However, while paying off student loans early is a commendable goal, aggressive repayment can have drawbacks. Focusing solely on student debt may cause borrowers to overlook financial opportunities and make mistakes.

Today, we will explore how to avoid repayment mistakes and prepayment penalties. We’ll also discuss strategies for integrating early student loan repayment into your broader financial goals.

Should I Be Concerned About Prepayment Penalties with Student Debt?

Student loan borrowers who are ready for aggressive debt elimination needn’t worry about prepayment penalties.

The federal government does not impose any fees for early repayment of student loans. Furthermore, Congress has prohibited private student loan lenders from charging prepayment fees since 2008. According to 15 U.S.C. § 1650(e), private educational lenders may not impose “a fee or penalty on a borrower for early repayment or prepayment of any private education loan.”

In short, lenders cannot penalize borrowers who wish to tackle their student loans ahead of schedule.

Will Early Student Loan Repayment Affect My Credit Score?

Some borrowers worry that early student loan repayment may negatively impact their credit score.

There is some truth to this concern, as some borrowers have reported a drop in their credit score after paying off a student loan. The most likely explanation is that the borrower’s oldest line of credit, the student loan, no longer appears on their credit report. When the oldest line of credit disappears that average length of credit is shortened, and this can reduce a credit score.

However, even if there is a risk of a credit score drop, the impact is typically minor and temporary. If the score does decrease, it will likely be a small change, and the score should recover fairly quickly. Consider this: if a credit score is a measure of creditworthiness, shouldn’t paying off a loan improve the score?

Ultimately, spending extra money to artificially boost a credit score rarely makes sense. In most cases, a few points in either direction has no impact on the consumer, so spending extra money each month for a few extra points would be a huge waste of money.

In very rare instances, delaying a final payment can make sense. For example, borrowers who are looking to buy a house and worried that a small drop in credit score might be costly should contact their mortgage company or a mortgage broker. Depending on your financial situation, they may advise you that paying off the student loan first might be helpful. Other times, they might suggest waiting to pay off the loan until the mortgage is final.

Will I Miss Out on a Student Loan Tax Deduction?

Some borrowers choose to delay paying off their student loans because of the tax break they receive.

This strategy is generally not advisable, however. The deduction applies only to a portion of the student loan interest paid and provides a meager tax benefit.

Some borrowers may not even qualify for this tax break. Furthermore, those who do qualify will hardly benefit from delaying repayment. For every dollar spent on student loan interest, the maximum tax savings will be 22 cents. This small saving usually doesn’t justify the additional interest costs accrued by prolonging the loan repayment.

Opportunity Costs – The True Expense of Early Repayment

When planning their financial futures, student loan borrowers often face choices between paying off the student debt or working towards other goals.

When you make a student loan payment, that money is gone for good. For example, if you spend $500 on your student loans, you cannot use that $500 for anything else. Economists call this concept as opportunity cost.

To put it simply, if we focus solely on paying off student loans, we will postpone or neglect other financial goals. These deferred goals represent some of the most significant hidden costs of early student loan repayment. The following are some examples of the decisions student loan borrowers must face:

Saving for Retirement – For those with high-interest student loans, it usually makes sense to prioritize paying off the debt before focusing on retirement. However, borrowers with lower interest rates on their loans might benefit more from starting to save for retirement early.

A generous employer matching program should usually be a higher priority than student debt elimination. Similarly, many borrowers should choose to refinance their student loans at a lower interest rate to free up cash for retirement savings. This site has previously detailed the options and provided a suggested priority order for borrowers seeking to balance retirement goals and repayment goals.

Buying a House – The process of purchasing a home while managing student loan repayment can be quite complex. Qualifying for a mortgage often requires setting aside funds for a down payment. However, it can be frustrating to see money sitting in a savings account earning minimal interest while being charged a much higher interest rate on the student loans. Despite such frustrations, homeownership offers numerous personal and financial benefits that can make the irritations worth it.

With careful planning, many borrowers can qualify for a mortgage. Often, this strategy involves prioritizing the repayment of specific student loans before buying a house, while addressing others through aggressive repayment after the home purchase.

Loan Forgiveness – Another hidden cost of early student loan repayment that borrowers often overlook is the loss of potential student loan forgiveness. Many government programs require ten years or more to qualify. However, there are numerous forgiveness programs that borrowers should investigate before deciding to pay off their loans early.

The Significant Cost of a Small Emergency Fund

Having an emergency fund is crucial.

An emergency fund serves as a safety net, providing funds for unexpected expenses such as medical bills, car accidents, or urgent home repairs. Additionally, an emergency fund is essential in the event of job loss. Without any income, making sure that a roof stays over your head and food still arrives on the table can become challenging.

Given the high risks associated with not having an emergency fund, student loan borrowers should prioritize building up their cash reserves before focusing on early loan repayment. This site has previously taken a deeper look at how much should be in an emergency fund and how to balance the fund with student loan repayment.

Keeping Your Eyes on the Prize

The purpose of this article is not to discourage borrowers from repaying their student loans early. In fact, it is quite the opposite. Many borrowers benefit from eliminating their student debt early. The goal here is to dispel a few myths and help borrowers make well-informed financial decisions.

