Time’s Up: How to Attack Your Debt as Student Loan Payments Resume

To say the last few years in the student loan world have been chaotic is an understatement.

Multiple payment pauses, the on again and off again wondering whether or not President Joe Biden’s forgiveness plan would get approved, then the Supreme Court answering that question with a resounding “no” at the end of June.

All that followed by changes to the income-driven repayment program, allowing more than 800,000 borrowers to actually have their loans forgiven.

If you have student loan debt, it’s been a whirlwind.

Now, as the winds of change begin to settle, you might be left wondering what to do next. You’ve had some time away from making monthly payments, and that time is up as of October.

If it’s any comfort (and it probably isn’t), you’re not the only one who owes. Outstanding student loan debt clocked in at $1.77 trillion in 2023, according to the Education Data Initiative.

But besides the obvious benefit — getting out of debt — making on-time student loan payments will reflect well on your credit score.

Ready to tackle that student loan debt? Good, let’s get started.

A Guide to Student Loan Repayment

When you’re ready to start repaying your student loans, it’s best to create a plan to avoid wasting time, money and energy. Here’s what you need to do before you make that first payment.

1. Know How Much You Owe and Who You Owe

If you’re like most grads, you took out multiple student loans over your multi-year college career. So it’s best to start organizing by figuring out who you owe, how much you owe and when it’s due. Oh, and interest rate is important, too.

To get this process started, you’ll need to write down the full amount you owe by logging into all your servicers’ websites. There’s been a lot of change in the student loan servicing industry as well. If you’re unsure who your student loan servicers are, check your account dashboard at studentaid.gov or call the Federal Student Aid Information Center at 1-800-433-3243

You can also check the National Student Loan Data Center to determine whether your loans are federal or private. If you don’t see any loans listed on this site, then they’re likely private student loans. Your options for repayment will differ based on whether your loan is backed by the federal government.

2. Come Up With a Plan … a Repayment Plan

If your student loan payments are a financial burden, you may want to consider getting on an income-driven repayment (IDR) plan. These plans calculate your monthly payment amount based on your income and family size. They cap your monthly payment typically somewhere between 10% and 20% of your discretionary income.

However, the Biden administration announced a major correction to these plans in June 2023. The Saving on Valuable Education (SAVE) plan raises the discretionary income level for borrowers and protects borrowers from accruing interest as long as monthly payments are made on time.

Borrowers are eligible to get remaining debt canceled when they have made payments for either 20 or 25 years, based on when they initially borrowed and the type of loan they have.

In the summer of 2024, the SAVE plan will cap monthly payments for undergraduate loans at 5% of discretionary income — half the rate that borrowers pay under most existing plans. This change alone will reduce the average annual student loan payment by more than $1,000.

A beta version of the updated IDR application is now available and includes the option to enroll in the new SAVE Plan. If you’re already enrolled in the REPAYE Plan or recently applied, you will automatically be moved to the SAVE Plan.

3. Pay Off Your Interest Before the End of Your Grace Period or When Repayments Begin

If you’ve recently graduated, and you have the cash, pay off at least the accrued interest on your federal student loans before your grace period runs out. It can save you a bundle of money by helping you avoid interest capitalization — when the interest gets lumped in with your principal amount and you start getting charged interest on the total amount.

The same goes if you’re coming out of the forbearance period with interest set to resume on Sept. 1 and payments in October. Do as much as you can to knock that balance down before payments resume.

Wondering where to find extra money before the deadline? Consider taking up a side hustle to make some extra cash to throw toward the payment.

4. Think About Forgiveness

Student loan forgiveness plans have been around long before the last few years. There’s actually quite a few ways to get your student loans forgiven. But it’s not easy or fast, or even likely.

But if you work in specific fields — like teaching or nursing — you could be eligible for loan forgiveness after a set number of years. If you work in public service, you could also apply for forgiveness through the Public Service Loan Forgiveness (PSFL) program. Though the waiver that added additional benefits has expired, the program is still available.

There are typically a lot of hoops to jump through — including making sure your loan repayment program and your employer qualify — so be sure you know the requirements of your forgiveness program.

5. Avoid Delinquency and Default

If you miss your payment by even one day, your federal loan becomes delinquent. If you’ve missed payments on your Federal Family Education Loan (FFEL) or direct student loan for 270 days, your loan is considered to be in default.

If you can’t afford your monthly payment due to unemployment or an approved economic hardship, you might qualify for deferment or forbearance. You can also qualify for deferment if you’re enrolled in an approved graduate fellowship program.

During deferment, you won’t owe monthly payments on your federal loans and your subsidized loans won’t accrue interest (but all the rest will).

If you don’t qualify for deferment, the other option is forbearance, during which your lender allows you to stop making payments or reduces your monthly payments for up to one year. However, during forbearance, interest will continue accruing on all of your loans.

Both options are only temporary fixes, and you’ll probably end up owing more money in the end. But at least you won’t wreck your credit score. Why does that matter? A high or good credit score allows you to qualify for better loans and credit cards with lower interest rates and more favorable terms. A poor credit score may not even qualify you for a loan.

6. Reset Your Budget to Account for the New Loan Payments

It can be tough to see beyond that debt, but remembering that there is more to life than student loans is important for your financial future.

First, while throwing every available dollar at your student loan might help you feel like you’re making progress in that arena, don’t sacrifice your present financial state by pillaging your emergency fund (you have one, right?). It’s there to cover those unexpected expenses — like a new set of tires or unexpected vet bill — without sending you into credit card debt.

Sit down and make sure you have set a zero-based budget, where you account for every dollar coming in and going out. Cut back on any unnecessary expenses so you can pay off that debt faster.

Additionally, you shouldn’t sacrifice your future for today’s debts. Instead of paying every dollar toward student loans, start saving for your retirement now. With plenty of years to go, you’ll be able to build an impressive nest egg future you will thank you for.

Bonus: Socking away your money in a 401(k) or IRA reduces your taxable income. So if you do decide to apply for an income-driven repayment plan, the federal government won’t count the money you’re saving for retirement.

Tiffany Wendeln Connors is deputy editor at The Penny Hoarder. Senior writer Robert Bruce contributed to this article.