Obtaining lower interest rates can save you hundreds or even thousands of dollars on your student loans.

Sign Up for Auto-Debit or Monthly Automatic Withdrawal

This route is the low-hanging fruit.

Signing up for automated payments saves .25% interest with pretty much every student loan company. Some lenders even offer a .50% reduction if you open a checking account. Saving a fraction of a percent in interest may not seem like much, but it can add up. For example, if you have $40,000 in student loans, that quarter percent savings is worth $100 per year. Not exactly huge savings, but a decent reward for minimal effort.

Even though this is an easy move that every borrower can make, we don’t recommend it for everyone. There are a couple of circumstances where it is best to stick with manual payments.

You can’t trust your lender – The automatic payments give your lender the green light to take money out of your checking account. Unfortunately, there is an element of danger here. This is especially true if your monthly payments might change, such as being on a variable-rate repayment plan. Taking out a fixed amount each month is one thing, but if there is a chance your lender takes out more than what you planned for, be cautious. Once your lender removes that money, it is hard to get back.

You can’t trust yourself – Smart student loan repayment is all about paying extra when you can and targeting high-interest student loans. The savings from this approach will far exceed the potential savings from a .25% interest rate reduction. If signing up for automated payments will cause you to be lazy when making extra payments, stick to manual payments. Lenders maximize profits when borrowers pay the minimum each month over the life of the loan. Don’t let a slight interest rate reduction bait you into maximizing your lender’s income.

Lender Rate Reduction Programs

Lenders seldom advertise or publicize interest rate reduction programs, but they do exist. Private lenders created these programs to help borrowers who had fallen behind on their debt. It is typically available only to those with an income insufficient to keep up with payments. A rate reduction program is rarely a term of the loan contract. As a result, lenders can change the requirements whenever they want.

The nice thing about rate reduction programs is that they can help. Lenders usually give most borrowers who cannot make a monthly payment the option of forbearance or deferment. Delaying payments is typically good for the lender and bad for the borrower, however. The balance on the account will grow due to unpaid interest. Once the deferment or forbearance ends, the borrower has a bigger student loan problem. Continuing to make payments with a lower interest rate allows a borrower to put a dent in the principal balance.

Perhaps the most notable rate reduction program is with Sallie Mae/Navient. Over the years, they have changed the requirements and tweaked terms several times. At present, borrowers can sign up for an interest rate reduction that lasts for six months. Qualifying requires a borrower to provide Navient a detailed accounting of their monthly expenses. Generally speaking, the further behind a borrower is in repayment, the more likely Navient is to help. We have also found that the quality of assistance depends upon whom you talk to you. If one call attempting enrollment is unsuccessful, a second or even third try might make a difference.

Pay Down High-Interest Debt First

On the surface, paying down high-interest student loans first might not seem like a method of lowering interest rates. However, we would argue that it does.

The math is relatively easy. Suppose you have two loans at $10,000 each. One has an interest rate of 8%, and the other has an interest rate of 2%. Your combined debt is $20,000 at an average interest rate of 5%. If you pay off the loans with equal payments, your average interest rate will stay at 5%. However, if you start to pay off the high-interest loan faster, your average interest rate will drop. So, if you eliminate the high-interest loan first, your average interest rate will become a very favorable 2%.

Many people realize that paying extra on their student loans is a great way to pay off loans faster and save money on interest. We like to call these people responsible borrowers. However, we found that when these responsible borrowers don’t focus on the high-interest debt, it can cost them.

Utilizing this approach doesn’t require an excellent credit score or enrollment in any program. If you just pay extra towards your highest interest rate student loan, your average student loan interest rate will drop over time. Finding that bit of extra money to attack high-interest debt can save a lot of money in the long run.

Enroll in the SAVE Plan

Signing up for SAVE can help you lower your interest rate in two different ways.

First, because the SAVE plan is currently being challenged in court, borrowers who sign up for SAVE can get there interest rate lowered to 0% as long as the case is pending. The case could take years to resolve.

Second, once the lawsuit is over, assuming SAVE survives, borrowers can receive the SAVE subsidy which covers the monthly unpaid interest each month on the loan.

Suppose your federal student loans generate $300 in interest each month, but your required monthly payment is only $100. As a result, your federal student loan balance is growing by $200 every month. Because the federal government doesn’t capitalize the interest each month, many borrowers think that their balance is just staying the same. Once an event that triggers interest capitalization occurs, the balance can jump by hundreds or even thousands of dollars.

Signing up for SAVE fixes this problem. Going back to our example, instead of growing by $200 each month, SAVE covers the extra $200, so your balance doesn’t move. For borrowers with significant student loan balances and smaller incomes, SAVE is an excellent option.

Even if SAVE were to be eliminated in the litigation, the older REPAYE plan would likely be reinstated. Like SAVE, REPAYE offers an interest subsidy. However, unlike SAVE, the REPAYE subsidy only covers half of the excess interest.

Join the Military

Choosing to serve your country can be a big boost in student loan repayment. For starters, numerous student loan forgiveness programs exist specifically for the military, such as the Military College Loan Repayment Program.

In the realm of interest rates, enlisting has immediate benefits as well. Military service can lower your student loan interest rates in two ways:

Servicemembers Civil Relief Act (SCRA) Interest Rate Cap – The SCRA limits all student loan interest rates for active-duty members of the military to 6%. This limit applies to both federal and private student loans. In fact, this interest cap applies to all debt, so long as the debt exists before you begin active duty. If you acquire new debt after active duty starts, it does not qualify for the interest rate cap. Federal law guarantees this rate cap, but you will probably have to contact your loan servicer to get things set up.

0% Interest for Service in a Hostile Area – Anyone who qualifies for special pay by serving in a hostile area doesn’t have to pay interest for up to 60 months. This benefit applies to all Federal Direct student loans issued after October 1, 2008.

Enlisting is obviously a major commitment. But, anyone currently in the military or considering joining should be aware of the potential opportunities to lower their interest rates.

Get Congress to Act

If you have student debt, it probably means that you don’t have millions of dollars to pay lobbyists or contribute to campaigns. However, borrowers as a group still wield enormous power in Washington.

Over the years, there have been proposals that would allow federal borrowers to lower their interest rates to the same levels that banks get when they borrow from the government.

Showing up to vote each November is critical to influencing DC. Think about the senior citizens. Seniors on Medicare and Social Security individually don’t have much money to spend on campaign contributions. But, they vote, and everyone in Congress knows it. Student loan borrowers currently number over 40 million. If they all voted for candidates who pledged to make a difference on student loans, lower interest rates could be just the beginning.

Refinance Student Loans at a Lower Interest Rate

Student loan refinancing is another excellent way to get a lower interest rate on your student loans.

When you refinance your student loans, a new lender pays off some or all of your old student loans in full. The borrower then agrees to repay the new lender according to new terms. The downside to this approach is that this eliminates the old loan’s terms and perks. So, if you like having income-driven repayment plans or loan forgiveness, it is best to skip refinancing and stick with federal loans.

The big advantage of refinancing is the enormous potential interest savings. College students without a job or a degree are risky bets and usually get charged higher interest rates by lenders. Graduates with a job and a degree are far less risky and generally more able to get better interest rates.

The more savvy a borrower is about the refinance process, the more they can save. There are multiple ways that a borrower can use refinancing to get lower interest rates…

Pick a Shorter Repayment Term or Loan Length

By refinancing student loans to a shorter-term loan, borrowers can significantly lower interest rates.

As an example, take a look at the best rates currently available on 5-year fixed-rate loans.

Rank	Lender	Lowest Rate
1		3.95%
2		3.99%*
3		4.88%

If we stretch things out to 20 years, the lowest possible rates jump considerably:

Rank	Lender	Lowest Rate
1		6.08%*
2		6.53%
3		6.55%

To see rates available for 5, 7, 10, 15, and 20-year loans, be sure to check out our best refinance rates by category page. These rates are updated monthly to provide a good idea of the best available rate for any given loan type.

The longer the loan repayment length, the riskier a variable-rate loan becomes. We typically suggest that all borrowers avoid variable-rate loans longer than ten years. However, if interest rates are at extreme highs, a longer-term variable-rate loan might make more sense.

Shop Around to Find the Best Rate

In the realm of student loan refinancing, the surest way to get the lowest possible rate is to shop around.

All lenders offer a range of loan types and loan options. What they don’t advertise is that all lenders evaluate applications differently. Lenders put different weights on different factors, such as the college you attended, how long you have been in your job, and your profession. A borrower with a high credit score and average income might get vastly different results than a borrower with an average credit score and high income.

Accordingly, the companies advertising the best rates may not be the company that actually offers you the best rate. Because there are so many variables in play, it is essential to check rates with several different lenders. We typically suggest investigating 5-10 lenders out of the many student loan refinance companies.

The good news about shopping around is that it takes very little time. Most borrowers can get a rate quote within 5 to 10 minutes.

Fortunately, shopping around does not hurt your credit score. The credit agencies treat multiple applications within the same window as a single application. This allows borrowers to shop around without fear of negative credit consequences. To be safe, try to keep your shopping around confined to a one- or two-week window.

Get a Cosigner

This option is a pretty lousy way to get a lower interest rate when you refinance. It can help borrowers with less than perfect credit qualify, but it is a massive obligation for the cosigner.

Getting a cosigner to help pay for college is one thing. Getting a cosigner to refinance is another story. Refinancing for some is more of a luxury. Obtaining lower interest rates is nice and saves money, but does it justify the risk that your cosigner is taking on?

That being said, borrowers who are struggling to get approved may be able to refinance successfully with the help of a cosigner. If that cosigner was on the original loan, this move might make even more sense. The cosigner’s obligation doesn’t change, but the borrower’s ability to pay it off faster is improved. This is a win for both parties.

Some borrowers use refinancing as a workaround to get their cosigner released from the loan. If the cosigner is on the original loan but not the refinanced loan, the cosigner has no further obligations when the refinance goes through.

Pay Off Existing Debt First

When refinancing, the two most significant factors in approval decisions are your credit score and your Debt-to-Income ratio (DTI).

Completely eliminating a debt can have a considerable impact on your DTI. Lenders usually don’t care about your current debt balances. For example, if you have a car loan, it doesn’t matter if you owe $20,000 or $5,000. The impact comes from monthly payments on your credit report. Lenders care about the $300 per month that you owe on your car loan. If you eliminate that monthly payment, your DTI improves. It also increases your chances of scoring the best possible interest rate.

If you are about to eliminate a monthly payment, be sure to let some time pass so that the debt doesn’t appear when lenders check your credit report.

Fix or Improve Your Credit Score

Lenders consider your credit score when determining the rates they offer you. Therefore, anything that you can do to improve your credit score will help your cause.

Correcting errors on a credit report is a quick way to get a boost, but that isn’t the only way to improve it. The impact of negative items on a credit report drops with time.

Find a New Job or Get a Raise

This tip probably falls into the easier-said-than-done category, but it can make a big difference to your debt-to-income ratio.

Different lenders have different requirements for documenting income and time required at a job, but a recent paystub is sufficient proof of income for many.

Refinance Again

The option to refinance a second or third time is something that many borrowers fail to consider.

The good news for consumers is that there is no rule or limitation on refinancing multiple times.

If you have had the good fortune of getting a higher-paying job, improving your credit score, or eliminating some old debt, there is a good chance that better rates may be available. Similarly, if the first time through the refinance process you skipped out on shopping around, a second bite at the apple might be an excellent opportunity to lock in the best deal.

With many lenders offering refinancing services, jumping around a few times can be an effective strategy.

Lowering Student Loan Interest Rates

The thirteen different approaches that can be used to get lower interest rates represent an opportunity for nearly all borrowers to get some help on their student loans.

Different strategies require different levels of effort, but for many, a minimal investment of time can result in major savings.

The post 13 Ways to Get a Lower Interest Rate on Your Student Loans appeared first on The Student Loan Sherpa.

The purpose of this article is to help borrowers identify and avoid student loan scams. Much of the advice contained below comes directly from the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB). I’ve also included details on some of the types of scams I’ve seen over the years.

Calling Out Scammers by Name: I’d love to make a list of known scammers as a resource for borrowers. Sadly, a scary experience dealing with a scam company makes going that route especially difficult.

What Does a Student Loan Scam Look Like?

The most effective scams that I have seen create a sense of urgency with borrowers. Act now before the opportunity disappears.

For many responsible borrowers, a limited offer is worth investigating. If there is even a chance that the offer is legitimate, the potential savings would be enormous.

While the rules for student loans do change, it never happens quickly, and it never costs any money to benefit. All federal student loan programs are free to enroll. Additionally, paying for expert help just to fill out paperwork is almost always a mistake.