Paying off student loans guarantees a return on your investment. The savings on interest accumulate, and monthly payments can be eliminated. The financial and non-financial advantages of debt elimination can be significant.

Getting rid of student loans can be very satisfying, and the right strategy can make the debt disappear surprisingly quickly.

The post The Hidden Costs of Paying Off Student Loans Early appeared first on The Student Loan Sherpa.

The following is the contents of the August email. If you wish to sign up to receive future editions of the monthly update, you can subscribe here.

New Federal Repayment Plan

The new SAVE plan will be the best IDR plan for most federal student loan borrowers.

It technically replaces the current REPAYE plan and is being released in two phases. Some provisions will be immediately available, and others go live July 1, 2024.

Click here to read more about the plan.

Click here to estimate your monthly payments in both phases of the new plan.

Budgeting for the Restart

The national media has picked up on a survey where nearly half the respondents expected to go delinquent on their debt once repayment begins.

I’m troubled by this report for a couple of reasons.

For starters, I hope it means that many of the survey participants don’t understand SAVE or IDR repayment.

Second, and more concerning, many other borrowers may read these headlines and conclude that they have no hope and default is inevitable.

I hope Student Loan Sherpa readers don’t feel this sense of hopelessness. Managing federal debt is brutal and frustrating, but default is often avoidable.

IDR Adjustment Update

Last year, the Biden administration announced a significant update to IDR payment counts.

This update will move many borrowers much closer to forgiveness.

For borrowers with FFEL or Perkins loans, consolidation before 12/31/23 is necessary to qualify.

Additionally, if your loans have different IDR counts, you may also want to consolidate. For example, if you attended college, left for several years, and then returned for graduate school, combining your debt may result in a higher IDR count.

Sadly, there is a lawsuit to challenge aspects of the one-time adjustment. I’m skeptical that the lawsuit will impact anything, but I can’t say for certain.

Help for Struggling Borrowers

For borrowers that have struggled in the past with their student debt, a couple of new resources are worth noting.

The first one to highlight is the Fresh Start program. If your loans defaulted before the payment pause started, Fresh Start is an excellent option to get started on IDR and clean up your credit report. Fresh Start will be a much better choice than rehabilitating or consolidating to address a default.

The other big change is the new bankruptcy policy. Historically, bankruptcy wasn’t really an option for federal student loan borrowers outside of the most extreme cases. Today, things are much different. Bankruptcy now provides a meaningful opportunity for borrowers overwhelmed by their federal debt.

Tip of the Month

Log in to your servicer account and update your contact information.

This tip may not seem particularly clever or helpful, but it is critical. Many borrowers have new servicers, and others have moved since 2020.

If you miss an important letter, email, or deadline, you won’t get any slack because it was sent to your old home or email address.

If you are unsure about who currently services your loans, it’s pretty easy to track down that information.

Did you know?

Working for a PSLF employer for ten years is insufficient to qualify for forgiveness.

You must be employed by an eligible employer at the time you apply for forgiveness and at the time it is granted.If PSLF is in your future, be sure not to leave your job too soon.

The post Student Loan Tips for August 2023 appeared first on The Student Loan Sherpa.

The reasoning here is pretty simple: private student loans are less flexible and, therefore more dangerous to the average borrower.

Federal loans offer forgiveness opportunities, income-driven repayment options, and interest freezes during times of crisis. Private loans can’t match these borrower protections.

We see exceptions to this basic rule in limited circumstances. Borrowers looking to buy a house might be better off focusing on federal loans. Likewise, financially secure borrowers focused entirely on debt elimination may determine that eliminating their government loans first is the optimal choice.

Debt Elimination and Loan Payoff Order Basics

Before we jump to specific situations and examples, it’s critical to clarify one point.

When we talk about eliminating one loan before others, it doesn’t mean entirely ignoring some loans. Missing a monthly bill can mean late fees, adverse credit reporting, and worse. Skipping out on any student loan bill should be reserved for desperate situations.

The discussion of loan prioritization is about determining where extra payments are best allocated. If your student loan bills total $400 per month and you can afford to pay $500 per month towards your debt, which loan should get the extra $100?

Our goal today is to make that extra $100 go as far as possible.

The Classic Strategy: Focus on the Loan with the Highest Interest Rate

If you do the math, eliminating the highest-interest loan will always save the most money in the long run — assuming that forgiveness and outside help isn’t available.

When you pay off high-interest loans first, as debt gets eliminated, your average interest rate gets lower and lower. The more money that gets applied to the principal, the better you do.

I usually don’t advise this classic strategy because it misses the big picture. If all your loans had the same terms and conditions but different interest rates, knocking out the high-interest loans first would save the most money. The problem is that loans don’t all have the same terms and conditions. Because federal loans have better terms and conditions, it is often advisable to leave that for last.

However, there are times when knocking out the loans with the highest interest rate first is best.

The classic example is someone with a good job and job security. Earning a good income alone isn’t enough — if your solid income can quickly disappear, you don’t want private loans hanging over your head. However, if your long-term financial outlook is strong, it might be a question of eliminating the debt as fast as possible. You might not care about loan forgiveness or income-driven repayment.

In this limited circumstance, tackle the loans with the highest interest rate, as it will likely save the most money in the long run. Borrowers in this situation can also leverage their earning power into lower interest rates using a student loan refinance.

