previous blog post, we walked through when it makes sense to pay debt down quickly and when a slower approach is recommended. Please review the 7% Rule in our blog post for a few weeks ago: Should I invest or Pay off Debt.
If you are planning on doing the Public Service Loan Forgiveness program, you don’t want to be paying extra on your loans. If the goal is to get our loans forgiven, we want to pay the minimum amount due to ensure we get the maximum amount forgiven. For more information about the PSLF program, please visit our website to learn more.
How to lower student loan payments
There are a few different ways that you can lower your student loan payments. If you are on an income-based repayment plan, there may not be a whole lot that you can do for this.
If you are on the standard repayment or have refinanced your loans, there are a couple different options available. In order to lower your student loan payment, one of two things needs to happen: You either need to lower your interest rate or extend your repayment schedule.
By extending the repayment schedule, this would reduce the amount that you pay each month. However, you would pay more towards the loan over the life of the loan.
For example, let’s say you had a student loan for $50,000 dollars at a 7% interest rate that had a 10-year repayment schedule. You would pay roughly $580/month for 120 months. The total amount over the life of the loan would be close to $70,000 due to interest.
Using that same example, if the interest rate was 4%, your monthly payment would be roughly $506/month. Over the life of the loan, you would pay roughly $60,000.
Using the original example, let’s say instead of a 10-year repayment schedule you chose a 15-year repayment schedule. Your monthly payment each month would be roughly $450/mo. But because you are paying less to the loan each month, it will take you longer to pay this off. The total amount over the life of the loan would be close to $80,000.
How to reduce student loan debt?
There are a few things you can do to reduce the amount of student loan debt that you have. The first thing is to be a smart borrower. If you limit the amount that you take out, you reduce the amount that you have to pay back in the future.
The second thing is to pick a repayment plan that is best for you. While working with clients, I have seen student loan balances anywhere from a couple thousand dollars to a couple hundred thousand dollars. With large balances and interest rates between 2-8%, we want to select a payment plan that helps us pay these off in the most efficient way.
In Conclusion, I hope this post helped answer some of the common questions out there. No amount of student loan debt is too much, as long as we come up with a gameplan on how to best tackle this.
If you would like to know more about some of the student loan options out there, you can reach out to all of us here at Finity Group with questions any time. We would be happy to provide some more information and discuss which plan might be the most beneficial for your situation.
Related Blog Posts
- Is PSLF Worth It?
- Should I Refinance My Student Loans?
- Getting Out of Debt
- How to Qualify for Public Service Loan Forgiveness