How to Pay Back Your Student Loan

Student debt cash

After three-plus years of intensive study, nothing slaps you in the face quite like the reality check of student debt. Saddled with the sudden burden of paying back an apparently insurmountable sum of money, your already stretched finances are drained further by interest rates that move the goalposts every time you’re making progress, leaving you to pick up the pieces and wonder if that Sociology degree was actually worth it.

But just how bad is it? How do you repay such a large amount? And is it possible to get rid of it altogether? Luckily, we’ve looked into the ins and outs of various repayment plans on both sides of the Atlantic to help you try and make some headway in this complex and convoluted field.

First, though, it’s important to clarify what exactly you’re meant to be paying…

How Do Student Loans Work?

Let’s face it: the student loan system in the US is complex. There is a multitude of loans available through both the federal government and various private lenders and you are not restricted to taking out just one. While this may sound like an appealing prospect at the time, it can turn into the stuff of nightmares when you come to pay everything back.

Part of the headache is that the terms of your individual loan or loans will vary, meaning it is vital to understand the structure – and consequences – of each one that you have taken out. The two main options are:

Federal (Government) Loans

Federal loans are guaranteed by the US government, meaning that if borrowers default on their payments, lenders still get their money. They are the preferred means of finance for most students, with easier access to funding and kinder repayment terms than private loans. They can also be consolidated further down the line, which, as we will see, is important. The three main types are:

  • Stafford loans – Fixed low-interest rates; no credit check required; six-month grace period following graduation; income-based repayment plan.
  • Perkins loans – Fixed 5% interest rate; nine-month grace period following graduation; highest amount of opportunities for loan forgiveness.
  • PLUS loans – Fixed 7.9% interest rate; interest accrues while studying; 4% fee; no maximum borrowings; only for postgraduates and/or children of undergraduates.

Private Loans

With significantly higher interest rates, notoriously difficult repayment plans and a predatory reputation among some lenders, private loans – unsurprisingly – have a very high default rate. They are not recommended as a primary funding option, although if you have exhausted all other avenues and still cannot meet your tuition fees, then you may have no choice.

Potential lending avenues include:

  • Commercial banks
  • Credit unions
  • Community banks
  • Online lenders
  • Sallie Mae (dedicated large private lender)

So, How Do I Go about Paying Everything Off?

In a word: quickly. Most finance experts – such as Jeffrey Trull – encourage graduates to pay off their debt as soon as possible as your loan will continue to accrue interest (US student loans are not written off after a period of time like their UK counterparts). Put simply, the longer it takes you to pay, the larger the amount will be. Fortunately, there are a few methods you can employ to help speed up this process:

1. Pay More than the Minimum

This is the most obvious place to start. Although it might mean trimming your other outgoings and sacrificing a few luxuries, paying more than you are obligated to each month will make a sizeable dent in your debt.

Trull recommends adding the extra amount onto your existing automatic payments, as it will stop you from being side-tracked by other temptations; it will also help you to organise your budget more effectively. The only potential downside is if you need short-term cash for an emergency, but on the whole, even contributing as little as $20 a month can still make a difference.

2. Consolidate and Refinance

Restructuring everything can also have a huge impact on your repayment plan. By refinancing, it is possible to decrease the interest rates, meaning more of your cash will go towards paying off the borrowings. If you’ve taken out multiple loans, consolidating them also makes it easier to streamline and manage everything; federal loans are set up with this practice in mind.

Conversely, not all private loans can be restructured in the same way, although it is possible to switch from variable to fixed-rate interest agreements; it is also possible to consolidate to a lower rate if your credit score has improved. The key is to discuss your options with your lender(s).

3. Seek ‘Forgiveness’

Certain careers may offer something called forgiveness, where, if you satisfy certain criteria, the remainder of your student loan is ‘forgiven’ by the government; only federal loans are eligible for this practice.

There are many types of programmes, including:

  • Public Service Loan Forgiveness (PSLF): For those in qualifying public service and government roles, your loan is forgiven after 120 monthly payments (10 years).
  • Income-Based Repayment (IBR) and Pay As You Earn (PAYE): Similar to the UK model, those who make consistent repayments (capped at 15% and 10% respectively of your monthly salary) can have their remaining balance forgiven after a minimum of 20 years. There is also a revised version of PAYE that removes eligibility requirements. Beware, though: the remaining sum is considered income, so if after 20 years you are forgiven $40,000, for example, expect a pretty hefty tax bill.
  • Profession-specific: Teachers, nurses, doctors and lawyers all have access to career-specific forgiveness programmes; there are also programmes for those in STEM fields, as well as vets and pharmacists. Some of these programmes are by state, so do your research.
  • Military forgiveness: The Army will pay one-third of your loans for three years, while the Navy and National Guard will shoulder up to $65,000 and $50,000, respectively.

The criteria for all forgiveness programmes are highly stringent, so it is important that you thoroughly research your eligibility. It is also worth noting that you can be on more than one forgiveness programme at the same time.

