Student loan debt: Strategies to pay it off faster, smarter

The growing student-loan problem has emerged as an issue for the 2020 presidential election. Democrat contenders Bernie Sanders, Elizabeth Warren, Joe Biden and others have proposals to cancel or forgive much of this debt.

It remains to be seen whether those plans will bear fruit, but the problem around student loans is escalating.

Balances have mushroomed in recent years to $1.5 trillion, making student loans second only to mortgages among consumer-lending categories.

The typical borrower pays about $179 a month or 5% of his or her income to meet student-loan obligations, reported the J.P. Morgan Institute. While that seems manageable, loan burdens are disproportionately carried by younger, less-affluent individuals.

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Unlike credit-card borrowings and many other types of debt, student loans typically can't be discharged in bankruptcy. About one in nine loans is 90 or more days delinquent, according to the Federal Reserve Bank of New York.

Student loans can be helpful. The nonprofit group Credit.org considers these loans to be "good debt" — a type of borrowing that, through increased education, adds value to your life in terms of boosting your net worth or income potential.

With a college degree, "you're probably in a more employable situation with higher lifetime earning potential," said Michael Rusinak, a certified financial planner and director of financial solutions at Fidelity Investments.

But plenty of borrowers face problems or don't fully appreciate what they're up against.

"This is often a person's first experience with debt and having interest accrue (against them)," Rusinak said.

Here are some tips to keep things from getting out of control:

Watch the clock

Student-loan debt repayment typically starts six months after a student graduates.

The payment clock can be delayed if a person remains in school, but otherwise borrowers need to know that this grace period will end and that they should take their repayment responsibility seriously.

Jessica Ferastoaru, a student-loan counselor at Take Charge America, a nonprofit debt-counseling service in Phoenix, recommends borrowers use the six months to understand what they're dealing with. That can be a daunting task, especially for people who also might be starting new jobs, possibly moving homes or grappling with other life changes.

"There's a theme of incredible confusion around student loans," she said.

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Borrowers often don't know how many loans they have, which payment-lowering options they might qualify for, who the servicing companies are or the consequences of falling behind on payments.

"We have seen people with 20 loans," Ferastoaru said.

Each one could have its own features and wrinkles. 

Treat it like other debt

It's important to make payments on time, yet some borrowers might not fully realize the implications, especially young adults who haven't dealt with creditors before.

Missing payments or going into default "is absolutely the worst possible thing you can do," cautioned Kalman Chany, author of the 2020 edition of "Paying for College."

Falling behind on payments can damage your credit score — a key measure of your ability and willingness to make good on debts — and this can crimp your ability to get credit cards, mortgages or other loans on good terms.

Defaulting on a loan can result in wage garnishment or having your income-tax refunds or even Social Security payments reduced or withheld by the government, Ferastoaru said.

Default also can make it difficult to obtain additional loans for graduate school, should that be a goal.

If in doubt about which federal loans you have and how much you owe, Ferastoaru suggests checking the National Student Loan Data System. Credit reports available through annualcreditreport.com should list private loan details.

Choose a payment strategy

If you can afford it, you might find it worthwhile to pay down your debts early. By adding, say, $100 a month to a fairly typical student loan of $29,000, you could get rid of the obligation three years early and save $3,000 in interest over that time, according to Ronald Denk of Denk Strategic Wealth Partners in Phoenix.

If you do decide to prepay some debt and if you have multiple loans, decide which ones to tackle first.

Denk suggests applying additional payments to get rid of those loans with the highest interest rates. Conversely, if you feel the need to see tangible progress sooner, consider paying off debts with smaller balances first to get them out of the way.

But as attractive as paying down a student loan early might seem, it's important to consider other and possibly better uses for extra cash. These include building up an emergency fund, saving for a home or contributing money to an employer's 401(k) plan.

"If your employer offers matching funds, that's often the best investment return," said Rusinak, though he adds that the decision gets more complicated, and personal, after you contribute enough to max out on available employer matching funds. 

Consider other options

As with mortgages and other debts, you might be able to obtain a new student loan featuring a lower interest rate. Just be aware that refinancing could mean extending the length of your indebtedness, possibly piling up higher overall interest costs and delaying the date when you'll be debt free.

Consolidation, or combining multiple loans into one, is another possibility.

This can simplify your financial life and possibly lower your payments. In particular, consolidating federal loans will give you a loan featuring one payment and a blending of the interest rates on your prior loans, Rusinak said.

Refinancing, by contrast, gives you "an entirely fresh loan," he added.

Be aware that consolidating or refinancing can affect, and possibly make you ineligible for, other benefits.

For example, some of your existing debt could be canceled if you become disabled or pursue various types of service careers. Chany cites teaching, law-enforcement or nursing work in low-income areas as examples of jobs that might qualify for forgiveness.

"There are dozens of programs to lower or postpone payments or even get them potentially forgiven," Ferastoaru said.

But tweaking your loans could invalidate that.

Also, as noted, there has been an increasing amount of talk among presidential candidates about forgiving student-loan debts on a massive scale. This might be reason not to make any serious changes to your loan situation for at least another year or so.

In the meantime, treat your loans as obligations that must be repaid.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.