Student loan debt is at an all-time high. It’s become the second-highest source of consumer debt (mortgage debt is number one) and is a tremendous burden on 45 million U.S. borrowers. It’s not surprising that getting out of student loan debt is a high priority for many Americans.
Fortunately, there are multiple student loan debt relief options for borrowers. Determining the one that works best for you will depend on several factors, such as how much is owed, if the lender is federal or private, and whether or not you have a good credit score.
Find the best solution to pay off federal and private student loans.
The burden of student loan debt
Do you feel like your loans are holding you back from living your life? If so, you’re not alone. Americans report that over 20% of their take-home pay goes towards student loans with an average monthly payment of $541 (for a Bachelor’s degree).
The squeeze on people’s wallets has impaired their ability to prepare for the future and enjoy the present. Student debt has put a severe dent in Americans’ ability to establish financial safety nets:
- 84% of American adults say student loans affected their ability to contribute towards savings or retirement
- 30-year-old non-college graduates have double the amount saved for retirement than their college-educated counterparts
Numerous studies confirm that education-related debt is a major factor in delaying major life milestones such as getting married, starting a family, and homeownership. It also lowers the likelihood of people becoming entrepreneurs or pursuing creative careers.
National student debt statistics at-a-glance
Then there are the unpleasant consequences of being behind on student loan payments. If you’ve defaulted on student loans, the Department of Education can request to seize your tax refund or garnish your wages without permission or warning. Those late payments will also cause your credit score to take a hit, which can make the cost of borrowing money far more expensive. You also lose eligibility to take out new federal student loans until you bring the loans you already have current—not an ideal scenario if you’re thinking of going to grad school or are a parent needing to put your child through school.
Do student loans affect your credit score?
Yes, student debt affects your credit score—but it’s not always negative.
How student loans help your credit:
- They are often the first lines of credit in most people’s credit history—an important aspect of the credit score formula
- They’re an example of “good debt”; they typically have low-interest rates and represent an investment in your future (a college degree can increase your lifetime earning potential)
- Making on-time payments will add positive remarks to your credit history and show other lenders that you’re reliable
How student loans hurt your credit:
- They are included in your debt-to-income ratio. If your DTI is too high, it can make it difficult to get approved for large loans like a mortgage
- Monthly student loan payments can take up a significant chunk of your income
- Missed payments will cause negative remarks on your credit score
How to get rid of student loan debt
There are several student loan debt relief options: refinancing, consolidation, settlement, or filing for bankruptcy. And yes, despite what you may have heard, it is possible to discharge student loan debt through bankruptcy—there are just a lot of hoops to jump through.
Determining the best route for you will depend on:
- Whether you hold federal or private loans
- How much you can afford to pay each month
- How significant of an impact on your credit score you’re comfortable with
For example, attempting to have $5,000 in loans discharged through bankruptcy or a settlement could be overkill. Would such a small amount of debt be worth significant damage to your credit that stays on your record for seven years? Getting rid of student debt is a balancing act of saving money and weighing how a particular strategy will affect current and future financial circumstances.
Option 1: Refinancing student loans
Refinanced student loans are when multiple loans, either federal and/or private, have been combined into a single loan with a new and, ideally, lower rate from a private lender. The federal government does not offer refinancing of federal loans; refinancing can only be done through a private lender—which has its perks, but also a few potential drawbacks.
Pros of refinancing student loans
The perks: Refinancers can choose a fixed or variable APR to get a highly competitive new interest rate. Those with good and excellent credit scores stand to benefit the most from refinancing as private lenders determine their interest rate based on market conditions and a person’s creditworthiness. But if market rates are low enough, even those with subprime credit scores can lock in a great APR.
Another benefit is a greater range of repayment time frames. Whereas the standard repayment term for federal student loans is 10 years, private lenders offer repayment periods of 5, 7, 10, 15, 20, or 25 years. This means you can get a term to fit your budget and goals. A longer term will offer lower monthly payments or you can choose a shorter term to get out of student debt faster.
Lastly, refinancing can be great for your bottom line. By combining multiple loans and switching to a single monthly payment, there’s the opportunity to save considerably compared to paying the minimums of several individual loans.
Cons of refinancing student loans
Now, the drawbacks of refinancing. The biggest is for those refinancing federal student loans. While refinancing can make paying student loans much more convenient and affordable, it also means forgoing the federal student loan benefits such as forgiveness programs or income-based repayment options. As such, many borrowers are selective about which student loans they include when refinancing and choose to only refinance their private loans.