Applying New School Psychology to Debt Elimination

Not all borrowers choose to pay off their highest-interest loan first. Some choose to pay off the loan with the lowest balance.

The idea behind this strategy is that knocking out a small loan gets the borrower an easy win. Fresh off success, the borrower is more likely to stick with their plan to pay off their loans aggressively.

This strategy isn’t the most efficient from an accounting perspective, but when you factor in the psychological benefits, at least one study found that it works better.

The problem with this approach is the same as the problem with paying off the highest interest rate loan first: neither strategy addresses what happens if you lose your job or get a pay cut.

Why Knocking Out Private Loans First is Best

Under ideal circumstances, whether your loans are federal or private doesn’t matter. Unfortunately, most of us will face financial circumstances that are less than ideal at one point or another.

If you are unemployed, dealing with federal student loans is dramatically different than private loans. In a financial crisis, federal borrowers can cut their monthly federal loan payment to $0. Additionally, they can get a substantial interest subsidy. Finally, all that time still counts towards the various student loan forgiveness programs.

The extensive federal protections are why I advise most borrowers first to eliminate their private loans. It might not be the best strategy from an accounting or psychological perspective, but it’s the one that will help borrowers sleep best at night.

Sherpa Tip: Another perk of saving federal loans for last is that it allows borrowers to maximize any new federal programs that might be created in the future.

For example, the $10,000 forgiveness program that was recently announced seemed highly unlikely just one year ago. The borrowers who focused on private loans first may not receive up to $20,000 of federal loan forgiveness.

Likewise, during the Covid-19 pandemic, federal borrowers had their interest rate lowered to 0%. The Covid-19 relief is something that private lenders can’t offer.

Buying a House can Change Repayment Strategy

Student loans can wreak havoc on a mortgage application.

Student debt can impact your credit score. However, the big consideration for homebuyers with student loans is usually the debt-to-income (DTI) ratio. Mortgage companies look at your monthly DTI to determine how big of a mortgage payment you can afford.

Thus, if you are trying to buy a house, sometimes it makes sense to pay off the smallest loan completely. Other times the best approach is to knock out the loan with the highest monthly payment.

Another strategy for those trying to qualify for a mortgage is to request lower monthly payments on their loans.

Repayment strategy for borrowers looking to secure a mortgage gets complicated quickly. There isn’t a simple answer in this situation.

Advanced Guidance for Homebuyers: The ideal approach will depend upon several factors unique to each borrower. The comprehensive guide for student loans and mortgages should help you identify the repayment strategy that maximizes your chances of mortgage approval.

Classic Debt Elimination Strategies Don’t Work for Student Loans

Many finance gurus like to get people started on easy-to-understand debt elimination strategies.

The problem with one-size-fits-all approaches is that student loans are far more complicated than most other debts.

Student loan terms are frustratingly harsh at times. In other situations, they may seem quite generous.

Don’t be afraid to pick the repayment strategy that works best for your student loans. The first loan you pay off should be the loan that is either the most significant obstacle or the biggest threat to achieving your financial goals. For most borrowers, that will be the private loan with the highest interest rate.

Tips For Borrowers Unsure of What Loan to Attack First

If you are still uncertain about what loan to pay off first, there are a few other factors that might impact your decision:

• Cosigners – Your cosigner may appreciate you eliminating the debt they are attached to. Even if you make all your payments on time, the student loan will still be on your cosigner’s credit report until it is paid off completely. Plus, if you encounter problems down the road, you don’t want those issues to also hurt your cosigner.
• Getting Rid of a Specific Lender – If you have one lender that is a thorn in your paw, paying down their loan first is worth considering. Eliminating their loan means you no longer have to deal with that lender, and it means they stop profiting from your debt. That can be very satisfying.
• Refinance – The option to refinance is a wildcard. The people who most desperately need the help usually can’t benefit, but the stronger your finances, the more a refinance can help. Some borrowers even choose to use a refinance to lower their interest rates so that they can focus on other financial goals like saving for retirement.

As of November 2024, the following lenders offer the lowest refinance rates:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

The post Why Most* Borrowers Should Repay Private Student Loans First appeared first on The Student Loan Sherpa.

Unfortunately, it isn’t always the best decision.

Today I’ll first explain why borrowers should be in a rush to make extra payments.

Then, I’ll highlight the four situations where delaying extra payments is the smart move.

Why the Rush to Make Extra Student Loan Payments?

Student loan bills make it appear as though interest is added monthly.

In a certain sense, this is accurate. Student loan interest does get added to your principal balance every month. However, interest accrues daily.

That means that the more debt you have, the more interest it generates each day. By making an extra payment, the daily interest that is accrued is reduced. Thus, the sooner the payment is made, the more it will save on interest.

Having said all that, the daily accumulation of debt isn’t so substantial that one day will make a huge difference. A $20,000 student loan with an 8% interest rate will generate about $4.38 in interest each day. A day or two of extra interest won’t make a huge difference, but the interest can quickly pile up.

When to Wait on an Extra Student Loan Payment

There are at least four exceptions to the “pay now” rule of thumb.

Concerns about future payments

The first exception would be if making your extra payment now might jeopardize a future payment.