4. Utilise Cash Windfalls

Now and then, you might run into a sizeable sum of money such as inheritance, a tax refund or even lottery winnings; as tempting as it may be to take that windfall and treat yourself to a week in Hawaii, you should stop and consider what your priorities are.

According to Trull, there are several tax refund strategies for student loan debt that work for financial windfalls, so using that money wisely could really benefit you in the long term. Besides, you can always save that trip for the future; it’ll be much easier to relax knowing you’re debt free.

5. Apply Your Raises

As a result of their education, most graduates work jobs that offer annual salary raises. But instead of upgrading your car, increasing the size of your TV or taking more exotic holidays, why not take the difference and use it to pay back your loans?

Trull argues that by taking half of your raise amount and putting it straight towards payments, you can significantly quicken the repayment process. Just add it to your automatic payments each month.

6. Take on a Side Gig

Taking on a second job doesn’t have to mean that you’re working every hour under the sun; side gigs come in all shapes and sizes. Consider freelancing your existing talents online to supplement your income, taking on as much work as you deem acceptable or, if you have a hobby such as baking, why not turn it into a small side business?

You can then take any earnings from your venture and put them straight towards your loans.

Can I Avoid Repaying at All?

Although it is rare, there are some instances where all or some of your loan can be cancelled; this primarily applies to those who have a federal Perkins loan. Although the criteria are complex, you could be eligible if you work in any of the following roles:

  • Teaching in a school for low-income families
  • Teaching children with disabilities or special requirements
  • Teaching a subject that is deemed by the state as having a shortage of qualified teachers in that subject
  • Full-time firefighter
  • Full-time nurse or emergency medical technician (EMT)
  • Full-time law enforcement or corrections officer
  • Active military service (including in a conflict zone)

This list is not exhaustible and there are also positions within academia and child support services that are eligible. If you have a Perkins loan, you should contact a Student Aid representative to see if you qualify. It is also possible to get your loan discharged if you declare bankruptcy, become disabled (affecting your ability to work) or if your school closes before you finish your study.

Meanwhile, voluntarily refusing (or being unable) to meet your obligations will have significant consequences, including garnished wages, restrictions on your ability to buy or sell assets and interest rate penalties. If you think you are going to default on your payments, it’s vital that you speak to your lender.

What If I’m Abroad?

It’s a commonly perpetuated myth that moving abroad absolves you of your repayments, but this simply isn’t true. While you might be avoiding repayments, the loans themselves won’t be going anywhere – in fact, they will simply be accruing more and more interest.

If you ever decide to return to the US, this will obviously cause major issues. Aside from owing an ever-increasing amount of money, defaulting on your student loans will significantly affect your credit rating; this will also cause you headaches in your adopted country, where you will struggle to get credit as a result of your non-residency. Additionally, if any of your loans were co-signed, your financial responsibilities will be passed on, meaning that while you are enjoying life on the other side of the world, your family will be left to foot your bill.

What If I’m a UK Student?

In comparison, the UK’s student loan structure is much more user-friendly; in fact, as a British citizen, you don’t have to do anything at all. Financed and administered by just one central institution, repayments are collected automatically by Her Majesty’s Revenue & Customs (HMRC) once you are earning above a minimum threshold. There are two kinds of loan plan which will determine how much you pay:

  • Plan 1 – For English and Welsh students who started studying before 2012 (and Scottish and Northern Irish students studying at any time). Repayments start above a minimum earning threshold of £17,775. Interest rates are variable but have not risen above 1.5% since March 2009. Written off after 25 years.
  • Plan 2 – For English and Welsh students who started studying after Repayments start above a minimum earning threshold of £21,000 (soon to rise to £25,000). Interest rates are calculated differently and are much higher; currently, they are set at 6.1%. Written off after 30 years.

Whichever plan you are on, you will only ever pay 9% of the difference between your salary and the threshold until it is written off. Therefore, UK finance expert Martin Lewis believes that, unlike in the US, trying to pay it back quicker or earlier is foolish; this is because the large majority of graduates will never fully pay back what they borrowed. ‘The term “student loan” is a misnomer,’ he says. ‘[A] more accurate term [would be] “graduate contribution” system.’ Just think of it as a 9% tax on your above-threshold earnings for the next 25-30 years.

If you are self-employed, HMRC will determine your payments based on your tax self-assessment, while if you live abroad you will have to inform the Student Loans Company (SLC) and make payments directly to them.

As you can see, student loans are inescapable for the majority of us, and thoughts of how to evade them are ultimately pointless. Instead, you should focus on how you will manage your repayments – especially in the US where there is less support from the government and less slack from lenders. Finally, always ensure that you keep abreast of your payments, the interest rates that are applicable to you and how much you’ve left to pay.

Do you think the student loan repayment system is fair? Let us know your thoughts in the comments section below…


All interest rates and repayment information was correct at time of writing.