September 20, 2023

How to Pay Off Student Loans Without Going into Debt?

Learn how to create a budget, prioritize loans, explore forgiveness programs, and more.‍

Have you ever wondered how many people in today's world are living under the shadow of student loan debt? Picture this: In the United States alone, as of 2023, approximately 43 million borrowers carried a staggering $1.78 trillion in student loan debt. That's a mind-boggling number, and it raises a crucial question – how to pay off debt without sinking into the depths of financial hardship?

Student loans are ubiquitous in modern education, offering access to the knowledge and skills needed for personal and professional growth. However, the burden of student loan debt often casts a long shadow over graduates' financial lives, affecting their ability to save, invest, and achieve financial goals.

People must arm themselves with the information and techniques needed to manage and eventually get rid of their student loan debt as it continues to climb. In this in-depth manual, we explore how to pay off student loans while avoiding the traps of taking on more debt. We discuss doable actions, offer professional counsel, and give you a road map to financial freedom.

Whether you are fresh out of college, a seasoned professional grappling with student loan payments, or a concerned parent planning for your child's future, the insights and strategies within this article will help you navigate the journey of student loan repayment with confidence and clarity. 

So, let us embark on this transformative financial journey together and discover how to break free from the shackles of student loan debt.

Read more: When should you start building credit?

Understanding Your Student Loans

Before we dive into strategies for paying off student loans, it is essential to have a clear understanding of the types of loans you have and the terms associated with them. Here are some key points to consider:

1. Know Your Loan Types

There are two primary types of student loans: federal and private. Federal loans are issued by the government, and they typically offer more favorable terms, such as fixed interest rates and income-driven repayment plans. Private loans, on the other hand, come from banks or other private lenders and may have variable interest rates and less flexible repayment options.

Common federal loan programs include Direct Subsidized Loans, Direct Unsubsidized Loans, and Perkins Loans. Private loans can vary widely depending on the lender.

2. Understand Interest Rates

Interest rates play a significant role in the total cost of your student loans. Federal loan interest rates are set by the government and can be fixed or variable, while private loan interest rates depend on your creditworthiness and the lender's terms.

It is crucial to know the interest rates for each of your loans, as this will determine how quickly your loan balance grows over time.

3. Review Your Loan Terms

Different loans have different repayment terms. Federal loans typically offer various repayment plans, including standard repayment (usually 10 years), extended repayment (up to 25 years), and income-driven repayment plans, which base your monthly payments on your income and family size. Private loans often have shorter repayment terms.

Understanding your loan terms will help you choose the right repayment strategy for your financial situation.

4. Be Aware of Grace Periods

Many student loans come with a grace period, a specified period after you graduate, leave school, or drop below half-time enrollment, during which you do not need to make payments. Federal loan grace periods are usually six months, while private loan grace periods can vary. It is important to know when your grace period ends, as this is when your monthly payments will start.[4]

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Now that you have a solid understanding of your student loans,
let's explore strategies for paying them off without going into debt.

How to pay off student loans without going into Debt?

1. Create a Budget

The first step in paying off your student loans is to create a comprehensive budget. A budget helps you track your income and expenses, giving you a clear picture of your financial situation. Start by listing all your sources of income, including your job, freelance work, or any other income streams.

Next, list all your monthly expenses, including rent or mortgage, utilities, groceries, transportation, insurance, and entertainment. Be as detailed as possible, and do not forget to include your minimum student loan payments.

