It’s no secret that student loans have become a major economic burden. Americans owe a combined $1.7 trillion in student debt. That’s one reason President Biden announced a public student loan forgiveness program in August.
While the administration readies the application process, you can take action now to try and reduce your cost under existing programs and practices, regardless of whether you qualify for this particular federal forgiveness program. And if you’ve benefited from the COVID-19 pandemic payment pause in federal student loan programs, you’re likely aware it ends on December 31, 2022.
That means it’s time to look for savings.
If you currently have a private student loan, the quickest way to save cash now is to refinance. Start exploring your options and get the process started today.
There are, however, strategies that work for both private and public student loans. Whether you’re looking to take a student loan out for the first time or are seeking ways to lessen your existing debt once payments resume, you have options.
Here’s a look at some of the top ways to save by loan type.
How to save money on private and federal student loans
- Borrow only what you need. It’s always a good idea to revisit your long-term budget but it’s especially useful if you’re just starting to look at loans. Take a step back and examine what you need your loan to cover – and don’t take out more than that.
- Set up autopay. Federal student loans and most private lenders offer a discount if you set up autopay. For federal loans, it’s 0.25% off the interest rate. Some private lenders offer an even bigger discount. Another bonus: autopay shows good payment history, which helps your credit score.
- Check if interest payments qualify as tax deductible. The Internal Revenue Service (IRS) offers a tool to determine if your student loan interest can be deducted from your taxes. Deductions can be up to $2,500 for loans solely used for education.
- Make extra or higher monthly payments. You can opt to make extra payments or higher payments that are slightly more than your monthly statement. Be sure to specify you’d like the extra to go to the principal part of your student loan. Payments go to fees, then interest, then principal. This is how extra payments save you time and interest (if you tell the servicer to apply them toward principal). Be sure to check with your federal student loan servicing company or a private bank or financial institution to make sure the extra funds are properly applied.
- Check for student aid grants and scholarships. There are numerous grants which don’t require repayment. You can also check for scholarships and grants by state, study area, group or organization.
How to save money on private student loans
- Refinance or consolidate at a lower rate. If you have a good credit score (typically 670 or higher), steady job, money in an emergency savings account and aren’t likely to qualify for federal aid programs, private student loan refinancing may be a good option. Many lenders look for a debt-to-income ratio below 50% to refinance a student loan. If you’re thinking of refinancing your loan it’s easy get started. Speak to a lender today and start saving.
- Shop for low rates. Private lenders offer varying rates so look for the private student loan with the best terms by shopping around. Make sure to do the math for the life of the loan to be sure you’re getting the student loan that works best for you.
- Look for loan discounts. Look for discount offers like waiving the loan origination fee and other costs when considering which bank or financial institution may fit your needs. Remember to do the math on the entire loan payout as well as monthly costs to be sure you’re truly saving money overall.
How to save money on federal student loans
- Check for forgiveness, cancellation and discharge options. Besides the new forgiveness program from the Biden administration, there are many existing forgiveness and cancellation programs. If you are approved, you’ll no longer be required to make student loan payments, including for those in military service and certain non-military public service jobs. If you are permanently disabled or the school where you received your public student loan is closed, you may be eligible for student loan discharge.
- Federal student loan consolidation. Consolidating your student loans can ultimately save you money and time. While consolidating federal student loans typically doesn’t lower your interest rate, it will lock you into a fixed rate so that your payments won’t change, offering stability. These Direct Consolidation loans may also help you qualify for public service loan forgiveness.
- Pay loan interest while still in school. This avoids capitalization (when interest payments are folded into the principal of your student loan, giving you a bigger balance to pay off once your grace period ends). When interest on a student loan is capitalized, you pay more over the long term because you are ultimately making interest payments on a bigger balance.
- Look carefully at loan repayment plans each year. There are several kinds of repayment plans, including those that lower monthly payments based on income level. But beware, the balance can rise fast because of interest capitalization, and you may end up owing more than the initial loan amount.
Don’t forget that different options apply to different loan types – not everything is applicable for both. If you have private student loans, however, you can start the process of lowering payments by refinancing your loans now.