Be sure to take careful consideration when choosing between a fixed or variable APR. Variable APRs are tied to the market and subject to fluctuation. Your new refinanced interest rate could be significantly lower than that of your original loans when you initially refinance them, but that rate could update to be even higher than your original interest rate if the market changes. However, you’re not completely at the market’s mercy, private refinancing lenders typically provide an APR range so there’s a limit to how high your interest rate can go.
The refinanced loan is considered a completely new line of credit and will reflect as such on your credit report. If federal loans are being refinanced, the private lender pays the remaining debt directly to the government which closes those accounts. The private lender then issues a brand new loan with their institution in its place. Closing old accounts and simultaneously opening new accounts won’t do your credit score any favors. Age of credit accounts for 15% of FICO scores and for most people, their student loans are their oldest, most established accounts.
Refinancing might be for you if…
- You currently have multiple private loans with variable rates
- You aren’t eligible for any federal loan forgiveness programs
- You have good credit (or a cosigner)
- The refinancing loan interest rate is considerably lower than your current loan rate
Option 2: Consolidating student loans
The term consolidation is commonly used in reference to combining federal student loans while refinancing refers to combining private student loans—at least, according to StudentAid.gov. In other places, the terms refinancing and consolidation often get used interchangeably and can apply to private or federal loans.
In the case of federal loans, consolidation is more of an organizational tool to make repayment more manageable, rather than more affordable. Both types of student loans can technically undergo student loan consolidation, though the process differs significantly depending on the type.
Federal student loan consolidation only allows for federal loans to be combined and are done so through a Direct Consolidation Loan. It doesn’t provide a lower interest rate (in fact, that rate applied to a single balance could actually be higher than some of your original balances). However, it’s useful if you have multiple federal loans offered by different loan servicers or a different federal loan program, or want a longer repayment period. Direct Consolidation Loans can provide up to 30 years to repay rather than the standard 10 years.
Here’s how it works: All federal loans are combined into a new federal loan which gets a new fixed rate interest rate. Unlike with refinancing, a consolidated federal loan rate is determined by a weighted average of each individual loan’s rate which is rounded up to the nearest 1/8%.
Consolidating is often a prerequisite for applying to federal debt relief programs such as income-driven repayment or Public Service Loan Forgiveness (PSLF). So while a Direct Consolidation might not directly lead to a lower interest rate, it could lead to significant savings down the road without losing federal loan benefits like automatic forbearance, forgiveness programs, or the six-month grace period to begin repayment.
Keep in mind that consolidated federal student loans can be refinanced with a private lender at any time. If circumstances change where the benefits of federal loans are no longer applicable to your situation, converting them to private loans through refinancing might offer significant savings.
Consolidating federal loans through federal loan servicers might be for you if you…
- Have multiple federal student loans and only want to make one monthly payment
- Work in a field that’s eligible for federal student loan forgiveness programs
- Want a student loan with a fixed interest rate
- Need more time to pay off your loans
- Have poor or no credit
Private student loan consolidation works similarly to credit card debt consolidation. A borrower applies for a consolidation loan through a bank, credit union, or other private company. Applicants will need good credit in order to be approved. Multiple loans can be included including federal loans (which effectively turn that into a private student loan).
The new private lender will then typically disburse funds directly to the servicers of those individual loans. Those loans will be paid off and marked as closed (which could ding your credit score). You will then pay the new lender for the total amount with a new, market-based interest rate that can be variable or fixed. Remember, variable rates have the potential to have higher monthly payments than the original loans.
Consolidating loans through private lenders might be for you if…
- Market interest rates are considerably lower than your original loans at the time of signup
- You have multiple lines of credit of a similar age to your student loans
- Your student loans are mostly private
- You have good credit
Student loan consolidation vs settlement
Consolidation allows borrowers to combine multiple loans into one for easier and possibly lower monthly payments Settlement is when lenders agree to accept a portion of the total amount owed and consider the debt paid off.
Settlement generally only refers to private student loan settlement. The Department of Education (which issues federal student loans) offers a semblance of a loan settlement option called standard, nonstandard, and discretionary ‘compromises’. The criteria for settling federal loans are murky at best and can range from the total principal and interest being waived with only 10% being waived. This is also distinct from the various loan forgiveness programs offered to federal loan holders.
Private student loan settlements can be equally challenging to come by as, once again, there are none of the same federally offered protections as federal loans. Most private loan settlements occur when the student loan is in default and has been sold to a collection agency. In the rare instances where the private lenders themselves will settle, they often require very large lump sums which can be unhelpful to low-income borrowers.