If you have the money now, but you are not sure that you will be able to make the minimum payment over the next few months, it might be a better idea to hold on to your cash.

However, some lenders will take the extra payment and count it towards the minimum for future months. If your lender engages in this practice, you can consider going ahead with the additional payment — just be sure to call your lender to verify their policy.

Better opportunities elsewhere

Aggressive repayment is highly encouraged as it can save borrowers a bundle on interest. However, a singular focus on student debt could be a mistake.

If you have high-interest credit card debt, it might be better to pay that off first. Similarly, if your employer matches retirement contributions, you could be better off in the long run if you set that money aside for retirement.

Before making the extra payment, be sure to consider how your student debt fits in with your other financial goals.

You are about to refinance your debt at a lower interest rate

Refinancing student loans can change your calculations.

If your loan with an 8% interest rate becomes a loan with a 3% interest rate, the urgency to pay it off may drop. This goes back to our previous point.

Lower interest rates could mean an opportunity to save for a home down payment, put money aside for retirement, or eliminate other debt. At present, student loan refinance companies offer rates starting at about 2%.

You might need the money for something else

This one should be pretty obvious, but it is worth highlighting.

Don’t eliminate your emergency fund just to pay down your student debt.

Once that money goes to the lender, you cannot get it back under any circumstance. If the money could be necessary for something else, keep the cash on hand.

Sherpa Tip: Most borrowers can find a justifiable reason to delay making student loan payments, such as saving for retirement or buying a house.

This mindset becomes dangerous if you delay attacking your debt but don’t divert the funds towards another justifiable priority. Don’t make the mistake of justifying a delay on your student loans to pay off credit card debt but then using the money to buy something else instead.

If temptation is an issue, knock out the debt when you can.

Finding Reasons to Pay Extra on Your Student Loans

If you are considering making an extra payment and worried about making a mistake, it is always good to think twice before cutting a check.

There are certainly times when paying extra isn’t the best course of action.

However, it is worth remembering that student loan lenders are experts at extracting every penny they can out of borrowers. By making an extra payment, you not only reduce your monthly spending on interest, but you take a massive step towards getting your loan paid off faster and paying less over the life of the loan.

When you do make your extra payment, just be sure to be smart about it.

The post Four Ways Extra Student Loan Payments are a Mistake appeared first on The Student Loan Sherpa.

Most consumers will benefit from knocking out their credit card debt first. This debt is worse because the interest rates are normally higher and because there are fewer resources available to help with repayment.

On the student loan side of things, tools are available to get the debt under control whether you are struggling or thriving.

Student Loan Debt And Credit Card Debt Are Both Bad

Before jumping into the explanation of why credit card debt is worse, it is worth noting that both forms of debt are harmful.

Some people have the notion that student loan debt is “good debt.” The elimination of consumer protections and the increase in tuition costs put an end to the “good debt” fairy tale.

If you have student loan debt and credit card debt, eliminating both debts is a priority. The only question is which debt gets eliminated first.

Why Credit Card Debt Is Usually Worse

Credit card debt is objectively worse because interest rates are usually substantially higher. In the world of student loans, a 10% interest rate is on the high end and considered lousy. For credit cards, a regular interest rate of 13% is considered good.

If you somehow had a student loan with a higher interest rate than your credit cards, the math changes. However, this circumstance is rare.

Credit cards also have less forgiving repayment options. Student loans typically have deferments and forbearances in the event of a hardship. Pausing payments is far from ideal, but a payment pause may help some borrowers. Additionally, federal student loans have options like income-driven repayment and student loan forgiveness. Credit cards don’t have these perks.

Important Exception: Student loans are worse than credit cards in bankruptcy. Credit cards are treated like most other debts, while student loans require special steps that make them more difficult to discharge. If bankruptcy is on the horizon for you, the student debt may be worse.

The Advantage of Paying Credit Card Debt First

Knocking out high-interest debt first can save a ton of money. Knocking out credit card debt first also provides a unique advantage.

Paying down credit card debt provides immediate help to your debt-to-income ratio or DTI. The DTI is how creditors compare your income to the debt you carry. If your income makes it a struggle to keep up with your debt, getting approved for credit is challenging. If you want to buy a house, the DTI is the driving factor for how big of a mortgage you can get. Your DTI is as important — or more important — than your credit score.

Most people don’t realize that DTI compares monthly debt to monthly income. As your monthly bills get lowered, your DTI improves.

With student loans, if you pay off half your balance, the minimum monthly payment stays the same. Knocking out student loan debt only helps your DTI when a loan is eliminated.

Minimum payments for credit cards are calculated based on your balance. As you pay down your credit card balance, the minimum payment drops. This means that your DTI improves every month you make progress.

If you want to buy a house soon, a slightly improved DTI may make a huge difference. Improving your DTI may also help if you’re going to refinance your existing debt.

When is Student Loan Debt Worse?

As noted earlier, a reasonable interest rate on a credit card is often considered an alarming interest rate on a student loan.

However, some credit cards come with introductory interest rates of 0%. The problem with these intro, or teaser, rates is that they don’t last long. A 0% interest rate becomes 22.99% fast. Most intro rates last for six to 18 months.

If it will take only three months to pay off your credit card, but you have a year at 0%, it means you can focus on student loans for the next nine months. The key is taking advantage of the low intro rate without getting hit with huge interest charges once the intro period is over.

Refinancing Credit Cards vs. Refinancing Student Loans

Debt refinancing provides an option to lower your interest rates, depending upon your credit score and DTI.

Student loans can be refinanced by working with a refinance lender. The refi pays off some or all of the borrower’s student loans and creates a new loan. For credit cards, consumers refinance by taking out a personal loan and using it to pay off existing credit card debt. In both circumstances, consumers find a lender willing to offer lower rates and save money in repayment.

Generally speaking, student loan refinancing offers lower interest rates than credit card refinancing. For example, lender SoFi currently offers a student loan refinance product and a personal loan to pay off credit cards. The personal loan comes with an interest rate of 5.99% to 18.85%, and borrowers have three to seven years to repay the debt. SoFi’s student loan refinance has rates of 2.25% to 6.94%, and borrowers have between five and 20 years to repay the loan.

Thus, refinancing is an option for both credit cards and student loans. However, the refinance option doesn’t shift the balance between which is worse because the student loan refinance options are better than credit card refinance options.

The post Which is Worse: Credit Card Debt or Student Loan Debt? appeared first on The Student Loan Sherpa.

My Review: The Laurel Road Card is a surprisingly decent option for student loan borrowers. Previous student loan focused credit cards were lousy, but this one could be helpful for some borrowers. However, traditional cashback cards are still the preferred option for many borrowers.

The highlight of the Laurel Road card is the 2% cashback that can be used with the majority of student loan lenders and servicers.

Laurel Road Student Loan Cashback Credit Card Basics

The Laurel Road card is a straightforward cashback credit card. Cardholders get 2% back on all purchases that can be redeemed towards student loans with most lenders. Those that wish to redeem their rewards as a statement credit only get 1% back.

The card has no annual fee or foreign transaction fees. The Laurel Road card is on the Mastercard network, and applicants will need good to excellent credit to get approved. As a World Mastercard, the card includes ID Theft Protection, Extended Warranty Coverage, and Purchase Assurance.

Borrowers who don’t pay their balance in full each month are charged an interest rate of 13.99% to 22.99% APR. Like most other rewards credit cards, this card should only be used by those who intend not to carry a balance.

Signup Bonus and Incentives

This newer card comes with a decent signup bonus for new customers.

Laurel Road is offering $500 towards any student loan for customers who spend $5,000 or more within the first 90 days. If you opt to receive a statement credit instead, the bonus drops to $250.

Laurel Road also offers a 0% introductory APR for balance transfers made within the first 60 days of having the card. Unfortunately, if you take advantage of the 0% balance transfer, regular purchases will be charged the full interest rate unless the entire balance, including the transfer, is paid in full each month. In other words, this card only makes sense as a balance transfer card OR a reward card. Doing both at the same time will result in interest charges on new purchases.

Who Benefits from the Laurel Road Student Loan Cashback Card?

In the world of cashback credit cards, 2% is on the higher end, but most consumers can qualify for a 2% card. For example, the Citi Double Cash offers 2% back and has no annual fee.

The Laurel Road card is ideal for someone who wants to pay down their student loans but finds themselves using credit card rewards for impulse purchases. For many consumers, a credit card reward is a bonus or “free money,” so it is often easy to justify spending reward funds on non-essentials. The reward structure of the Laurel Road card provides a huge incentive to use the money towards student debt.

Avoiding a Mistake

If you carry a balance on your credit card or don’t have student loans, the Laurel Road card is a lousy option.

A 2% cashback reward doesn’t offset interest charges of 13.99% or more. Only use this card if you plan on paying your balance in full each month.

Additionally, it is essential to make sure your student loan servicer is on the list of eligible companies from Laurel Road. This list includes major servicers like CommonBond, Discover, Earnest, MyFedLoan, Great Lakes, MOHELA, Navient, Nelnet, PenFed, and Sallie Mae. Laurel Road claims they work with 95% of servicers, but this is a detail you want to verify before applying for the card.

Final Thoughts: Laurel Road Student Loan Cashback Credit Card Review

The card is a new product from Laurel Road, but as a refinance lender, Laurel Road has a solid reputation.

It would be nice if the card offered more features geared specifically towards student loan borrowers, but 2% cashback is a great start. As a result, the Laurel Road card is a reasonable option for student loan borrowers looking to repay their student loans aggressively.

The post Laurel Road Student Loan Cashback Credit Card Review appeared first on The Student Loan Sherpa.

The idea of borrowing more money to fix the problem of too much student debt sounds dumb. After all, you wouldn’t run up more credit card debt to fix your high credit card bills.

However, many borrowers may benefit from additional education, and yes, more student debt.

More Opportunities for Employment

Some students don’t realize their major was a bad idea until it is far too late.

If you are struggling to find a job, a graduate degree in a more marketable field could provide an edge. Obviously, this won’t be the case for all majors and all graduate degrees, but it is worth exploring.

For example, suppose you go back to school and get an M.B.A. from a top business school. Your previous studies combined with your newly earned business expertise might lead to terrific job opportunities.