This graphic from the FTC best summarizes some of the telltale signs of a scam:

Lower Student Loan Interest Rates: Real or Scam?

The good guys and the bad guys both promise lower interest rates.

What is Legitimate – There are many student loan refinance companies that can actually lower your interest rates. Most of them work with both federal and private student loans.

The legitimate companies make money by offering lower interest rates to borrowers who are highly likely to pay back their student loans. These lenders pay off your existing debt with your old lenders. Then, you pay back the new company at, what is hopefully, a lower interest rate. The aggressive advertising, lower interest rates, and sign-up bonuses often trigger the “too good to be true” alarm for many consumers.

The best way to know you are dealing with a legitimate company is that good credit will be required. They will need your credit report to determine if you are a borrower who pays back your debt and can afford the loan.

This service is normally advertised as student loan refinancing, and there are many lenders in the refinance business. I’ve ranked and reviewed the nationwide companies offering student loan refinancing. Note that although some lenders received negative reviews, they are still legitimate companies. They just provide rates and terms I think could be better.

When a Lower Rate is a Scam – One of the biggest red flags to be aware of is when a company promises you lower interest rates and student loan forgiveness. You can get lower rates by refinancing your federal loans. However, those loans become private loans and lose eligibility for federal forgiveness programs. Alternatively, you can pursue federal forgiveness, but the government won’t be cutting your interest rate.

If everybody gets a lower interest rate, it is also probably a scam. Refinance companies only make money if they are smart in choosing their customers. If they pay off the loans for people who won’t pay back their debt, they will lose money.

Obama, Trump, or Biden Student Loan Forgiveness

Scammers love to advertise forgiveness programs associated with the current president. They try to benefit from the harsh political climate by appealing to a particular point of view.

However, it isn’t fair to say that all federal forgiveness programs are a scam. It has just been my experience that if somebody attaches the President’s name to the program, it is more likely to be fraudulent in some way.

What is Legitimate – Many student loan forgiveness programs exist for federal student loans. The most common are the forgiveness programs offered through income-driven repayment plans and Public Service Loan Forgiveness. There are also programs for borrowers in certain occupations, such as teachers and military personnel.

You can enroll in the legitimate programs directly through your federal student loan servicer. No special expertise is required. Although, researching and understanding the programs is very helpful for preventing errors. Furthermore, there is no cost to signing up for any of the student loan forgiveness programs. Federal law created these programs and are often a term in your student loan contract with the government.

Legitimate student loan forgiveness does not immediately wipe away all of your debt. It takes years to reach. It is a good idea for some borrowers, while others are better off aggressively paying off their debt.

Student Loan Forgiveness Scams – One of the biggest giveaways to a student loan forgiveness scam is a high-pressure sales environment. If somebody is aggressively trying to push you into a program that will erase your debt, it should be a red flag. Another huge red flag is any fees associated with the program. Again, student loan forgiveness is federal law, and signing up costs nothing. There should be no enrollment fees or monthly costs.

Another common red flag is when a company advertises a special relationship with the Department of Education. Such a relationship doesn’t exist. Student loan programs are open to all federal borrowers. No outside company can change your eligibility.

Finally, if you are working with a company that requires your FSA PIN, now known as the FSA ID, you are likely getting scammed. The Department of Education makes it clear that the borrower is the only person who should have access to this number.

You can achieve enrollment in any student loan forgiveness program through your federal student loan servicer. Any third party that tries to enroll on your behalf likely has bad intentions. At best, they are charging you money to fill out forms that you could submit on your own. At worst, they are flat-out stealing your money or your identity.

Student Loan Consolidation Scams

Student loans are consolidated when multiple existing loans are combined into one new larger loan. There are two types of consolidation. One is federal student loan consolidation, and the other is private loan consolidation. For many borrowers, student loan consolidation is a helpful or even necessary step. Unfortunately, there are also scammers advertising student loan consolidation services.

Legitimate Student Loan Consolidation – Many borrowers elect to consolidate their federal loans to gain eligibility for certain programs. For example, FFEL loans are not eligible for public service loan forgiveness, but they can be included in a federal direct consolidation loan and gain public service forgiveness eligibility. You can consolidate your federal student loans only directly through the federal government. This process can only take place using the Department of Education’s consolidation site.

Student Loan Consolidation Scams – If you are paying for this service, it is almost definitely a scam. Whether you are consolidating your federal loans for program eligibility or consolidating on the private market for a lower interest rate, the cost to you should be $0. Another red flag is if the company you are working for asks for your FSA ID or FSA PIN.

$0 Per Month Student Loan Payments

Like many other scams, the $0 per month payment scams start with a legitimate federal program and use it to take advantage of borrowers.

What is Legitimate – Federal student loans do have income-driven repayment plans. If you don’t have any income or your income is below a certain level, your monthly payment could actually be $0. It is also possible that the government could eventually forgive your loan. This is something you can do directly with your student loan servicer and requires no expertise or special knowledge.

When $0 Payments are a Scam – If you see advertising for income-driven payments, the odds are pretty good that it isn’t legitimate. Loan servicers and the federal government don’t spend money advertising these options. They have no incentive to promote these programs. They simply make it available for the borrowers who need help. If you are seeing aggressive advertising from a company offering $0 payments, it is a huge red flag.

Private lenders don’t have income-driven repayment plans. If you see an advertisement for this, somebody is probably trying to sell you something, and you probably don’t want to buy it.

Personalized Student Loan Consultations 

There are numerous self-described student loan specialists offering personalized advice for individual student loan circumstances. This is a gray area in the world of student debt.

For the sake of transparancy, I should disclose that I am someone who falls into this category of self-described specialists offering individual guidance.

As such it probably isn’t fair for me to say who or what is legitimate and what might be a scam. What I will say is that when shopping for a service like this be wary of ongoing fees and lofty promises.

Paying someone for an hour of their time and insight is reasonable. There isn’t any reason for monthly charges, or charges based upon the amount of debt forgiven. Likewise, nobody can promise loan forgiveness or a specific outcome. Anyone engaging in either practice should be viewed with some skepticism.

Red Flags to Avoid

If the specific details covered so far don’t apply directly to your situation, the Consumer Financial Protection Bureau has some excellent general guidelines for identifying and avoiding student loan scams.

According to the CFPB, the following are all signs of a scam:

Pressure to pay high up-front fees. It can be a sign of a scam when a debt relief company requires you to pay a fee up-front or tries to make you sign a contract on the spot. These companies may even make you give your credit card number online or over the phone before explaining how they’ll help you. Avoid companies that require payment before they actually do anything, especially if they try to get your credit card number or bank account information.

Promises of immediate loan forgiveness or debt cancellation. Debt relief companies cannot negotiate with your creditors for a “special deal.” Federal law sets payment levels under income-driven payment plans. For most borrowers, loan forgiveness is only available through programs that require many years of qualifying payments.

Demands that you sign a “third party authorization.” You should be wary if a company asks you to sign a “third party authorization” or a “power of attorney.” These are written agreements giving them legal permission to talk directly to your student loan servicer and make decisions on your behalf. In some cases, they may even step in and ask you to pay them directly, promising to pay your servicer each month when your bill comes due.

Requests for your Federal Student Aid ID. Be cautious about companies that ask for your Federal Student Aid ID. Your FSA ID — the unique ID issued by the U.S. Department of Education to allow access to information about your federal student loans — is the equivalent of your signature on any documents related to your student loan. If you give that number away, you are giving a company the power to perform actions on your student loan on your behalf. Honest companies will work with you to develop a plan. Further, they will never use your FSA ID to access your student loan information.

A Couple Final Tips from the Sherpa

I once received a call from a student loan company that was going to fix my student loans. The glaring red flag was the fact that they didn’t even know my name. If you call me to offer a service and don’t even know my name, I know you are a spammer. Enough Americans have student loan debt that some scammers just call every phone number they can.

However, I’ve received mail from companies that had detailed information about my student debt situation. After some investigation, I determined that they were scams attempting to charge me for free federal student loan programs. The lesson: companies that have your loan information on file may not be legit. To this day, I have no idea how the scammers knew about my debt balance.

Finally, calls, texts, emails, letters, and ads about brand new laws and special programs from Congress are almost always scams. Any new student loan program from the government gets a ton of attention. These programs are easy to verify via a quick Google search. Don’t ever assume that some company has special access or information.

The post Student Loan Forgiveness Scams vs. Legit Programs – How to Tell the Difference appeared first on The Student Loan Sherpa.

Borrowers often believe they must choose between paying off loans and saving for retirement. After all, every dollar you put towards retirement is a dollar you can’t use to pay down student loans.

What if it was possible to build a retirement and make student loan debt disappear at the same time?

It might sound surprising, but there are at least four different strategies that can be used to work towards both milestones.

Use Student Loan Forgiveness to Build a Bigger Retirement

The federal student loan forgiveness programs can be excellent opportunities to eliminate student loan debt. For borrowers with large student loans and a smaller income, these programs can be life-changing.

Borrowers on income-driven repayment plans can have their remaining balances forgiven after 20 to 25 years worth of payments. Those employed by the government or an eligible non-profit can have their loans forgiven after just ten years of payments.

Unfortunately, there is some risk in chasing after student loan forgiveness. While borrowers should understand the rules of loan forgiveness, there are no guarantees. Even though the concern over the high rejection rates in the media may be exaggerated, there is no denying that forgiveness comes with a bit of uncertainty.

Borrowers worried about qualifying don’t have to skip the program entirely. Instead, they can chase after student loan forgiveness but protect themselves if it doesn’t happen.

One option is to open a savings account as a Plan B fund. Borrowers make the minimum student loan payments as they pursue forgiveness and any additional funds that they have available go into the Plan B account. Going this route allows borrowers to attack their debt aggressively, but also try to maximize forgiveness opportunities.

If it becomes clear that forgiveness won’t happen, the Plan B fund can be used to put a huge dent in the debt balance. If forgiveness does work out, the Plan B fund can be used as a huge head start toward retirement.

Refinance and Build a 401(k) or IRA

Those who aren’t eligible for forgiveness can still lower payments and save for retirement.

Companies like SoFi, Splash, and CollegeAve all refinance student loans for borrowers with a decent credit score and income. These companies pay off the older high-interest loans in full, and a new loan with a lower interest rate is created.

Further Reading: Learn how student loan refinance companies make money.

By refinancing, borrowers can free up some additional cash each month. This additional money can be put towards retirement in a 401(k) or an IRA.

For example, suppose a borrower pays $500 per month on their student loans. They may be able to refinance and get the monthly payment lowered to $350. This means an extra $150 monthly. Instead of keeping this money, they can invest it in an IRA.

Depending upon the terms of the student loans, a borrower can refinance student loans to get them paid off more quickly AND use the additional funds available each month to save for retirement. The key to the process is finding the lowest refinance rates available.

Get Your Employer Involved

One of the best ways to build a retirement is to take advantage of employer matching programs. If your employer offers a dollar-for-dollar match, it means each retirement contribution essentially doubles from day one.

Unfortunately, some student loan borrowers do not take advantage of this program because they feel they need every dollar from their paycheck to pay down student loans and pay for the essentials. (Editor’s Note: Passing on an employer matching program is usually a bad idea as it is essentially passing on free money.)

New legislation now allows employers to tie 401(k) matching contributions to employee student loan payments. In other words, payments toward student debt can become retirement contributions depending on your employer.

Because this is relatively new territory, many employers don’t know about this option, and many others will be hesitant to do so. However, some employers may embrace the opportunity. The matching cost to the employer is the same whether the match is based upon a student loan payment or a retirement contribution.

Discuss with your boss or HR how employers can now match contributions based on student loan payments. Many companies are looking for ways to attract young, talented people, and this could be very appealing.

Turn Retirement Tax Breaks into Lower Student Loan Payments

This is my favorite student loan hack.

Borrowers on IDR plans like IBR, PAYE, and SAVE can lower their AGI —and their payments — by contributing to a retirement account.

As most borrowers know, when IDR payments are calculated, the government usually uses your most recent tax return. The important number pulled from the tax return is the AGI or Adjusted Gross Income. A higher AGI means higher student loan payments, and a lower AGI likewise means lower monthly payments.

Contributions to a 401(k) or a traditional IRA lower the AGI. Accountants call tax breaks that lower the AGI above-the-line deductions. For each dollar that is put in a 401(k) or IRA, the AGI is reduced by one dollar.

If a student loan borrower puts $300 per month in an IRA, their AGI will be $3,600 lower the following tax year. The lower AGI means a lower tax bill AND lower student loan payments. Borrowers can use the federal government’s student loan repayment estimator to see how changes to their AGI would change their monthly student loan bill.

Putting money in a 401(k) or IRA provides student loan borrowers with three primary advantages:

1. A lower tax bill in April,
2. A lower monthly payment on an IDR plan, and
3. A larger balance in their retirement accounts.