The cash savings of having to pay back thousands of dollars can come with some serious consequences, however. The difference between the amount settled and the original loan is considered taxable income by the IRS. As such, eliminating student debt via settlement can have ramifications on your taxes whether the loans were with federal or private lenders. Speaking with a debt specialist can help you navigate this so there are no surprises once you’ve gotten rid of your student loans.
Option 3: Student loan forgiveness
There are several student loan forgiveness programs available to those who work in specific career fields such as teaching, nursing, or the military; reside in specific areas; work for a non-profit or serve public interest. The most well-known program, Public Service Loan Forgiveness only works for federal loans. However, some lesser-known programs can forgive private student loans, but may not be offered directly by the loan servicer. Instead, they may be offered by educational institutions, volunteer groups, or other organizations related to a certain trade.
Do you qualify for student loan forgiveness?
Option 4: Cancelling student loans
Cancellation and forgiveness are used almost interchangeably in the student loan space. Both have similar end results where the borrower is no longer on the hook for a partial or total amount of their student loan.
The biggest difference between the two is that in most cases, cancellation allows for debts to be erased nearly outright. Forgiveness programs typically require meeting an income requirement, working in a certain profession, proving financial hardship, or having student or military status. Cancellation doesn’t require borrowers to apply or jump through nearly as many hoops to have the debt wiped. It’s more closely akin to student loans being discharged—another method of student loan debt removal.
Federal and private student loans can be eligible for cancellation or being discharged—though the latter can be difficult to come by. Federal student loans are required to offer means that exempt borrowers from having to repay their loans and provide set criteria for doing so. If a private lender offers any means for loans to be canceled or discharged, they often only do so under very specific circumstances or as determined on a case-by-case basis. It’s more likely that a private loan servicer will settle than waive the partial or total debt.
Option 5: Discharge through bankruptcy
A common myth is that student loans can’t be discharged in bankruptcy. This is profoundly false as the Bankruptcy Code applies to all consumer debts which includes both federal and private student loans. Where the confusion often lies is that, unlike other unsecured debts, student loans are not automatically discharged after declaring bankruptcy.
Federal student loans require filing a separate action known as an adversary proceeding after having already declared bankruptcy. You must prove that repaying your student loan(s) would pose “undue hardship” to you and your dependents and prevent you from maintaining a minimal standard of living and that your hardship will continue for a significant portion of the loan repayment timeframe.
When it comes to private student loans, things can be slightly more streamlined. Some loans may automatically be discharged as part of a normal bankruptcy proceeding. These include:
- Loan amounts higher than the cost of attendance
- Loans for institutions not eligible for Title IV funding (schools that were unaccredited or in a foreign country)
- Loans covering living expenses incurred while studying for professional exams (like the bar exam) or associated with residency for medical and dental students
- Loans to students who attended school less than half-time
However, there are also reports of private lenders failing to provide borrowers with accurate bankruptcy policies or actively misleading borrowers by continuing to charge (and penalize) for already discharged loans. Such actions violate the Consumer Financial Protection Act and can be reported to the CFPB.
Student loan debt relief programs
Whether you hold federal or private student loans, if your status or circumstance meets certain criteria, your student loans may be eligible for relief in the form of forgiveness, cancellation, or discharge. What those types of relief entail and how to qualify for one or the other can vary between federal and private loan servicers, and then can vary further still amongst private institutions. Below are the specifics about qualifying for different types of student debt relief.
Federal student loan forgiveness programs
All federal student loans are potentially eligible for forgiveness programs that eliminate part or all of a loan amount. Such programs can apply to both subsidized and unsubsidized loans, direct or consolidated. They do not, however, apply to defaulted student loans.
None of the loan forgiveness programs take place automatically so borrowers need to apply to have their debts forgiven. Even if your specific loan meets all of the eligibility requirements above, you’ll still need to meet specific criteria to be approved.
Public Service Loan Forgiveness (PSLF)
- Work full-time for the government or a non-profit organization
- Made 120 qualifying monthly payments towards direct federal student loans.
Private student loans are not eligible for PSLF, nor can PSLF overlap with other forgiveness programs even if an individual is eligible for more than one.
Professions that are eligible under PSLF include:
Teacher loan forgiveness
There are several student loan forgiveness programs for teachers. Most teachers should find themselves eligible under the PSLF program. There’s also the National Defense Education Act (NDEA). It allows full-time, state-certified teachers with a bachelor’s degree who have worked for five consecutive years (one of which was during the 1997-1998 academic year) in low-income elementary, middle, high schools or an educational service agency can have up to $17,500 in student debt forgiven.
