Six-figure student debt is overwhelming, but the good news is that your federal student loans won’t follow you around forever.

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Question: I got my master’s degree in finance and accounting — and a huge student loan debt to go along with it. I am embarrassed to ask for help, since my degree is actually in finance, but dealing with such a huge debt is a little overwhelming.

As of right now, I have over $120,000 in student loan debt. I know some people who consolidate their loans — but I still have mine separated — so I have 19 separate loans in varying amounts. I did get the interest rate lowered for most of them by setting up a certain payment process, from 6.8 percent to 6.55 percent, I believe. I’m also paying on an Income Based Repayment plan. It is nice having the piece of paper, but that does not guarantee you a job these days. 

I know there has got to be a way to tackle this debt. But I just need help in setting up a plan to do it. Do I consolidate? Is a good approach to pay off one of the loans at a time, but which ones to pay off first? Would you be able to help me?

— Jennifer in Ohio

Howard Dvorkin CPA explains the best way to handle $120,000 student loan debt

I don’t blame you for feeling completely overwhelmed, Jennifer – six-figure debt has a way of doing that to people. You also can’t be faulted for not knowing what to do in this situation. Finance classes in college rarely cover personal finance challenges like student loan repayment.

First, I want to assure you that you won’t be weighed down by this debt forever. You may not like the timeline on how long it will take to get rid of it, but at least you can rest assured that there’s a finite amount of time you’ll be dealing with your loans.

Why is it so easy to rack up so many student loans?

A big problem with student loans is that they don’t really explain them to you after you apply for federal student aid through FAFSA. You apply, they tell you what you qualify for and you just “sign here.”

But what happens is that you end up taking out a new loan each semester that you’re in school. That’s how you end up with a dozen or more student loans, depending on how long it took you to get through school.

Income-based repayment will ease the burden, but won’t get you out of debt quickly

Enrolling in an income-based repayment plan (IBR) was a smart move. These programs are designed to match your monthly payments to your income, which is highly beneficial when you owe over $100,000 and you’re starting out on an entry-level salary.

So, your IBR consolidated those 19 loans into one monthly payment. Then it also started matching your monthly payment amount to your income.

For most people, using an income-based repayment plan (IBR) will reduce their monthly payments to about 15% of your Adjusted Gross Income (AGI). For non-finance majors, that’s the income that you claim on your taxes after all the deductions and credits that you claim.

The problem with an IBR is that it isn’t not designed to get you out of debt quickly. It lowers your monthly payments to ease the burden on your budget. But the tradeoff is that it increases the term of your loan up to 25 years.

If nothing else, your remaining balances will be forgiven in 25 years

If you do the math, there’s little chance given that your debt will accrue interest charges each month that you’d pay off the full $120,000 before the end of the 25-year term. However, that doesn’t really matter.

Any balance that remains once the 25-year term ends will be forgiven without penalties. All remaining balances would be cleared, and the debt will show as paid on your credit report. Still, that’s 300 payments from the time you start to when those balances will be forgiven.

If you were a public servant, like a teacher or police officer, then you could qualify for loan forgiveness after 120 payments or 10 years. Unfortunately, as a finance major, you won’t qualify for that program, which is called Public Service Loan Forgiveness.

So, for now at least Jennifer, it seems like you’re using the best strategy possible. It sounds like you’re at least meeting your payment obligations, which will keep your loans out of default. Hopefully, with your IBR, you’re able to maintain a balanced budget.

If not, you may want to consider other repayment plans that can drop your payments even more, such as Pay As You Earn. This program will drop your payments to 10% or less of your AGI.

Finding solutions to get out of debt faster

Once you start to make more money, you may want to consider other options. When you’re just out of school, you’re unlikely to make enough income to really tackle your debt efficiently. But your master’s degree in finance and accounting should put you on a path to quickly advance as far as salary goes.

As your salary increases, your repayment strategy can and should evolve. In fact, once you hit a certain income level, you may not qualify for an IBR at all, since those kinds of programs are meant for people facing financial hardship.

When this happens, you’ll be moved automatically to a standard repayment plan, but you may want to consider some other options.

Graduated repayment plans

Graduated repayment is another federal student loan repayment plan, only this one is meant for paying off student loan debt aggressively when you have the income to do so. The monthly payments start fairly low – usually lower than standard – but increase by 7% every two years.

The idea is that it matches payment increases to gradual increases in your salary. You start low, but then your payments grow as you advance in your career.

This can be a great option for people to work towards actually paying off the massive amount of debt that comes with a graduate degree. Once your income starts to advance, you can quickly start to pay down your debt.

Private student loan refinancing

The other option would be to convert your federal student loan debt to private. If you have a good credit score, you may be able to qualify for a much lower interest rate. A lower rate means you can focus on paying off the principal, instead of wasting so much money on accrued monthly interest charges.

You need to be aware that converting your federal school loan debt to private will make you ineligible for programs like IBR and Pay As You Earn. So, if you ever end up facing hardship again, you won’t qualify for these hardship programs that tie your payments to your income.

Still, if you’re fairly confident that you’ll be able to maintain your salary, going for a lower rate will give you the opportunity to pay off your debt faster.

You may want to see what kinds of rates you’d qualify for with a private lender once you have a stable income and the means to implement a more aggressive repayment strategy. Work with the lender to see how quickly you could pay your loans off. If it’s better than the 25-year term that you’re looking at now, then it may be in your best interest.

Crushed by student loan debt and worried you’ll never pay it off? There is help available.

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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC