Today I have I guest post from Ben Luthi over at Student Loan Hero. Student Loan Hero enables you to enter in your loan information on their website to see if you can consolidate your loans to ultimately save you money. They shop companies like SOFI and LendKey to see get you into a lower interest rate.
This article is targeted toward people graduating with student loans, specifically engineering graduates.
Engineering is one of the best fields you can enter after graduation. According to the National Association of Colleges and Employers, the median starting salary for engineering jobs ranges from $62,500 to $98,250, depending on your specialization.
Getting there isn’t cheap, though; the average student loan balance for an undergraduate degree is $37,172.
Regardless of your starting salary as an engineer, a large chunk of your monthly income could go toward student loan payments. Whether you need relief from massive payments or you’re looking for ways to accelerate your repayment plan, here are four effective ways you can tackle your student loan debt.
1. Apply for student loan forgiveness
If your student loan debt is overwhelming, getting it completely wiped out can be appealing. There are two ways to go about it.
Public Service Loan Forgiveness
With the Public Service Loan Forgiveness Program, you can get your remaining balance forgiven after you make 120 qualifying monthly payments. To qualify, you must work full-time for a government or qualifying nonprofit organization.
Although this idea is enticing, consider the fact that you might be giving up a higher salary through a private employer to be eligible.
Depending on where you choose to work, some other student loan forgiveness options might be available.
For example, the Alfond Foundation and the state of Maine will pay up to 50 percent of student debt — as much as $60,000 — for qualifying STEM students who commit to working in the state for at least five years.
Take the time to research whether a similar program exists in your state.
2. Apply for an income-driven repayment plan
If you have federal student loans, you might be eligible to get a lower monthly payment through an income-driven repayment (IDR) plan.
With an Income-Based Repayment (IBR) plan, for instance, your monthly payment is limited to 10 to 15 percent of your discretionary income. That number is the difference between your adjusted gross income and 150 percent of the federal poverty guideline for a family of your size in your state.
For example, say your adjusted gross income is $65,000 and you live with your spouse and two children in Florida. You have $50,000 in student loans with an average 6.00% APR, a repayment term of 10 years, and a monthly payment of $555.
With IBR, your monthly payment would be reduced to $351, saving you $204 a month.
The main drawback of IBR and other income-driven repayment plans is the fact that they extend your repayment period, which means you’ll pay more interest. In the example above, you’d pay $8,947 more in interest and be in debt 15 years longer.
3. Refinance your student loans
Whether you have federal or private student loans, refinancing can give you more flexibility with your repayment plan. Student loan refinancing companies such as SoFi offer potentially lower interest rates, different repayment terms, and other features.
In fact, SoFi claims that people who refinance with the company save $22,359 on average.
Let’s take another look at the example above to illustrate how it works. You have a $555 monthly payment on $50,000 in student loans with an average APR of 6.00%. The repayment term is 10 years.
If you were to qualify for a 4.00% APR on a 10-year loan with SoFi, your monthly payment would drop to $506 a month. You’d also save $5,865 in interest over the life of the loan.
If you can afford it, you can opt for a shorter repayment term. For example, if you were to opt for a seven-year repayment term with your new SoFi loan, your new monthly payment would be $683. But you’d save $9,203 in interest by paying off your loan three years sooner.
Before you choose to refinance your federal student loans, make sure you won’t miss out on any of the benefits that come with federal loans.
For example, Public Service Loan Forgiveness and income-driven repayment plans will no longer be available to you if you refinance. Plus, a student loan refinancing company might not offer similar forbearance and deferment options.
4. Set an early target payoff date
Regardless of how you plan to tackle your student loans, it’s critical to have a plan to pay them off as efficiently as possible. Set a target date for when you want to make your last payment and use the options above to reach your goal.
Consider paying more than the minimum required amount every month. Even a small extra payment each month can save you hundreds of dollars in interest.
For instance, say you stick with the original loan above instead of refinancing or getting on an income-driven repayment plan. You add $45 each month to your payment to make it an even $600.
The result is that you’ll pay off the loan in 9.1 years instead of 10 years and save $1,775 in interest. Not bad for the price of a dinner out with your partner.
As you work to pay down your student loans, always look for more ways to lower your interest costs and pay off your debt sooner. That way, if you reach your payoff goal before your target date, you can use that money for something more worthwhile. And if you’re interested in learning about additional strategies for paying off student loans, check out the Ultimate Guide to Student Loan Repayment for Engineers.
Thanks, Ben for this insightful article. I’ve been asked by many readers the best way to tackle their debt and the strategies outlined in this article definitely will help you. Ideally, you can refinance to a lower interest rate so that you can apply more money toward your principal loan balance and eliminate your loans more quickly.