The NDEA applies to direct loans (both subsidized or unsubsidized) or Federal Family Education Loan (FFEL). The FFEL program worked with private lenders but ended in 2010. Eligible loans must have originated before the end of the qualifying years of teaching service. Additionally, there are several exceptions for teachers who did not complete a full academic year but may still be eligible for the program:
- Completed at least half of the academic year and
- The employer considers your contract requirements fulfilled or you were unable to complete the year because of the following acceptable reasons:
- Returned to postsecondary education at least half-time for an area of study directly related to teaching
- A condition covered under the Family and Medical Leave Act (FMLA)
- Called to active duty for more than 30 days
Non-federal student loan forgiveness programs
There are several student loan forgiveness programs that are not part of either federal government or private lending establishments. Issued by third-party organizations, these programs often cater to those who work in specific professions, work with specific communities, or have a protected status such as military or disability; and can apply to both federal and private loans.
- Clinical medical researchers
- Non-profit lawyers
- Occupational and physical therapists
- Volunteers – offered by AmeriCorps, AmeriCorps VISTA, and the Peace Corps
Student loan cancellation
The only formalized type of federal student loan cancellation is Federal Perkins loan cancellation. It applies to Perkins loans which were low-interest federal loans offered to undergraduate and graduate students with the greatest financial need (the program was discontinued in 2017). All or partial loans may be canceled for those who had eligible teaching employment or volunteer service.
If approved, any negative credit remarks due to delinquency or default payments may be deleted from your record. You may also get a reversal of the default status and receive a refund for any payments made towards the loan.
Perkins Loan Teacher Cancellation
The Perkins loan teacher cancellation program offers up to 100% loan cancellation to eligible teachers. It’s a tiered program that offers different amounts of student loan debt cancellation depending on the number of years of service:
- 15% canceled per year for the first two years of service
- 20% for the third and fourth years
- 30% canceled for the 5th year
The canceled debt also includes any accrued interest.
Eligibility criteria for teachers:
- Work full-time in a public or non-profit elementary or secondary school
- Provide direct services related to classroom teaching (i.e. school librarians or guidance counselors)
- Serve either low-income families, children with disabilities, or specific fields of expertise where there’s a state shortage (i.e. science or lingual education)
- Are directly employed by the school system
Teachers are not required to be certified or licensed in order to be eligible for Perkins loan cancellation.
Other types of Perkins loan cancellation
There are several other types of employment that can qualify for partial or full Perkins loan consolidation which follow the same loan cancellation tiers (15% canceled for years one and two; 20% canceled for years three and four; or 30% on year five).
- Eligible professions/fields include:
- Early childhood education provider
- Child or family services agency
- Faculty at a tribal college or university
- Law enforcement officer
- Librarian with master’s degree at Title I school
- Medical technician
- Military service
- Public defender
- Speech pathologist with master’s degree at Title I schools
- Volunteer service (AmeriCorps VISTA or Peace Corps)
Student loan discharge programs
Discharges can apply towards federal direct loans, FFEL loans, and Perkins loans, though some may not apply towards all three. Federal student loan discharge programs are distinct in that they’re tied to circumstances beyond a person’s control. These include:
- Bankruptcy – Uncommon and is not automatically applied
- Borrower defense repayment – If your loans were related to an educational service that your school failed to provide (only available for direct federal loans)
- Closed school discharge – If your school closes while you’re enrolled or soon after you withdraw
- Death – Direct and Parent PLUS Loans may be discharged upon proof that the student for whom the loans were taken out has died
- False certification discharge – If the school falsely certified your eligibility to receive a loan (not applicable to Perkins loans)
- Forgery discharge – For eligible loans fraudulently made using your name
- Total and permanent disability discharge (TPD) – Veterans who can provide proof of total and permanent disability will be relieved of all obligations to repay their loans
- Unpaid refund discharge – If you withdrew from school and the institution didn’t return required loan funds to your loan provider (not applicable to Perkins loans)
Borrowers that meet eligibility criteria can apply to have their loans discharged by contacting their loan servicer.
Forbearance & Deferment
Forbearance and deferment are two temporary types of student debt relief that allow borrowers to reduce or postpone their usual monthly payments while keeping their accounts (and credit scores) in good standing.
Both federal and some private lenders provide forbearance and deferment options, though the criteria for eligibility may vary. In either case, typically neither type of temporary relief is automatic. Borrowers must contact their lender to apply and prove financial hardship or another circumstance that would make repayment difficult (like going to graduate school). Currently, federal student loans are in automatic deferment under the CARES Act until October 31, 2022.