Once you have your income and expenses laid out, calculate the difference between the two. This will help you determine how much extra money you can allocate toward your student loans monthly. The goal is to maximize your loan payments while maintaining a comfortable standard of living.[1][2][3]

2. Prioritize High-Interest Loans

If you have multiple student loans, it is essential to prioritize them based on their interest rates. High-interest loans cost you more in the long run, so it makes sense to pay them off first. Here's a step-by-step process to tackle your loans strategically:

  • List Your Loans: Make a list of all your student loans, including their balances and interest rates. Sort them from highest to lowest interest rate
  • Pay Minimums on All Loans: Continue making the minimum monthly payments on all your loans to avoid defaulting on any of them
  • Allocate Extra Payments: Take the extra money you identified in your budget and allocate it toward the loan with the highest interest rate. By doing this, you will be able to pay off this loan faster and reduce the overall interest payable
  • Snowball or Avalanche Method: There are two popular methods for paying off multiple loans: the snowball method and the avalanche method. In the snowball method, you focus on paying off the smallest loan balance first, while in the avalanche method, you prioritize the highest interest rate loan. Choose the method that aligns with your financial goals and preferences.[1][2][3]

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3. Explore Income-Driven Repayment Plans

If you have federal student loans and your standard monthly payments are too high to manage comfortably, consider enrolling in an income-driven repayment plan. These plans adjust your monthly payments based on your income and family size, making them more affordable.

Common income-driven repayment plans include:

  • Income-Based Repayment (IBR): Caps your monthly payments at 10-15% of your discretionary income, depending on when you took out your loans. Any remaining balance after 20-25 years of payments may be forgiven
  • Pay As You Earn (PAYE): Limits your payments to 10% of your discretionary income and offers forgiveness after 20 years of payments
  • Revised Pay As You Earn (REPAYE): Caps payments at 10% of your discretionary income for undergraduate loans and 20% for graduate loans, with forgiveness after 20-25 years of payments
  • Income-Contingent Repayment (ICR): Sets your payments at 20% of your discretionary income or the amount you would pay on a fixed 12-year plan, whichever is less. Any remaining balance is forgiven after 25 years

Keep in mind that while these plans can lower your monthly payments, they may result in paying more interest over the life of your loan. Additionally, any forgiven balance under these plans may be considered taxable income.[1][2][3]

4. Make Biweekly Payments

Instead of making monthly payments, consider switching to biweekly payments. By doing this, you will make 26 half-payments in a year, which is equivalent to 13 full monthly payments. This extra payment each year can significantly reduce your loan balance over time.

To set up biweekly payments, contact your loan servicer and ask if they offer this option. Alternatively, you can divide your monthly payment by two and make that half payment every two weeks. Just be sure to inform your servicer that the extra payments should go toward the principal balance of your loan.[1][2][3]

5. Make Extra Payments

Whenever you have extra money, such as a tax refund, work bonus, or a monetary gift, consider putting it toward your student loans. These extra payments can have a big impact on reducing your loan balance and the total interest you will be required to pay.

When making extra payments, make sure to specify that the additional funds should be applied to the principal balance of the loan. Some loan servicers may automatically apply extra payments to future interest or fees, which will not help you pay the loan faster.[1][2][3]

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6. Explore Loan Forgiveness Programs

Loan forgiveness programs can provide relief from student loan debt under certain conditions. While these programs are often associated with public service jobs, there are various options available:

  • Public Service Loan Forgiveness (PSLF): PSLF is available to borrowers who work full-time for a qualifying government or non-profit organization and make 120 qualifying payments under an income-driven repayment plan. After 120 payments, the remaining loan balance is forgiven tax-free
  • Teacher Loan Forgiveness: Teachers who work in low-income schools or educational service agencies may be eligible for loan forgiveness of up to $17,500 on their federal Direct or Stafford loans after five years of service
  • Income-Driven Repayment Plan Forgiveness: Under income-driven repayment plans, any remaining balance on your loans can be forgiven after 20-25 years of qualifying payments, depending on the specific plan
  • Military Service Loan Forgiveness: Members of the military may be eligible for various loan forgiveness programs, including the Public Service Loan Forgiveness program and the National Defense Student Loan Discharge program
  • State-Specific Loan Forgiveness Programs: Many states offer independent loan forgiveness programs for residents who work in specific fields, such as healthcare, education, or public service. Research the programs available in your state

Loan forgiveness programs can be a valuable option if you meet the eligibility criteria. Be sure to understand the requirements and maintain accurate records of your employment and loan payments.[1][2][3]

7. Refinance Your Loans

Refinancing your student loans can be a smart move if you have a strong credit history and can qualify for a lower interest rate. When you refinance, a private lender pays off your existing loans and issues you a new loan with a potentially lower interest rate and different repayment terms.

