Do you hate student loans? I know I do. I’ve had to deal with them for several years now.
But you know what? I’ve made some real headway.
How did I do it? I thought proactively about how I was going to pay them off, studied, and then took action.
The principle is a simple one: Don’t sit there and think that your student debt is going away any time soon, because it’s not. Student loans are one of the few obligations that are not dischargeable in bankruptcy.
So instead of burying your head in the sand, learn how to get rid of it with these tips:
1. Structure multiple loans
If you’re like most people with student loans, you have several loans that comprise your total indebtedness. For example, you might be $45,000 in debt, and that debt is comprised of six different loans: some private loans, some federal subsidized loans and some federal unsubsidized loans.
Private student loans are granted by private enterprise, like Wells Fargo, for example. Subsidized and unsubsidized federal student loans are provided by the U.S. government. These all have varying interest rates. Generally, if you have government loans, those have the lowest interest rates.
With an understanding of the different types of loans you have, it’s time to decide which to pay off first. There are two competing theories on this.
Option 1: Start with the loan that has the lowest balance and pay that first. The idea here is that you will energize your efforts more when you surmount a smaller hurdle early on. If you’re the type of person who gets demoralized by not seeing headway quickly, go with paying off the smallest loan first, and then move to larger ones when confidence improves.
Option 2: Start with the loans that have the highest interest rates. This way you’ll minimize the additional cost of interest over the time you pay the loans off. If you’re the type who looks at everything as a numbers game — and always looks for the lowest price — then pay the loan with the highest interest rate off first. You’ll end up saving money on interest down the line.
Honestly, I don’t think one of these strategies is clearly superior to the other here. The main thing is to have a strategy. Never just start paying without understanding what you’re going for.
2. Pay more than the minimum each month
I don’t know if you have ever rung up a fairly substantial credit card bill. Let’s say over $3,000.
But if you have, your statement probably included a chart that stated how long it would take to pay off that debt with minimum monthly payments.
It can be staggering – think decades of paying a minimum payment. Unfortunately, the same is true with student loans.
I’ve heard of people paying the minimum each month, with the effect of basically only paying interest. That means people can make payments for ten or more years and the principal barely decreases.
The point here is simple, even if it’s just $50 extra dollars a month, don’t make the minimum payments on your student loans if you can possibly afford to pay more. Minimum payments don’t make your principal decrease.
And don’t assume that you will hit some financial windfall in the future, and pay more then. Your life has begun. Don’t be a spectator. Aspire to pay your student loans off and get control of your finances.
Bottom line: pay more than the minimum any month you can.
3. Don’t defer payments
When someone tells you to defer your student loan payments that person is not your friend.
To quote the government, “A deferment… allows you to temporarily postpone making your federal student loan payments or to temporarily reduce the amount that you pay.”
Sounds beautiful, doesn’t it? It makes it sound like, “Hey, if you can’t pay, no big deal. Just pay us less, or nothing at all.”
No. It is a big deal. Deferred loans continue to accrue interest while you’re not paying, so the amount you have to eventually pay continues to grow. At least with making minimum payments, you’re probably keeping the amount you owe from getting any larger.
If you do have economic hardship after graduating college – like a lot of us have experienced – don’t defer your loans. Instead, work a part-time job, or a menial job, or several part-time menial jobs.
Live with your parents. Shack up on a friend’s couch. Live in a tent on your uncle’s ranch. Eat less. Ride a bike to work.
Do anything, so that you can make that minimum payment. Because if you don’t, your hardship will only get worse later on.
4. When to ramp up payments
The time will come in your life when you should push on loan payments, meaning, really double-down your efforts to pay off your student loans.
For example, when you get your tax refund, don’t go out and buy clothing or blow it on good times. Tell the bank you mean business, and pay a chunk of that student loan.
If and when you do start to make more money, don’t go out and buy a new car. Instead, get peace of mind by putting a dent in your loans.
An integral part of ramping up is understanding your own energy. You’re most energetic when you’re young. You generally have less competing obligations. Retirement is a distance away, and you don’t have to worry about sending one of your kids to college yet. Thank God.
That’s why I recommend really doubling down on your loans when you are in your 20s and early 30s.
This might require you to live frugally. Maybe even very frugally. That’s why this idea is so unpalatable — because it happens to coincide with when you first start to have discretionary income.
I’m here to say that if you have student loans, especially substantial ones, you don’t have discretionary income, not at least if you ever want to pay them off. Learn to live with less, your future-self will thank you later.
5. Deduct interest paid on student loans from your taxes
There is some good news: you might be able to deduct the interest from those loans (see line 33, Form 1040).
Not sure how much you paid in interest? Get a copy of Form 1098-E from your loan provider for this information, if you don’t get a copy of it in the mail.
The amount of the deduction will be the lesser of:
- Actual amount of interest paid
As an “above the line deduction,” you can deduct your student loan interest and still take your standard deduction.
There’s a caveat here, though. You can take the deduction only if all of the following apply:
- You paid interest on a qualified student loan in the tax year
- You are legally obligated to pay interest on a qualified student loan
- Your filing status is not married filing separately
- Your modified adjusted gross income is less than a specified amount which is set annually
- You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return
One more thing: If you make over $75,000 (or $155,000 when married and filing jointly) then you can’t deduct your student loan interest. It’s kind of a bummer, but at the same time, if you’re making that much money, it’s a good problem to have.
We’re here to help.
Think of Dino Tax Co this upcoming tax season, and we’ll make sure you make the right deduction when it comes to your student loan interest. Learn more about our tax preparation services here.