It is worth noting that a lower monthly IDR payment can mean spending more in interest over the life of the loan, so borrowers should factor total loan cost into their planning. However, for borrowers who will eventually qualify for federal student loan forgiveness, this option can result in a larger portion of the loan balance being forgiven.

Final Thought: Plan Ahead and Know the Rules

These advanced strategies can be confusing, but they are worth understanding for better financial planning.

All student loan borrowers should familiarize themselves with the terms of their student loans and understand how the debt impacts their finances.

By understanding and planning, borrowers can use these strategies to quickly and efficiently eliminate their debt. They will also be empowered to meet other important financial goals, such as retirement.

The post 4 Ways to Save for Retirement AND Eliminate Student Loan Debt appeared first on The Student Loan Sherpa.

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.

Consolidating loans can turn loans that are not eligible for certain programs into loans that are eligible. Years of legislative changes to student debt, combined with Department of Education fine print, can make things confusing.

Things can get especially difficult with Parent PLUS loans because of the limited options available for repayment and the steps required to enroll.

It is in this tangled-up web of rules and regulations that some borrowers make an incredibly expensive mistake. They consolidate their Parent PLUS loans with other federal loans.

Parent PLUS Loan Consolidation

Why is it a mistake to combine Parent PLUS loans with other federal loans?

There are certain limitations that apply to Parent PLUS loans. For example, Parent PLUS loans are not eligible for the best repayment plans. These plans include income-driven plans such as IBR (Income-Based Repayment), PAYE (Pay As You Earn), and SAVE (Saving on A Valuable Education). The only income-driven plan that Parent PLUS loans are eligible for is the Income-Contingent Repayment Plan (ICR).

To the average borrower, these plans all sound pretty much identical.  In reality, there are huge differences between these plans. All of these plans require borrowers to pay a certain portion of their discretionary income towards their student loans each month. The idea is that you pay what you can afford, regardless of how much you owe.

However, these plans require different percentages of your discretionary income. PAYE and SAVE are great because they only require 10%. IBR is a little bit more expensive, requiring borrowers to pay 15%. ICR is the most expensive, requiring 20%. Outside of the percentages, there are other differences between these repayment plans, but the important part is this: for many borrowers, signing up for ICR will result in double the monthly payment.

Why Does ICR Even Exist?

Once upon a time, ICR was the very best plan available.

For borrowers who didn’t have jobs, or who could afford their monthly payments, ICR was awesome. Payments were based upon income, not debt levels.

As time passed, Congress and the Department of Education decided that 20% was too high. A new plan came along requiring only 15% of a borrower’s monthly discretionary income, and IBR was born. As more time passed, new plans came along requiring only 10%.

Even though ICR was once the best, it has become an outdated dinosaur.

Unfortunately, for borrowers with Parent PLUS loans, it is the best plan that their loans are eligible for. Borrowers with a Parent PLUS loan cannot sign up for IBR, PAYE, or SAVE with that loan.

Sherpa Tip: If you have parent PLUS loans, the typical solution is to do a split consolidation. Parent PLUS loans go into one consolidated loan, and all other federal loans go into another consolidated loan.

One other option that is temporarily available for some borrowers is the double-consolidation loophole. This loophole will eventually get closed, but for now some borrowers may be able to get around the strict Parent PLUS rules.

The Big Parent PLUS Error To Avoid

The borrowers with their own federal loans and Parent PLUS loans have mixed eligibility problems.

Some loans can sign up for preferred repayment plans while others cannot. In this situation, the best option is usually to pay off the Parent PLUS loan first. Once that loan is eliminated, the other loans can be enrolled in the more generous repayment plans.

The worst thing that can be done is consolidating a Parent PLUS loan with other federal student loans into a federal direct consolidation loan. The government will then apply the restrictions that applied to the Parent PLUS loan to the new larger loan.

As an example, suppose a borrower has $25,000 in federal loans from when they went to school and $5,000 in Parent PLUS loans to pay for their child’s education. The borrower can combine the loans into a $30,000 direct consolidation loan. The problem is the government will treat the new loan with all the limitations of a Parent PLUS loan. The $25,000 that would have been eligible for IBR or REPAYE is now only eligible for ICR. It can be an expensive mistake.

Avoiding the Parent PLUS Consolidation Mistake

Combining Parent PLUS loans with other federal loans is almost always a mistake. There are many ways borrowers can get tripped up when consolidating.

First, the many different federal repayment plan options can make things confusing.

Second, even though combining Parent PLUS loans with other federal student loans is a huge mistake, borrowers do have the right to combine the loans in a consolidation.

Finally, many customer service representatives do not understand the magnitude of the mistake. If they don’t understand why it is a bad idea, they cannot warn borrowers before it is too late.

The Severity of the Situation

Once the loan is consolidated, there is no undo button. There is no fix.  A consolidated loan cannot be “unconsolidated.”

For many borrowers, this can mean decades of higher student loan payments due to one single mistake.

Sherpa Thought: I think there is a great argument for this rule to change. However, making that change a reality will require action from affected borrowers.

Bottom Line

Combining Parent PLUS loans with other student loans in a direct consolidation loan can be a lasting error. Unfortunately for many borrowers, it is an easy mistake to make, and there is no good way of fixing it.

(Editor’s Note: There are also Graduate PLUS loans… these loans sound very similar to Parent PLUS loans, but combining them with other federal loans is not the same huge mistake. The Graduate PLUS loans are eligible for the preferred repayment plans. Dealing with these loans is an entirely different circumstance.)

The post The Biggest Parent PLUS Loan Mistake… appeared first on The Student Loan Sherpa.

The long hold times we are facing haven’t been a surprise, but errors made by servicers have added a new and complicated wrinkle to the restart.

Sherpa Thought: A big thanks to all of the readers who have reached out to share the challenges you’ve faced.

I’ve collected the most commonly reported issues in this article. Hopefully, it will help other borrowers navigate this difficult time.

Incorrect Recertification Deadlines

Many borrowers are reporting that their servicer is requiring new IDR income certifications. This shouldn’t be happening.

To be clear, borrowers may choose to submit income verification for IDR enrollment. For example, if you are on PAYE and want to sign up for SAVE, income verification will be a necessary step.

That said, the Department of Education policy is that borrowers are not required to submit new income information if they wish to resume payments on their old repayment plan. For borrowers who make more money than what they did in 2020, waiting to recertify could mean considerable savings.