What’s the difference between student loan forbearance and deferment?
The primary difference between the two is whether interest accrues during these paused payments. Whether forbearance or deferment waives interests along with monthly payments can depend on whether the loan servicer is federal or private.
With federal student loans, forbearance is the option where interest will accrue. Borrowers get a temporary respite from monthly payments but will continue to be charged interest which will be added to their total balance. This option is available for subsidized and unsubsidized federal loans.
Those same rules don’t apply to private student loans, however. In some cases, both forbearance and deferment will charge interest but this can vary from institution to institution.
Different student loan repayment plans & who’s eligible for them
The following repayment plans are available for all federal student loans. Plans are typically for a 10-year payment period, though consolidated debts may have repayment periods of up to 30 years. Private student loans may not offer these repayment options.
It’s important to note that you’re not locked into a plan once you choose it. You’ll start standard repayment by default but you can change plans as often as you like. Say that right out of college you get a job with a great salary and feel confident that you’ll be able to grow with the company. You might opt for the graduated repayment plan. However, if something sudden happens where you move to a different job with a lower salary, you can change to Pay as You Earn.
See the complete guide: How to pay off student loan debt»
The standard repayment plan is the default for federal student loans. It includes fixed payments made for up to 10 years. Direct and FFEL consolidated federal loans also offer an option that extends repayment to up to 30 years—the precise number of years will depend on total education loan indebtedness. This plan generally has the highest monthly payments (initially) but generates less interest so it will cost less over the entire life of the loan.
Income-driven repayment programs (IDRs)
The federal government offers five different income-based student debt repayment options:
- Pay as you earn (PAYE)
- Revised pay as you earn (REPAYE)
- Income-based (IBR)
- Income-contingent (ICR)
- Income sensitive
In an IDR plan, a monthly payment amount is determined by your current income level and the size of your family. The payments on an IDR can be considerably lower than those of standard repayment plans. In some cases, low-income borrowers can have monthly payments as low as $0 a month.
Income-driven repayment is beneficial for students who haven’t found a job before their grace period has ended or whose paychecks are primarily going towards taking care of their dependents and making ends meet. IDRs require you to re-apply each year, so your monthly payment may change depending on changes to your salary or household size.
Graduated repayment plans
Graduated repayment plans start low with lower payments than the standard repayment plan. However, the payments increase over time to a maximum of three times any other payment. These plans are based on 10-year repayments except for consolidated payments which can be extended for up to 30 years.
Unlike IDRs, payments under a graduated plan will increase every two years regardless of your financial status. This can be a beneficial option for those who have a low starting salary out of college and want the breathing room to pay more once they’ve had a chance to become more established. Minimum payments will never be less than the amount of interest accrued so graduated payment plans also cost less than IDR over the course of their lifetime.
Extended repayment plans
As its name implies, the extended repayment plan simply provides a longer repayment period, from 10 to 25 years. This plan allows for lower monthly payments but will result in more interest being accrued over the loan’s lifetime—making it more expensive in the long run. Still, if you’re looking to make student loan payments more affordable without worrying about a sudden jump in your monthly payment or having to reapply, this could be the repayment option for you.
The extended repayment plan is available to those with over $30,000 in federal loans. If you have multiple types of federal loans (e.g. direct and FFEL), only that type that meets the minimum threshold can be considered for extended repayment. Loans from different programs may be combined using a federal direct consolidation loan.
Dealing with student loan debt can weigh heavy on your finances and your well-being. If you’re one of the thousands of people who owe student loans, you’re not alone. According to Federal Reserve, the average borrower owes over $25,000.
Student loans are broken up into two categories, federal and private. If you have federal student loans, exclusively through FAFSA, you may be eligible for consolidation, repayment plans, and even forgiveness. If you have a combination of federal and private student loans, we have consolidation options for you, as well. The factors that determine your eligibility vary, and if you are looking to lower monthly payments to fit your budget or if you want to pay off your loans quickly, reducing the total interest, there are programs available for you.
Navigating your options for student loan relief can be tricky. Not knowing all of your options or what to apply for could end up costing you thousands of dollars in unnecessary payments. Why not talk to a student loan resolution specialist for free. We are A+ rated by the Better Business Bureau and have helped thousands of people become financially stable.
To get started, fill out the form at the top of this page or better yet, give us a call right now and we’ll match you with the right service provider. So, don’t wait any longer. Give us a call. When life happens, we’re here for you.
Article last modified on August 4, 2022. Published by Debt.com, LLC