Want To Pay Off Student Loan Debt? Ask These 9 Questions

There is a lot of advice on the internet about how to pay off your student loan debt, but which is best for you? Since only you can answer that question, here are nine questions to ask yourself, so you can figure it out.

What Is My Current Financial Situation? 

To figure out the best way to tackle your student loan debt, start by looking at your current income, expenses, and overall financial health. What’s your annual salary? How much do you have in your bank account? What are your monthly bills (including your monthly payment on student loans)?

You can get really granular with this by making a spreadsheet or using a budgeting app. Or you can keep it high-level and just outline the basics. Essentially, what you want to determine here is how much disposable income you can put toward paying off your student loans or achieving other financial goals. 

You may also want to ask yourself if you have any options to increase your income or reduce your expenses. Instead of pinching pennies, start by looking at your biggest expenses like housing and transportation. If you live alone, can you move in with a housemate to save money or move back home for a little while? Can you walk, ride your bike, or take public transportation instead of driving? If you can make cuts in these areas, you’ll often save more than skipping a coffee out here and there. 

How Does My Student Loan Debt Compare My Other Debt? 

A big part of understanding your financial situation is understanding your debt.

If you have high-interest debt like credit card debt, it may not be to your advantage to focus on your student loan debt first. Why? Most federal student loans have lower interest rates than credit cards. Also, if you have federal loans, you can temporarily pause your payments with deferment or forbearance or change your repayment plan to make your payment more affordable. Credit card companies and most other lenders don’t offer these advantages.

If you have different kinds of debt, don’t despair! Many debt repayment strategies can help. Start by exploring the debt avalanche or snowball method. Both require you to write down all your debts: the loan balance, interest rate, loan term, and monthly payment amount. If you’re cringing at the idea of this, you aren’t alone. But know that most borrowers feel empowered after they face their debt head on and make a plan to conquer it. You can too!

What Are My Financial Goals Beyond Student Loan Repayment? 

Now that you have a sense of your financial landscape, including your debts, it’s time to dream. What are your financial goals? What do you want to use money to help you achieve?

Most of us don’t have endless income, so we have to make some tough financial decisions. These decisions are easier to make when you’re clear about your financial goals and values. Understanding your long-term goals can also help shape your student loan repayment strategy.

If you have some disposable income each month, prioritize where to put it based on your goals. For example, if it’s important to you to save for retirement, can you contribute to your retirement fund and also make more than your minimum monthly student loan payment? If not, which is more important to you? Which will have the greatest impact in the long run (and how will this impact you in the short term)? 

You can use a student loan repayment calculator and an investment calculator to compare how much you’ll pay in interest versus how much you’ll earn if you invest over the same time period.

What Is My Risk Tolerance and Timeline for Debt Repayment? 

This may be the most important question to ask yourself to determine your financial priorities.

The truth is, we all have different tolerance for debt. Some people simply do not like having debt, so it’s important for them to pay it off fast — even if that means they have to sacrifice saving for retirement or delay other financial goals.

Other people don’t mind debt and take a more calculated approach. Since federal student loans often have relatively low interest rates, these folks may prefer to make their minimum monthly student loan payment and put more of their disposable income into savings or investments.

Neither approach is right or wrong. What’s important is to know yourself — what stresses you out and what inspires you — and to make decisions that align with your own values.

What Type of Student Loans Do I Have? 

When you applied for federal student aid, you may have been offered a combination of grants, scholarships, and loans. There are several different kinds of each of these forms of financial aid, so if you’re confused about what you have to pay back, you aren’t alone. The only type of financial aid you have to pay back is loans, so let’s do a quick primer on types of student loans.

How To Find Your Federal Student Loan Information

Over 90% of all education loans in the U.S. are made and backed by the U.S. Department of Education, aka the federal government. Today, most of those loans are Direct Loans. If you’re repaying student loans from years ago, you may also have Federal Family Education Loans (FFEL) or Perkins Loans, but these are less common.

It’s important to know what kind of loan you have because it’ll affect your repayment and student loan forgiveness options. Luckily, it’s easy to get information about your federal student loans from the National Student Loan Database System (NSLDS). This is run by StudentAid.gov (the same place you filed your FAFSA). 

An NSLDS report will give you details of your federal loans including:

• The student loan servicer(s), which is the company that manages your loan and repayment

• Your loan amount(s), including the outstanding principal amount and accumulated interest

• The type of loan(s) you have (direct, consolidated, subsidized, unsubsidized)

The other 10% of student loans are made by private lenders. These are usually called private student loans. The repayment terms are determined by the lender. 

Am I Eligible for Any Loan Forgiveness or Income-Driven Repayment Options? 

Now that you know what kind of loans you have, look into your payment options and check your eligibility for student loan forgiveness plans like Public Service Loan Forgiveness (PSLF). 

What Is Student Loan Forgiveness?

If you work a public service job (for a government agency or qualifying nonprofit) or you work in certain healthcare jobs, you may qualify for student loan forgiveness. Most of these federal programs still require you to make student loan payments for a period of time (for PSLF it’s 10 years), but you do so on an income-driven repayment plan (IDR plan). This plan ties your monthly payment to your income, meaning your payments will generally be more affordable. 

Those enrolling in PSLF or other loan forgiveness programs may be surprised to learn that conventional student loan repayment advice often will not apply to them. For example, in the PSLF plan:

• You must be on an IDR plan (not the Standard Repayment Plan… which is often the cheapest way to repay loans so many experts recommend it).

• You don’t want to refinance your loan because it’ll turn it into a private loan and won’t qualify for PSLF forgiveness.

• You want to be careful about student loan consolidation as it can affect your eligibility.

• It’s not advisable to make extra payments on your loans, since your loan balance will eventually be forgiven.

Should I Consider an Income-Driven Repayment Plan?

If you’re struggling to make your monthly payments on the Standard Repayment Plan, consider enrolling in an income-driven repayment plan. This will lower your monthly payment. 

But beware: It also extends the term of your loan (the number of years in repayment), which means you’ll end up paying more in interest over time. That said, this may be the best choice depending on what your goals are and what other debt you’re working to pay off.

You may want to continue paying under the Standard Repayment Plan — if you can afford the monthly payments — if your goal is to pay off your student loans quickly and with as little interest as possible. The SRP is a 10-year plan, while IDRs run for 20–25 years.

Tip: If you stay with the SRP and you want to pay your loan off even faster, make extra payments toward the principal balance (specify this with the loan servicer when you pay!). You can also make biweekly payments instead of monthly payments. With a biweekly payment, you pay half of your monthly balance every other week. Doing so means you’ll make 13 payments a year instead of 12.

Have I Explored Loan Consolidation or Refinancing? 

When you audited your personal finances, were you overwhelmed by the number of payments you have to make each month? Were you surprised by how much you’re paying in interest on your loans? 

If so, you may want to consider consolidating your loans. This rolls all your current loans into one loan with a single payment due date and a fixed interest rate. The interest rate will be the weighted average of all your current loans. Only federal loans can be consolidated.

Bonus Tip: After consolidating your loans, put your payment on autopay to receive an additional discount on your interest rate and so you don’t have to worry about missing a payment!

If you have private student loans, you can look into refinancing your loans, which may help you get a lower interest rate.