If you don’t want to change plans, the earliest you will have to recertify your income is March 1, 2024.

Recalculating IDR Payments for the SAVE Plan but Excluding Spousal Loans

As the REPAYE plan gets replaced with SAVE, borrowers who were on REPAYE before the pause should receive updated payment amounts.

This revised payment amount should always be lower.

If the servicer is using the previously certified income and the newer, more generous SAVE formula, payment amounts should decrease.

Sadly, some former REPAYE borrowers are getting new larger payment notices. This issue appears to be happening to married borrowers with spouses who also have federal student loans.

If spousal loans are mistakenly excluded, the married borrower could have a considerably larger monthly bill.

Inaccurate Forgiveness Timelines

Many borrowers are getting widely inaccurate information about when their loans will qualify for IDR forgiveness.

I’ve never been shy about criticizing federal loan servicers, but they are not to blame when it comes to forgiveness timeline mistakes.

At some point next year, borrower progress toward forgiveness will get updated. This IDR Count Update will award borrowers credit for periods on non-IDR repayment plans and some deferments and forbearances.

It will be at least several months before servicers get updated numbers.

For borrowers, extra work will be required to determine their progress toward IDR forgiveness.

Sherpa Tip: Don’t expect help from the Loan Simulator. Even though it reports expected forgiveness timelines, right now, the estimated time remaining projections are only reliable for borrowers starting repayment.

It appears that the Department of Education will overhaul this aspect of the tool once the IDR count update is completed.

Correcting Servicer Errors

The best approach for fixing a servicer error will depend on the type of servicer error.

If they provide bad advice, there isn’t much for the borrower to do. It’s not your job to educate the representatives. At most, you can file a complaint about the servicer. Right now, the most important thing is to verify any information you receive.

If they miscalculated your monthly payment or they want an immediate recertification, more steps are required.

In many cases, fixing an error is easier if you can identify how the mistake was made. For example, if you were on REPAYE, but your SAVE payment is larger, explain that they may have calculated your monthly payment without including your spouse’s loan information. Ask them to rerun the numbers.

If they want an immediate income recertification, pull up the Department of Education article that says that March 1, 2024, is the earliest deadline. Ask why this particular rule doesn’t apply to you.

Sadly, playing nice with the loan servicer isn’t always enough. Sometimes, filing a complaint is the best way to get things resolved.

Filing a Servicer Complaint

The best way to draw attention to a loan servicing issue is to file a complaint with the Consumer Financial Protection Bureau.

These complaints help the CFPB and the Department of Education identify widespread servicing issues. Additionally, they trigger a higher-level review of each individual complaint raised.

The CFPB complaint is often the fastest and most efficient way of correcting a servicer’s mistake.

Tips for Dealing with Servicers

Call waiting times are brutal. The longer the wait, the more frustrating the experience.

It is tempting to take out this frustration on the representative. After all, they get paid to help you, and in many cases, they fall short.

Unfortunately, the people working in loan servicer call centers are often underpaid, overworked, and insufficiently trained.

Rather than getting angry, be a breath of fresh air. Be patient and understanding. Be kind.

Whether or not you get help with your student loan issue may come down to the motivation of the call center representative. Be the type of person they want to help.

The post Common Student Loan Servicer Mistakes: Frequent Errors Complicate Restart appeared first on The Student Loan Sherpa.

Many of you have emailed asking about possibly making double or triple payments to speed up the PSLF or IDR forgiveness clock.

Even though a new provision allows borrowers to make extra payments to get closer to loan forgiveness, most borrowers will find that speeding things up isn’t a realistic option.

Paying Extra for Faster Forgiveness

When the SAVE plan was created, the Department of Education issued many new regulations.

One of these new regulations allows borrowers on an IDR plan to make “catch-up” payments for previous periods when they were on a deferment or forbearance. The purpose of making these extra payments is to qualify for forgiveness sooner.

Unfortunately, there are some significant limitations with this new provision. For starters, it does not become available until July 1, 2024.

Additionally, “catch-up” payments can only be made for deferments and forbearances less than three years old.

Lastly, borrowers on an in-school deferment cannot use the catch-up provision to count that time toward IDR forgiveness.

Sherpa Tip: Even though the catch-up doesn’t address older deferments and forbearances, borrowers may still be able to get credit for these periods under the one-time IDR count adjustment.

Extra Payments Don’t Usually Move Forgiveness Clock

To see why paying double can’t count as two payments, an example might help.

Suppose a borrower just graduated college and worked during school. This new graduate qualifies for a monthly payment of $10 under the new SAVE plan.

If borrowers could make multiple payments in a month, this example borrower could pay $240 in one month and be two years closer to loan forgiveness.

Such a rule would be incredible for the borrowers who qualify for low monthly payments, but it hardly seems fair to everyone else.

Strategy Behind Extra Payments

Why pay extra if making extra payments doesn’t speed up the forgiveness clock?

In many cases, paying extra is a lousy strategy. If you are working toward IDR forgiveness or PSLF, it just means less money to forgive at the end.

Some borrowers consider paying extra to keep their balance under control. The new SAVE subsidy already addresses this issue. With this new program, many people are better off just putting that extra payment into a high-yield savings account.

Understanding the Forgiveness Clock

In the past, many borrowers thought about forgiveness purely from a time-based perspective. PSLF takes ten years, and IDR forgiveness takes 20 or 25 years.

I’ve encouraged borrowers to think of it less as a forgiveness clock and more as a payment count, especially with PSLF. This approach helps ensure that borrowers don’t skip over critical eligibility factors.

As we look at things from a payment count perspective, it is essential to remember that there is still a time-based element. If you need 20 years’ worth of payments for IDR forgiveness, it will take 20 years to get there.

The post Accelerated Forgiveness: Making Extra Payments for Quicker Forgiveness appeared first on The Student Loan Sherpa.

The standard repayment plan may sound like a good starting point, but it often carries the highest monthly payments. Income-Driven Repayment (IDR) might sound good, but similar-sounding names like Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) quickly make things confusing.

Is it a good idea to pick the plan with the lowest monthly payment? Which plans qualify for loan forgiveness? How do you avoid a mistake?

Sherpa Tip: This is an extensive article covering the various aspects of selecting a repayment plan and the strategies involved.

Feel free to skip through sections that don’t apply to your loan situation.

Also, if you want the easy answer for most borrowers: it’s an IDR plan. Pick the IDR plan with the lowest monthly payment. I will show my work below, but if you are in a hurry, opting for an income-driven repayment plan is usually the safest first student loan repayment plan.