Here are some key considerations when refinancing:

  • Interest Rate: Look for a lower interest rate than your current loans to save money over the life of the loan
  • Fixed vs. Variable Rate: Decide whether you want a fixed interest rate (which remains the same throughout the loan term) or a variable rate (which may change over time)
  • Loan Term: Consider the length of the loan term. A shorter term can lead to higher monthly payments but lower overall interest costs
  • Loan Features: Evaluate other loan features, such as deferment options, forbearance, and the ability to release a co-signer

It is important to note that refinancing federal loans with a private lender means losing federal benefits, such as income-driven repayment plans and loan forgiveness options. Therefore, carefully weigh the pros and cons before refinancing.[1][2][3]

8. Seek Employer Assistance

Some employers offer student loan repayment assistance as part of their benefits package. If your employer provides this benefit, take advantage of it. Employer-sponsored repayment assistance can help you pay your loans faster and save on interest costs.

Check with your HR department or benefits manager to see if this option is available to you and understand the terms and eligibility criteria.[1][2][3]

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9. Side Hustles and Additional Income

Increasing your income can significantly accelerate your student loan repayment journey. Consider taking on a part-time job or side hustle to generate extra income. Popular options include freelance work, consulting, gig economy jobs, or selling items online.

Allocate the additional income you earn solely to your student loan payments to make a substantial dent in your debt.[1][2][3]

10. Live Frugally

Living frugally means finding ways to cut your expenses and redirecting those savings toward your student loans. Here are some frugal living tips to consider:

  • Reduce Housing Costs: Consider downsizing, finding a roommate, or moving to a more affordable area to lower your rent or mortgage
  • Cut Non-Essential Expenses: Review your spending habits and identify areas where you can cut back, such as dining out less, canceling unused subscriptions, or buying generic brands
  • Use Public Transportation: If possible, use public transportation or carpool to save on fuel and maintenance costs
  • Shop Smart: Look for discounts, use coupons, and take advantage of sales when shopping for groceries and other necessities
  • Cook at Home: Preparing meals at home is often cheaper than dining out or ordering takeout
  • DIY Repairs: Learn to perform basic household repairs and maintenance tasks to save on service fees

By adopting a frugal lifestyle, you can free up more money to use for your student loans without sacrificing your quality of life.[1][2][3]

11. Stay Informed About Loan Changes

Student loan policies and regulations can change over time. It is essential to stay informed about any updates or changes that may impact your repayment strategy. Subscribe to newsletters, follow reliable financial news sources, and periodically check the official government websites for student loans to ensure you are aware of the latest developments in this area.[1][2][3]

# A Case Study with Sarah

Let's take the example of a recent college graduate named Sarah who has $30,000 in student loan debt. She's eager to pay off her loans without going into debt and wants to explore the strategies you've listed. Here's how each step can apply to her situation:

  • Create a Budget: Sarah starts by creating a detailed budget that tracks her income and expenses. This helps her understand how much money she can allocate toward loan payments each month
  • Prioritize High-Interest Loans: Sarah identifies that some of her loans have higher interest rates than others. She decides to prioritize paying off the loans with the highest interest rates first. This minimizes the amount of interest that accumulates over time
  • Explore Income-Driven Repayment Plans: Sarah learns about income-driven repayment plans and applies for one that caps her monthly loan payments at a percentage of her income. This provides some relief when her income is lower, and she can put more money toward loans when she earns more
  • Make Biweekly Payments: Instead of making monthly payments, Sarah switches to biweekly payments. This results in 26 half-payments per year, equivalent to 13 full monthly payments. Over time, this extra payment helps her pay off her loans faster
  • Make Extra Payments: Whenever Sarah receives a windfall, like a tax refund or a work bonus, she puts a portion of it toward her student loans as an extra payment. This accelerates the loan repayment process
  • Explore Loan Forgiveness Programs: Sarah researches loan forgiveness programs specific to her field. If she qualifies, she could have a portion of her loans forgiven after working in a certain role or for a specific number of years
  • Refinance Your Loans: As her credit score improves and she secures a stable job, Sarah considers refinancing her student loans to get a lower interest rate. This reduces her monthly payments and overall interest costs
  • Seek Employer Assistance: Sarah inquires whether her employer offers any student loan assistance or repayment benefits. Some companies provide financial incentives to help employees pay off their student loans
  • Side Hustles and Additional Income: To boost her income, Sarah explores side hustle opportunities like freelance work or part-time jobs. She earmarks this additional income solely for her loan payments
  • Live Frugally: Sarah adopts a frugal lifestyle, cutting unnecessary expenses and finding ways to save money. She redirects these savings toward her student loans
  • Stay Informed About Loan Changes: Sarah keeps herself informed about changes in student loan policies, interest rates, and repayment options. This allows her to adapt her strategy as needed to optimize her loan repayment

By implementing these strategies, Sarah can work toward paying off her student loans efficiently and without accumulating additional debt. It's important to note that everyone's financial situation is unique, so Sarah may need to adjust these strategies based on her circumstances and goals. Additionally, seeking guidance from a financial advisor or student loan counselor can provide personalized advice tailored to her situation.

Read more: How to pay off credit card debt step-by-step?

Final Thoughts

Paying off your student loans without going into debt requires careful planning, discipline, and a willingness to make financial sacrifices. While it may take time and effort, the peace of mind that comes with being debt-free is well worth it. 

Remember that everyone's financial situation is unique, so choose the strategies that work best for you and adapt them as needed. With persistence and determination, you can conquer your student loan debt and achieve financial freedom.

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  1. What's the difference between federal and private student loans?

Federal student loans are issued by the government and typically offer more favorable terms, including fixed interest rates and income-driven repayment plans. They may also offer forgiveness options. Private student loans, on the other hand, come from private lenders and often have variable interest rates and less flexible repayment options. Understanding these differences can help you make informed borrowing decisions.

  1. Are there any tax benefits associated with student loans?

Yes, there are some tax benefits available for student loan borrowers. The most common is the student loan interest deduction, which allows you to deduct up to a certain amount of the interest you paid on your student loans from your taxable income. Be sure to consult with a tax professional to determine your eligibility and the specific rules that apply.

  1. What is loan consolidation, and should I consider it?

Loan consolidation is the process of combining multiple federal loans into a single Direct Consolidation Loan. While consolidation can simplify your loan payments, it may not always be the best option. Consolidating loans can lead to a higher interest rate in some cases, and you may lose certain borrower benefits, such as interest rate discounts or forgiveness options. Assess your unique situation before deciding if loan consolidation is right for you.

  1. Can I refinance both federal and private student loans together?

Yes, you can refinance both federal and private student loans together through a private lender. However, it is essential to understand that refinancing federal loans with a private lender means giving up federal benefits like income-driven repayment plans and loan forgiveness options. Make sure to carefully evaluate the pros and cons of refinancing both types of loans together before proceeding.

  1. What happens if I can't make my student loan payments?

If you're unable to make your student loan payments, it is crucial to contact your loan servicer immediately. They can help you explore options such as deferment (temporary postponement of payments), forbearance (temporary reduction or postponement of payments), or enrolling in an income-driven repayment plan. Avoid default at all costs, as it can have severe consequences for your credit and financial well-being.

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