2 Tools to Eliminate Student Loan Debt

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Americans have amassed more than $1.3 trillion of student loan debt. 11 percent of borrowers are already in default. Many more borrowers are delaying homeownership and children to deal with their debt burden. Fortunately, there are an increasing number of options out there for both graduates and parents to manage their student loan debt. Two of the most effective methods are federal income-based repayment programs and refinancing options made available by private lenders. While these can be great tools, they aren't for everyone.

Income-Based Repayment

According to the Department of Education, "if your outstanding federal student loan debt is higher than your annual income or if it represents a significant portion of your annual income, you may want to repay your federal student loans under an income-driven repayment plan." With the three available plans, your monthly payment would generally be capped to no more than 20 percent of your discretionary income. For people who are struggling to make student loan payments, the savings can be dramatic. You can estimate your monthly payment under the plan by using a payment tool created by the government.

Once you are enrolled in the program, your monthly payment reduces. However, your situation will be re-assessed every year and you will need to re-enroll. If your salary increases your monthly payment would likely increase. Depending upon the program, any remaining balance would be forgiven after 20 to 25 years. That debt forgiveness would be taxable. The people who benefit the most from this program are individuals with big federal student loan balances and low lifetime earnings.

It is possible to have your monthly payment reduced to nothing, if you don't earn enough income to make the payment on time. Enrolling in an income-driven plan doesn't harm your credit report or your credit score.

Unfortunately, income-driven plans are only available for people with federal student loans. Private loans aren't eligible for the program. You can apply for the program at StudentLoans.Gov.

If you are a parent with a PLUS loan, you are eligible for ICR (income-contingent repayment), so long as your loans are consolidated. Even if you only have one PLUS loan, you can still "consolidate" it and then apply for ICR.


If you don't have problems making your monthly payment, but you are tired of the high interest rate on your student loan debt, you should consider refinancing with one of the new marketplace lenders. Today there are more than 20 providers (and growing) that offer student loan refinancing at very low interest rates. Fixed interest rates start as low as 3.25 percent, and variable rates start as low as 1.9 percent. You can comparison shop for the best rate at MagnifyMoney. One of the leading providers has disclosed that its average borrower saves $14,000 when refinancing.

In order to qualify, you need to have an excellent credit score, a good job and strong cash flow. Student loan refinancing companies are offering excellent interest rates to people with the best credit scores. If you have missed payments or have too much credit card debt, you might find getting approved difficult.

Refinancing student loan debt makes perfect sense for people with private student loans. However, people with federal student loan debt should be cautious. When you refinance a federal loan, you will be giving up income-driven repayment options described earlier. If you are highly confident that you can pay off your student loan debt in the next few years, it may be a risk worth taking. However, if you think it might take 20 years to pay off your debt, you should carefully weigh the risks before proceeding.

What if I Have Private Loans and Can't Afford My Payments?

People with federal loans facing difficulty making payments have great options. Unfortunately, people with private loans are at the whim of their servicing companies. If you are having difficulties making payments, your best bet is to call your servicing company and explain your situation. Private lenders are under increasing scrutiny from regulators to help people in hardship.

Nick Clements is co-founder of MagnifyMoney.com, a financial education and price comparison company.
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