The critical detail in this analysis is finding the right graduate degree. Those considering graduate school should carefully investigate a school’s employment numbers and the marketability of the degree. If your undergraduate degree isn’t paying off, use those hard-earned lessons to find a graduate degree that does pay off.

Extra Debt is Less of a Risk

If you are already in a student loan nightmare, adding more debt sounds terrifying.

However, the extra debt may not cause any more pain.

One of the big advantages of graduate school is that the federal borrowing limits are significantly higher than the undergrad limits. If you are already dependant upon an income-driven repayment plan and student loan forgiveness, having more debt could simply mean more debt gets forgiven at the end.

There is still a risk. Borrowers should still be wary about the additional debt load and potential tax consequences if forgiveness happens. Forgiveness is no guarantee, and more debt means a more considerable student loan burden.

Converting Private Debt to Federal Student Loans

Many borrowers facing a student loan disaster have a lot of private student loans. They may also be working really hard to keep up with their bills.

Graduate school presents a unique opportunity to essentially convert private debt into federal student loans.

Suppose you work during the summer before each year of graduate school and earn $10,000. Traditionally, many students would use that $10,000 towards tuition for the upcoming year to reduce how much they have to borrow. Instead, borrowers could use that $10,000 to pay down their private student loans. In the fall, they need to borrow an additional $10,000 to pay for tuition. This slight difference means converting risky private debt into more manageable federal debt.

The Mistake to Avoid

Accumulating extra student debt is a risky path out of a student loan nightmare.

Robert Farrington of The College Investor notes that it is an especially bad idea to use extra classes to get a deferment. In general, deferments are usually a lousy option, but borrowing more money just to qualify for a deferment is a colossal mistake.

Farrington thinks borrowers should focus on the return on investment of additional classes.

Final Thought: Doubling Down on Student Debt

If your college degree was a bad investment, running up more student debt might not seem like the answer.

For many borrowers, more debt will only lead to more problems.

However, there are times where additional student loans may be necessary to get to debt freedom. Borrowers that carefully research graduate school and employment opportunities may be pleasantly surprised with the results.

The post How to Use Graduate School as a Path to Student Debt Freedom appeared first on The Student Loan Sherpa.

Robbing a bank or winning the lottery are methods that conceivably could get student loans paid off more quickly, but our focus will be based upon a more realistic approach to eliminate all student debt fast.

We will also skip over obvious tips like “earn more money” or “spend less money.” The idea here is to find the most efficient path to debt freedom.

Step #1: Track Down All of Your Debt

This one is a fairly simple step, but it cannot be ignored.

During college, students often switch from one lender to another. Unfortunately, it can be relatively easy to lose track of a loan or two over the years.

Making matters even more difficult is the fact that lenders often sell loans to other companies. These transactions require no prior approval from the borrower and can happen without the borrower getting notice. Even if the lender keeps the loan, they may choose a different company to service the loan. The result of all this movement is that it isn’t always obvious how much a borrower owes or who gets the monthly check.

The good news is that it is reasonably easy to track down the debt before starting repayment.

Tracking down federal student loans is especially easy. Records of all federal student loans are stored at studentaid.gov, the site of the Department of Education. This database has records of the exact amount owed for various loans, the interest rate of each loan, and the servicer in charge of the loan. Finding these records isn’t easy, but this guide should help.

Finding who holds private loans can be a little bit more complicated. Fortunately, most borrowers can find all of their private student loans by simply pulling a copy of their credit report. From there, borrowers may have to reach out to the individual companies to determine repayment plan options and interest rates.

Step #2: Lock in the Lowest Interest Rate Possible

There are no less than 14 different ways to get lower interest rates on student loans.

Borrowers interested in aggressively paying off their student loans as fast as possible will usually benefit from student loan refinancing. The challenge with refinancing is finding a lender willing to offer a low-interest loan so that a borrower can pay off higher interest rate student loans.

The good news is that there are about 20 different companies offering refinancing services. Getting approved isn’t as tricky as it sounds either. College students often end up with high-interest loans because they have no job and no degree. A graduate with a job and a degree is much less of a credit risk and can usually qualify for lower interest rate loans.

Lenders like SoFi and LendKey make their money by identifying borrowers who are likely to pay back their loans and offering those borrowers preferable interest rates.

Note: Refinancing is not an all-or-nothing proposition. If a refinance company offers to refinance at 4%, a borrower can choose to refinance their higher interest loans while the loans already below 4% remain unchanged.

There is also some strategy that goes into the loan selection. The lowest refinance interest rate loans are usually on the 5-year variable-rate loans. The problem with these loans is that the rates could go up. Borrowers who expect to take many years repaying their loans may be better off selecting a fixed-rate loan.

Finally, now is an excellent time for a reminder that this article focuses on paying off loans as quickly as possible. Refinancing private loans is an easy decision, but refinancing federal loans comes with risks that should not be ignored.

Step #3: Get the Minimum Payment Possible for Each Loan

When one thinks about quick debt elimination, making minimum payments seems like the opposite of the desired goal. However, making minimum payments is actually a key step in getting rid of student loans.

The idea here is that a borrower with a 3% loan and a 10% loan really wants to knock out the 10% loan as soon as possible. If you can get a lower payment on the 3% loan, it frees up cash to attack the 10% loan. Your monthly spending doesn’t change, but the debt gets eliminated faster.