Don’t Panic: Changing Repayment Plans is Easy

Every student loan decision can seem high stakes. Balances are often large and scary, and we have all heard student loan horror stories.

Picking your first student loan repayment plan is a low-stakes decision. You can always change repayment plans. If you pick a 25-year repayment plan, you are not committed to it for the next 25 years.

If anything, the one big mistake to avoid is losing eligibility for the various student loan forgiveness programs. The good news is that it is easy to confirm whether or not the plan you select will be eligible for all of the federal student loan forgiveness programs.

Income-Driven Repayment is the Best Option for Most Borrowers

Income-Driven Repayment, usually shortened to IDR, refers to a category of repayment plans.

Before jumping into the specifics of the various IDR plans, it is important to first cover the many similarities they share. These common features make IDR plans far superior to the other federal repayment plans — especially for borrowers starting repayment.

IDR Plans Keep the Door Open on Forgiveness

The path to a zero-dollar balance isn’t always obvious when starting student loan repayment. It might also change as life circumstances change.

Starting with an IDR plan is preferable because IDR plans count towards the various federal student loan forgiveness programs. Borrowers starting in repayment don’t necessarily need to understand the intricacies of each forgiveness option. They just need to know that IDR keeps that door open.

Borrowers Picking Their First Repayment Plan Often Qualify for $0 Per Month Payments

IDR payments are typically calculated based on your most recent tax return.

For recent graduates, this often means little or no income. Thus, it is common for people starting repayment to qualify for $0 per month payments on an IDR plan.

Borrowers can always pay extra without penalty, but qualifying for extremely low or $0 per month payments provides flexibility during a time of significant life changes.

The $0 per month payments will last for 12 months. Before the year ends, borrowers must submit new income documentation. At that point, payments get adjusted to match the newest tax return on file.

Signing Up for Your First Repayment Plan

Borrowers don’t actually have to sign up for a repayment plan. However, if they don’t pick a plan, one will be selected for them.

The problem with going this route is that the 10-year standard repayment plan is the default option. Of all the federal repayment plans, it is the one that usually results in the highest monthly payment.

Thus, the best move for most recent graduates and borrowers entering repayment is to sign up for an IDR plan before starting repayment.

How to Enroll in an IDR Plan

The Department of Education makes IDR enrollment pretty simple.

Studentaid.gov has a page dedicated to IDR enrollment and income verification. The built-in IDR data retrieval tool allows borrowers to document their income with little effort. Borrowers can complete an electronic application without having to print any documents or mail any paperwork.

The Department of Education estimates that the process takes less than 10 minutes.

For borrowers that wish to avoid an electronic application, a paper form is also available.

Picking the Right Income-Driven Repayment Plan

Selecting the best IDR plan isn’t always easy.

One helpful resource is the Student Loan Simulator. This tool, provided by the Department of Education, allows borrowers to see estimated payments on the various repayment plans.

This tool sometimes falls short in helping borrowers decide between the various IDR plans. For example, borrowers that qualify for $0 per month payments usually have multiple repayment plans with a $0 payment.

In this scenario — and for most recent graduates — the REPAYE plan is usually the best option. REPAYE comes with an interest subsidy that can cover a portion of the monthly interest accrued. If your monthly bill is lower than the interest your loan generates each month, REPAYE is an excellent option.

For borrowers that are married or have Parent PLUS loans, a deeper dive into the various IDR plan options is often necessary.

Sherpa Tip: New IDR plans may become available in the future that lower payments for all borrowers and allow a greater percentage of borrowers to qualify for $0 per month payments.

There is a new version of REPAYE currently in development.

Long-Term IDR Benefits

Thus far, we have only looked at IDR from the perspective of a borrower starting repayment.

It’s worth noting that the IDR benefits are long-lasting. Most borrowers will benefit from sticking with IDR for the duration of their loan repayment.

The obvious benefit is qualifying for forgiveness under a program like Public Service Loan Forgiveness. Repaying only a fraction of the debt and having the remainder forgiven is a great deal.

However, loan forgiveness isn’t the only benefit of IDR repayment. It is just the tip of the iceberg.

IDR Allows Borrowers to Focus on Other Risky Debts

Borrowers that use IDR to lower their monthly payments should have more cash available to attack credit card debt or high-interest student loans.

Given the many borrower protections associated with federal loans, focusing on eliminating private loans or credit card debt is a smart move. Borrowers can save money on interest and protect themselves if they lose their job or face a financial emergency.

Lower Payments During Financial Stress

When borrowers certify their income for an IDR plan, that certification is good for 12 months.

However, if the borrower faces a change in circumstances, they can immediately request a new payment calculation.

Borrowers that lose their job can submit a new income verification, certify that they don’t have any income, and lower their monthly bill to $0. This feature makes IDR plans well-suited to help borrowers navigate any period of unemployment.

Avoiding Deferments and Forbearances

Deferments and forbearances sound better in theory than how they actually behave in practice.

Pausing payments is great, but outside of a couple of exceptions, interest continues to accrue. By the time the deferment ends, the borrower is left with a larger balance.

Additionally, deferments and forbearances are limited resources. Once a borrower maxes out their hardship remedies, they must begin repayment.

By comparison, sticking with a plan like REPAYE is better. Borrowers can get affordable monthly payments, continue on REPAYE indefinitely, get help with the accruing interest, and make progress toward forgiveness.

For this reason, deferments and forbearances are usually a mistake.

Buying a House Could be Easier with IDR

The underwriting process for buying a house is notoriously tricky for student loan borrowers.

Recent policy changes now mean borrowers can use IDR payments for mortgage calculations. This can make a huge difference in an applicant’s debt-to-income ratio.

IDR can be the difference between buying a house and renting for student loan borrowers with large federal debt balances and more modest incomes.

The Risks and Concerns of IDR Repayment

Even if IDR is the best plan for most borrowers, it certainly isn’t the best repayment option for all borrowers.

There are a few potential issues with IDR that all borrowers should understand.

IDR Danger #1: Interest

Low monthly payments are great, but they can mean you rack up more interest.

Some borrowers may spend more money chasing forgiveness than what they would have paid if they tried to pay off the loan as quickly as possible.

IDR is best suited for borrowers struggling to manage their debt. The more money you make and the smaller your debt, the less benefit to IDR.

IDR Danger #2: Yearly certification

Sticking with IDR is a bit more high maintenance than other repayment plans.

Each year borrowers must certify their income. Failure to meet the deadline means the borrower gets put back on the standard 10-year repayment plan.

Income certification only takes a few minutes, but it is an essential step for all IDR borrowers.

IDR Danger #3: Increased Income

This “danger” of IDR should be pretty obvious.

The more money you earn each year, the more you have to pay on an IDR plan.

At a certain point, your income might become large enough that IDR no longer makes sense.

IDR Danger #4: Marriage

This last danger of IDR is probably the biggest one.

Getting married makes IDR payments more expensive. Some IDR plans allow borrowers to file taxes separately, but that usually means a larger tax bill. Make no mistake: there is a marriage penalty for IDR borrowers.

It is one of the aspects of IDR repayment that is incredibly unfair.

Digging Deeper: Advanced IDR Strategy

Now that we’ve covered most of the pros and cons of IDR, you might be ready to learn how to maximize the benefits.

Here are a few topics worth investigating:

• Using IDR to help maximize retirement savings
• Cleaning up student loan payments to prepare for a mortgage application
• Tax strategies to lower IDR payments

Dealing with IDR repayment isn’t always easy, but it is the best choice for most borrowers.

If you are starting your repayment journey, an IDR plan is often the best option.

The post Selecting Your First Student Loan Repayment Plan: Tips and Strategy 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.

For borrowers who have college debt without the earning power of a degree, repayment becomes exceptionally difficult and frustrating.

The only sliver of good news is the fact that several different programs have been created over the last few years to help borrowers in this situation. These programs are imperfect, but they can help many borrowers with large student loans and a worthless degree.

Sadly, many of these programs only apply to federal student loans. However, there are still options for private loan borrowers.

The Popular Federal Student Loan Forgiveness Options

There is a long list of federal student loan forgiveness programs.

The two most popular forgiveness programs, IDR forgiveness and PSLF, can be life-changing for any borrower.

Public Service Loan Forgiveness – To qualify for PSLF, borrowers don’t need a degree in any specific field. They don’t even need a degree. PSLF requires that borrowers meet three basic requirements: (1) Work for a government or non-profit employer for ten years, (2) enroll in an eligible repayment plan, and (3) have eligible student loans.

It’s critical that any borrower considering PSLF closely review all of the rules and fine print. However, the most important takeaway is that any federal student loan borrower can potentially qualify for this program.

Income-Driven Repayment Forgiveness – Borrowers who enroll in an IDR plan can have their student loans forgiven after 20 or 25 years, depending on the plan. This may sound like an excessively long time to deal with student loans, but it is a path to debt freedom for borrowers overwhelmed with unaffordable debt.

One of the IDR highlights is that many borrowers qualify for $0 per month payments. This keeps debt manageable for people who are unemployed or struggling to get by. Best of all, the $0 per month payments still count towards the 20 to 25 years needed for forgiveness.

Does the federal student loan payment and interest pause count towards forgiveness? Due to the Covid-19 pandemic, federal student loan payments were paused for over three years. Fortunately for borrowers, this time still counts towards IDR forgiveness and PSLF, assuming the borrower is working in a PSLF-eligible job.

Federal Student Loan Cancellation for Borrowers with Worthless Degrees

There are also loan forgiveness/cancellation programs specifically designed for borrowers with worthless degrees.

Borrower Defense Against Repayment – Nobody attends college intending to get a useless degree. In some cases, schools lie and mislead students into signing up. The Borrower Defense Against Repayment Program allows for the total cancellation of these student loans.

Closed School Cancellation – Some borrowers couldn’t finish their degree because their school closed. Others completed their degree just before the school closed and could not find work in their field because of the school closure. If your school closed, you might be entitled to a discharge of all of your federal student loans.

While these two programs may help many borrowers, not all who need help will qualify. Fortunately, there are other options available.

Keeping Monthly Bills Affordable

Thus far, we have focused on federal student loan forgiveness and cancellation options. Sadly, these programs won’t help everyone. Some borrowers won’t qualify for the program they want, and others have private loans that are not eligible for federal relief.

Whether or not you qualify for cancellation or forgiveness, keeping your debt manageable while you pursue relief is essential.

One option that tempts many borrowers with unaffordable loans is a deferment or a forbearance. Other than the Covid-19 payment pause, forbearances and deferments are not good options for most borrowers. The problem with not making payments is that interest accrues, your balance grows, and monthly payments increase. Unless you have a temporary financial hardship likely to end soon, a deferment or a forbearance is likely a mistake.

Instead, borrowers should focus on finding something sustainable. For federal borrowers, this usually means enrolling in an Income-Driven Repayment Plan. For private student loan borrowers, this means working with your lender to find a plan that works long-term.

Sherpa Tip: Ask for lower monthly payments on all of your student loans. If you have one loan that you cannot afford and three loans that you can afford, try to get payments reduced wherever possible. This will make your total monthly student loan bill go down.

Additionally, signing up for lower monthly payments gives borrowers more flexibility in attacking their debt.

Bankruptcy Options

For many years, bankruptcy didn’t offer student loan borrowers much relief. Getting a discharge proved difficult, even for borrowers in dire financial circumstances.

Fortunately, things have recently changed.

A new Department of Justice Policy makes discharging federal student loans significantly easier for borrowers. Under these new rules, borrowers who didn’t finish their degree and borrowers who don’t work in their field of study are far more likely to qualify for a debt discharge.

The new federal rules may also help borrowers with private student loans. Private lenders may feel compelled to follow suit if the government says to the judge that they think a borrower’s loans should be discharged.

If your student loans are unaffordable and things are unlikely to change, talking to a local bankruptcy attorney could be wise.

Private Loan Solutions

Private student loan lenders are notoriously ruthless.

They don’t offer income-driven repayment plans, and they don’t offer loan forgiveness programs. Sadly, converting private loans into federal loans is extremely difficult.

There isn’t a single option or strategy that will work for most borrowers. Some might need to pursue bankruptcy. Others will benefit from repeatedly calling their lender and asking for help. Some might get the best outcome by filing a complaint about their lender with the CFPB.

Lastly, borrowers with a decent credit score and income can refinance their private loans to get a lower interest rate and more affordable monthly payments. Those with a cosigner can also explore this option.

As of November 2024, the following lenders offer the lowest interest rates on a 20-year, fixed-rate loan:

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 Tips for Borrowers Stuck with Large Student Loans and a Worthless Degree appeared first on The Student Loan Sherpa.