It may feel like you’d need to win the lottery to reduce or eliminate your student debt, but you don’t have to. Here’s how three borrowers are paying down their debt and how you can get rid of your student loans, too.
If you have good credit and a steady income: Student loan refinancing
You can potentially get a lower interest rate and save money on your federal or private student loans by refinancing. You’ll likely be eligible if you have good credit and make at least $24,000 a year.
However, federal student loans become private loans when you refinance. That means you’ll lose the option to take advantage of federal forgiveness programs and income-driven repayment plans. If you don’t qualify for those benefits or if you have private student loans, you’re probably a good candidate for refinancing. Compare student loan refinance lenders to make sure you get the lowest possible interest rate.
Baltimore-based art teacher Zac Lawhon began saving more than $150 a month after refinancing a private loan and switching to an income-based repayment plan for his federal loans.
Refinancing lowered Lawhon’s private loan interest rate from 11.5% to 8.5%. He chose not to refinance his federal loans because he wants to be eligible for the federal Public Service Loan Forgiveness program in the future.
“These savings are what helped me qualify for a mortgage,” says Lawhon, who owes around $200,000 between federal and private loans. “So it seems small, but it was significant.”
If you work for the government or a nonprofit: Student loan forgiveness
Depending on your career, you may be eligible for one of the federal government’s student loan forgiveness programs. Teachers can be eligible for forgiveness after five years of working in a qualifying school district (while making consistent loan payments), and nonprofit and government employees can be eligible after they’ve worked and made payments for 10 years. For more details about these federal forgiveness programs, what it takes to qualify and other forgiveness options, check out our guide to student loan forgiveness.
Julia Westbrook, a family and consumer science teacher in Lincoln City, Oregon, got $17,500 of her federal student loans forgiven through the federal Teacher Loan Forgiveness Program. But she still has more than $30,000 in outstanding student debt. Since she works for a public school district, she’s also eligible for the federal Public Service Loan Forgiveness program, which would forgive her remaining debt. However, borrowers cannot overlap forgiveness programs, so Westbrook has to work an additional 10 years on top of the five she’s already worked to qualify.
Another thing to keep in mind: Forgiveness programs can change as government budgets shift, so you shouldn’t rely on them to absolve you from debt, says Betsy Mayotte, director of regulatory compliance at American Student Assistance, a nonprofit focused on helping students pay for college.
“Borrowers should never take on debt with the expectation that they’ll be able to get their loans forgiven,” Mayotte says.
If you don’t earn enough to make your monthly payments: Income-driven repayment
If you’re struggling to make your monthly payments, consider an income-driven repayment plan for your federal loans. There are four such plans — including the new Revised Pay As You Earn (REPAYE) plan — that allow you to cap your monthly payments at between 10% and 20% of your income. The plans also extend your term from 10 years to 20 or 25 years, depending on when you first borrowed.
Although you’ll have smaller monthly payments with an income-driven plan, you’ll end up paying more in interest in the long run. But income-driven plans also offer forgiveness on any remaining balance after 20 or 25 years.
When he began paying back his student loans, Chicago-based social worker Carl Wiley immediately switched to an income-based plan to lower the monthly payments on his $50,000 federal loan. His federal loan payments are now $365 a month, which he estimates saved him hundreds of dollars a month compared to the standard repayment plan, to which most grads are automatically assigned.
That amount is still a lot for his budget; Wiley also has $70,000 in private loans, which aren’t eligible for income-based repayment. In total, he owes $730 a month, or about one-third of his monthly income.
Despite the burden of his debt, Wiley has hope: He works for a nonprofit, so he’ll be eligible for the Public Service Loan Forgiveness program if he continues working in the public sector for about nine years.
“There’s at least some light at the end of the tunnel,” he says.
NerdWallet writer Brianna McGurran contributed to this report.
Updated May 4, 2017