Key Takeaways:
- Student loans refer to a type of borrowed money used to pay for higher education costs.
- Some plans for saving money to pay off that debt faster include creating a budget and enrolling in autopay.
- The average bachelor’s degree holder owes $29,550 in federal student loans upon graduation.
College-bound learners expect to owe $17,000 after graduation.
In reality, their debt could reach twice that amount.
So, what plans for saving money can families make now to better manage – or even reduce – their student loans later?
What Are Student Loans?
Student loans refer to a type of borrowed money used to pay for higher education costs, including:
- Tuition
- Room and board
- Books
- Fees
The total amount you can take out usually depends on your college’s estimated cost of attendance after accounting for grants and scholarships.
You must pay back what you owe over time, generally in monthly installments and with interest and fees.
Two kinds of student loans exist:
- Federal
- Private
As the name implies, the U.S. Department of Education issues federal student loans.
You apply for them by filling out the Free Application for Federal Student Aid (FAFSA).
Most don’t require a credit check and Congress sets a fixed interest rate on them, which tends to be lower than what the private student loan providers offer.
Other benefits include:
- Options for deferment or forbearance if you face a financial hardship
- Potential eligibility for loan forgiveness programs
- Opportunities for parents to help cover their child’s expenses
Banks and credit unions fund private student loans.
They each come with different requirements and terms, so you should carefully review them before signing.
For example, it might carry a variable rate for the interest, meaning how much you pay could increase or decrease over time.
You obtain them directly through the lender.
Should I Take Out a Student Loan?
It’s not inherently bad to incur debt to earn a degree.
Four-year college graduates:
- Earn about 60 percent more than those with just a high school diploma
- Experience lower unemployment rates
- Encounter lower levels of poverty
- Work in jobs more likely to offer health insurance and retirement benefits
However, you should only take out student loans if:
- Scholarships, grants, and other sources of financial aid fall short of covering your education costs, and
- Your expected future earnings support its monthly payment while avoiding excessive compound interest
When you borrow outside of those conditions, it could lead to financial challenges that include damage to your credit score and less flexibility in your budget.
How Can I Pay Off My Student Loans Faster?
If you decide to take out a student loan, you should pay it back as quickly as possible to:
- Save on interest
- Lower your debt-to-income ratio
- Eliminate financial stress
- Improve your credit profile
Here’s how you can do so in six steps.
- Stick to the standard repayment plan – and start early
The government and most private lenders put borrowers on a 10-year repayment plan but offer longer term options. Avoid them. They lower your monthly bill but increase the amount of interest paid.
Some federal student loans give a six-month grace period after leaving college too, but as soon as you secure a job, you should start paying them off. - Create a budget
A budget allows you to track your student loan payment against your income and other expenses, such as rent, utilities, and gym memberships.
It’ll help you understand how much money you can realistically put toward your balance and identify areas where you can cut back to get it to zero faster.
For example, you might realize you need a roommate or can’t eat out as much each month. - Enroll in autopay
This year, the Department of Education began offering a 1% interest rate reduction to borrowers with eligible federal loans who sign up for its autopay program.
The discount lasts through June 2028 as long as you enroll by the end of the year.
Doing so ensures you avoid missed due dates while reducing the amount of interest owed.
Most private lenders provide a quarter-point discount if you register for automatic withdrawals. - Pay extra when possible
You can pay more than the minimum balance due.
If you receive a bonus at work, consider putting some of it toward your loan. Or redirect the money you save by canceling an unused subscription toward your monthly bill.
However, if you do so, you must instruct your servicer to apply that extra amount toward the principal rather than the next payment so you actually reduce the amount of interest owed. - Prioritize high-interest loans
In case we didn’t make it clear – interest adds up.
If you carry multiple loans, pay off the one with the highest rate first. Continue making the minimum payments for the other ones, then repeat the process with the next-highest rate until you clear your debts.
This approach saves you money over time. - Look into forgiveness or repayment assistance
The government offers a few programs, which discharge a portion – or in some cases all – of your loan balance.
In general, borrowers need to work in public service, education, or health care for a specific length of time and make a minimum amount of payments to qualify.
Employers will sometimes also offer to repay your loans as part of their company benefits package.
How to Pay for College Without Taking on More Debt
You can pay for college without taking on debt. It requires a well-thought-out strategy that entails the following:
- Applying for scholarships and grants: Scholarships and grants don’t need to be repaid unless you withdraw from school or fail to complete an obligation of the award.
Institutions, nonprofit, and private organizations fund them and offer them based on factors such as grades, talent, or field of study. - Completing college courses early: You can earn transferable credit while still in high school through accredited online institutions such as Portage Learning. Its self-directed format lets you affordably complete a variety of courses on your schedule then apply them to your degree at your college of intent.
You could also sign up for an AP class or a CLEP exam. - Comparing tuition and financial aid options: Tuition at private universities tends to be higher than at public schools, and in-state institutions usually come with a lower price tag than out-of-state colleges.
- Educating yourself on personal finance: A report published in the Journal of Financial Economics found students who attended a high school that required personal finance education more likely to pay down their student loan balance or reduce it by 7% in some instances.
In addition to college courses, Portage Learning offers a class that teaches you money management principles and meets the personal finance requirements for most states.
What Happens If You Can’t Afford Student Loan Payments?
When you miss one or two student loan payments, you’ll be charged a late fee and your account becomes delinquent, which can show up on your credit report and negatively affect your score.
If you continue not to pay, usually after three to six months, you risk the loan going into default.
When that happens, your balance becomes immediately due. Your tax refund and paycheck can be withheld, with that money instead being sent to your loan provider to repay the amount owed.
Default makes it incredibly difficult to buy a car or get a credit card since it damages your rating.
Planning Ahead for Student Loan Repayment
The average bachelor’s degree holder owes $29,550 in federal student loans upon graduation – a number most families don’t anticipate.
But a little planning goes a long way.
By understanding your borrowing options and making informed decisions about repayment, students and parents can keep that debt manageable.