Getting lower payments on federal student loans is fairly easy. The Department of Education’s Student Loan Simulator shows borrowers what their monthly payments would look like on various federal repayment plans. The borrower’s student loan servicer should provide instructions for enrollment in the desired repayment plan.

Lowering monthly payments on private student loans can be a bit more tricky. Private lenders tend to be far less flexible on repayment choices. Often, the best way to get lower monthly payments is to call the lender and ask for some alternatives.

Once the lowest interest rates possible have been secured, and the lowest possible monthly payments are selected…

Step #4: Attack One Loan at a Time

This is where aggressive repayment starts to pay off.

Many borrowers have a wide range of student loan interest rates. Some are quite reasonable. Others look more like credit card interest rates.

The more a borrower spends on interest, the more the lender profits and the longer it takes to pay off the debt. A borrower can reduce total spending on their student debt by attacking the student loan with the highest interest rate. Paying down student loans in this manner can save thousands — we’ve done the math.

Once a borrower pays off the entire highest interest rate student loan, he or she can attack the next loan. This process gets repeated until all student loans are paid off in full.

Step #5: Make Payments Quickly

This one might sound silly, but the final step of the process is to make payments as quickly as possible.

Student loans accrue interest daily. If money is sitting in your bank account, it is earning next to nothing in interest. Using that money to pay down a student loan lowers the student loan balance and decreases the daily interest it generates.

Admittedly, waiting a few days won’t make a huge difference unless you have a massive interest rate or large balance, but if the goal is to pay off the loans as fast as possible, making payments as soon as possible helps the cause.

A Few Warnings

Paying off student loans as fast as humanly possible does come with a few risks.

Borrowers who want to get aggressive about repayment are doing the smart thing. Still, it is essential to remember that there are options besides paying the minimum or paying it off as quickly as possible.

Other factors borrowers should consider:

• Student Loan Forgiveness Opportunities – There are about a dozen different ways student loans can be forgiven. Not everyone qualifies, and chasing forgiveness can sometimes cost more than just paying off the loan in full. However, it is vital to explore these options before making a plan. This is especially true for federal borrowers thinking about private refinancing. Once that loan is refinanced, many forgiveness options are permanently closed.
• Borrower Protections like Income-Driven Repayment – Like the federal forgiveness programs, private consolidation of federal loans means that there are no more income-driven repayment plans to enjoy. Most borrowers in aggressive repayment don’t require this assistance, but it is a nice protection to have in the event of a job loss.
• Opportunity Cost – Dedicating a large portion of your budget to paying off student loans can be a very responsible decision. However, it is crucial to think about the financial impacts of that decision. Aggressive repayment can make it harder to save up a deposit for a house. It can also make maximizing retirement savings a challenge. A more nuanced plan might consider all financial goals rather than just focusing on student loan elimination.

Many borrowers choose to attack their private loans before the federal loans because of the federal perks.

A Final Tip to Pay Off Student Loans as Quickly as Possible

Stick to it!

Skipping a single trip to Starbucks or paying an extra $20 on your next payment will not make student debt disappear overnight.

The key to success is sticking to the plan long-term.  Even quick repayment of student loans is a marathon.  Don’t make the mistake of stretching yourself too thin for a few months and then giving up.

Further Reading:

• Make a decision on student loan forgiveness – Sometimes, it makes sense to chase after federal loan forgiveness. Other times it is a mistake. Learn how to make this important decision.
• Find some hidden shortcuts to debt elimination – Student loan “tips” almost always include adding a side hustle or living at home. These under-the-radar tips don’t get much attention, but they can make a huge difference.
• Follow refinance rates – Borrowers often refinance their loans more than once. This page tracks the best rates on the market so that borrowers can keep interest spending at a minimum.

The post How to Pay Off Student Loans as Quickly as Possible – 5 Easy Steps appeared first on The Student Loan Sherpa.

Taking a less aggressive approach to student debt may be the best choice for your mental health and financial health.

What is the Difference Between Coasting and Aggressive Repayment?

Most borrowers use one of two main repayment strategies:

Aggressive Repayment – The goal behind aggressive repayment is to minimize interest spending. The longer student debt lingers, the more interest it generates. If you pay off your loans as quickly as possible, you minimize interest spending.

Coasting – If you are paying the minimum payment on each student loan, you are coasting to the finish line. This approach is often frowned upon, but there are times where it is the best strategy.

On the surface, coasting looks and sounds like the lazy approach, while aggressive repayment sounds more responsible. However, these first impressions can be misleading.

The Loans that Should Get Paid Off ASAP

Before discussing the advantages of coasting, it is worth mentioning that there are times where coasting is an objectively bad idea. If any of the following apply to you, aggressive repayment is probably the ideal repayment strategy.

• High-interest student loans – Not all student loans are created equal. A loan with a 3% interest rate is a great candidate for coasting, while a loan with an 11% interest should get paid off as quickly as possible.
• Cosigned student loans – If someone was generous enough to cosign one of your student loans, do them a favor and pay it off whenever possible. Cosigned loans make it harder to get credit in the future and are a source of stress for many cosigners. Knocking out cosigned debt is a great way to say thanks. If the cosigned debt is otherwise an excellent option for coasting, look into getting a cosigner release.
• Borrowers with poor impulse control – Even if the loans are suitable for a relaxed repayment strategy, the borrower might not be. Coasting is a mistake if it leads to irresponsible spending or other poor financial habits.

The Benefits of Coasting to Student Debt Elimination

Costing advantages come from a simple fact: if you make minimum student loan payments, you have more cash each month for other goals.

Saving extra money for retirement is an excellent reason to coast. Suppose your employer offers a generous match, or your investments earn far more than your student loan interest rate. In that case, you will come out ahead by directing your resources towards these savings opportunities.

Borrowers may also choose to coast to save a downpayment for a house. The accounting math gets tricky when comparing these options, but for many borrowers, the math is secondary. There are many advantages to homeownership, and only some of them are financial. If buying a home is an important goal, coasting on your student loans may help make that happen. However, there are also times where student debt gets in the way of buying a home. Before selecting a strategy, borrowers should understand the many ways student debt impacts getting a mortgage.

Coasting to debt elimination may have mental health benefits as well. If student loans are a constant source of stress and pinching every penny to maximize payments has become all-consuming, changing strategies could make sense. Here again, every borrower is different, but if your student loan repayment strategy is causing sleepless nights, it is time to explore another alternative.

Finding the Right Approach: If you coast on your student loans, you will spend more money on interest. However, you will have extra money for something else. If that something else justifies spending extra money on student loan interest, coasting makes sense.

Shortcuts to Start Coasting Sooner

If shifting your financial goals sounds appealing, there are a couple of shortcuts available that make coasting more feasible.

For borrowers with federal student loans, chasing after forgiveness is already a form of coasting. If you are trying to maximize the amount of debt forgiven, it means minimizing payments and freeing up cash each month for other goals. Public Service Loan Forgiveness is the most frequently discussed forgiveness option, but there are many different paths to student loan forgiveness.

Private loans don’t have forgiveness options, but refinancing can convert high-interest student debt that needs to be paid off right away into a low-interest student loan better suited for coasting. The hurdle for borrowers wanting to refinance is that it requires a job and a decent credit score. However, for those that qualify, there are excellent options suited for coasting.

The best choice might be a 20-year fixed-rate loan. While stretching out payments for two decades might sound excessively long, it also means minimal monthly payments. With 20-year loan interest rates currently very low, it is a viable strategy.

Right now, the following lenders are offering the best rates on 20-year fixed-rate loans:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

The post Coasting to Student Debt Elimination appeared first on The Student Loan Sherpa.

How?

No matter how small, erasing a single student loan is a huge step forward. From an accounting perspective, it makes attacking other loans significantly easier. Going beyond the numbers, eliminating a loan makes it easier to follow your plan and stick to a budget.

Monthly Flexibility Makes Repayment Easier

Many borrowers find themselves on the minimum payment treadmill. They exhaust themselves paying the bills as they come in, but they aren’t going anywhere.

Paying only the minimum on student loans usually means two things. First, it means you will probably be making payments for decades. Second, it means you are maximizing lender profits on the loans.

If you can knock out one loan, you free up that monthly payment to attack your other loans. It may not seem like much, but an extra $10 per month can save thousands of dollars in repayment and payoff loans years earlier. Seriously. Click on that last link and look at the charts. Ten bucks can make a huge difference.

If you eliminate an entire loan, you move the needle in a big way. If your student loan payment was $50 per month, it means you have an extra $50 per month to attack your other loans. You could also reward yourself. Pocket $20 as a reward for your success and use the remaining $30 to attack another loan.

Many borrowers can only afford to make minimum payments on their student loans. If you manage to pay off a student loan, it means breathing room. It means that life with student loans just got easier.

Eliminating a Loan Means Lower Balance

The significance of a lower balance should be pretty obvious, but it is worth pointing out an important detail: If you have a smaller balance, you are spending less on interest.

If you are spending less on interest, it means a higher portion of your monthly payment lowers the principal balance. In other words, your regular student loan payment does more damage to your balance.

As payments shift from mostly interest to mostly principal, balances start to drop faster, and borrowers build momentum.

Momentum In Student Loan Repayment (and Physics)

Paying off a single student loan may not seem like much, especially if it is a small loan compared to your other debts.

However, this tiny bit of success can build. If you can pay off a $1,500 loan, knocking out a $3,000 might seem more attainable.

Your building success might look something like this:

Each win builds on the last win. When one loan gets paid off, there is more money to attack the next loan. Each taste of success makes it easier to stick to the plan.

The First Loan is the Hardest to Pay Off

Some might argue that the loan with the largest balance or the highest interest rate is the hardest to pay off. Those loans might be the most expensive, but in terms of difficulty, that first loan is probably the hardest.

As students, we build up large student debt balances. These balances grow because we take out new loans and because the existing loans generate interest. Upon finishing school, we get a “grace period.” During that time, the loans continue to grow.

For some borrowers, loan balances continue to grow even though they are making payments.

At the point you pay off that first student loan, the trend reverses. Instead of growing, your balance starts shrinking. With each passing month, things get a little bit easier. Knocking out that first student loan is a huge milestone and a clear sign that things are getting better.

The post How Paying Off One Student Loan Changes Everything appeared first on The Student Loan Sherpa.