You're not alone if you feel saddled with debt from student loans. Data shows that the average public university student borrows around $26,000 to attain a bachelor's degree.1 The good news is that there are things you can do to pay off student loans quicker so you or your child can be free of the weight of debt sooner.
Let's explore some effective strategies and smart financial decisions that can help you break free from the burden of student loans.
1. Pay Down High-Interest Debt First
This option is the most cost-effective first step in paying off your college loans. By eliminating your high-interest loans first, you will free up more cash that you can use to pay off your education debt. High-interest loans, such as credit cards, are expensive. Consolidating your credit card debt with a personal loan can reduce interest costs, make your payments more manageable, and even shorten the payoff period.
If you have considerable high-interest credit card debt, that debt is probably costing you more than your student loan debt. In that case, consider paying off your credit cards before you tackle your student loans. One option is to take out a lower-interest personal loan and consolidate your credit card debt so you can make one payment each month.
2. Refinance to a Lower Interest Rate or Better Repayment Terms
Another option is to refinance your student loans. As with credit cards, refinancing uses a new loan with new terms to replace your existing debt. A personal loan should have a lower interest rate and better overall terms. Your credit score will determine how favorable those terms are. Typically, a lender will require a FICO score of 670 or higher for student loan refinancing.
A shorter loan term will cost less in overall interest paid, but your monthly payments will be higher. If you choose a longer term and lower monthly payments, it might be easier for you to meet the payments each month. Shop around for the best rates, weigh the consequences of fixed and variable interest, and make sure you understand all the fees charged.
3. Explore Payment Plans
There may be a better plan for paying off your student loan than the one you currently use. Federal loans offer various plans, including standard, graduated and extended plans based on your income:
- Standard Plan: Payment is spread over 10 years with fixed interest
- Graduated Plan: Starts with lower payments, which then increase over 10 years
- Pay As You Earn Repayment Plan (PAYE): Caps monthly student loan payments at a percentage of discretionary income and forgives remaining debt after 20 years
- Saving on a Valuable Education Plan (SAVE): Extends the forgiveness period to 25 years and is open to more borrowers
- Income-Based Repayment Plan (IBR): Adjusts monthly student loan payments based on income and family size
- Income-Contingent Repayment Plan (ICR): Calculates payments using income and loan balance
- Income-Sensitive Repayment Plan: Tailors payments to income
If you have a private student loan, you can choose between interest-only payments, fixed payments, and full deferment:
- Interest-only payments: You pay only interest until you graduate or are enrolled part-time
- Fixed payments: You start with smaller payments that increase once you graduate
- Full deferment: You begin payments once you leave school
4. Check If Your Employer Offers Education Benefits
Some employers offer education-related benefits, such as direct, tax-free contributions to your student loan. Employers can repay up to $5,250 on employee student loans until 2025.2 Some companies offer signing bonuses or lump-sum payments after you've been with the company for a set period. Other employers might make recurring payments to your lender or supplement your paycheck.
An employer may offer to contribute to your retirement if you put a certain percentage of your paycheck toward student loans instead, or they might trade vacation time for contributions toward student loans.
5. Claim the $2,500 Student Loan Tax Deduction
Take advantage of tax deductions for student loans.3 Claiming the $2,500 student loan tax deduction will free up money that you can use to make extra payments on your loan and pay the debt down quicker.
6. Create a Budget, Reduce Spending, and Free Up Money
Managing your finances requires budgeting. Most banks offer mobile apps that help you track your income and expenses so you can identify where your money is going. Look for ways to cut back on expenses to free up cash to put toward student loans. For example, can you eat out less often and cook more? Can you manage without a car and rely on public transportation for a while?
7. Make an Extra Payment Each Month or Pay Biweekly
You might be surprised how much cash you can free up if you cut back on simple things like entertainment, eating out, and subscriptions to streaming services. Buying a skinny vanilla latte at $4 a day adds up to $80 a month. Two takeout meals a week at $15 each adds up to $120 a month. Just by cutting back on coffee and takeout, you can afford an extra $200 each month toward your student debt.
If you can free up cash from better budgeting, you might consider a biweekly payment schedule. Making two payments a month instead of one can shave off years and significant interest from a student loan. With a biweekly schedule, you pay half your monthly payment every two weeks, which means you'll make three half-payments two months a year, which is an extra payment each year.
When you do make payments, do so through autopay. Some federal student loan services and private lenders will reduce your interest rate by around 0.25% if you set up autopay.4
8. Find Out If You're Eligible for Student Debt Forgiveness
You might qualify for a student debt forgiveness plan if you meet certain requirements. Teachers and other public service workers who have been in public service for 10 years, military service members, employees of some nonprofit organizations, nurses, doctors, people with disabilities, and those repaying student loans through an income-driven repayment plan could meet the criteria for some type of debt forgiveness.
The Public Service Loan Forgiveness (PSLF), a federal initiative that forgives the remaining student loan balance after you've made 120 qualifying payments, is the most common way people apply to have their student loans forgiven.5 Use the PSLF Tool on the Federal Student Aid website to find out if you are eligible.
Why Paying Off Your Student Loans Is Important
There are two good reasons to pay off your student loans. First up, if you can shorten the life of the loan, you will pay less in interest, sometimes thousands of dollars less. Second, by reducing the amount you owe, you will improve your debt-to-income ratio, which means you can qualify for better credit in the future.
Save Thousands of Dollars in Interest
Student loans tend to have lower interest rates than many personal loans and credit card debt because the payments are spread out over a longer period. However, the interest you pay over all those years will add up.
The average student loan debt of borrowers between the ages of 25 and 34 is $32,950.6 Let's say you take out a $30,000 student loan at an APR of 5.5% (the average federal student loan interest rate7)and make $400 payments each month. You would pay $7,000 in total interest over the life of the loan, which is around 7.5 years. If you paid an extra $100 each month, you would pay off the loan in around six years and pay $2,000 less in interest. That's a significant savings.
Qualify for Better Loans in the Future
If you pay off your student loans earlier, you will qualify for better credit in the future, saving you even more money. Lenders consider your debt-to-income ratio when qualifying you for financing, and your student loan debt is included in the calculation of that ratio.
Your debt-to-income ratio measures how much of your income goes toward paying off your debt. The lower the ratio, the more money you have to pay off loans, and the more appealing you are to a lender.
With a lower debt-to-income ratio, you may qualify for a lower-interest car loan, personal loan, or mortgage. Ultimately, you could buy a bigger house or a more expensive car.
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Loan Payoff Pitfalls To Avoid
There are some pitfalls to watch out for if you decide to pay off your college loans, including pre-payment penalties and losing your tax deduction.
Pre-Payment Penalties
The Higher Education Act passed in 1965 stipulated that lenders cannot charge pre-payment penalties on federal student loans, and the Higher Education Opportunity Act mandated the same for private student loans in 2008. Before making any pre-payments, check that your loan is exempt from pre-payment penalties.
Tax Deductions
The student loan federal income tax deduction allows you to subtract up to $2,500 of the interest you pay on a qualified student loan from your taxable income.8 You might also qualify for a tax credit under the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit. It's probably not worth keeping your loans just for the tax benefits, but remember, this is one benefit you will forgo once you pay off your loans.
How First Horizon Bank Can Help With Student Loans
Paying off your student loan debt will open you up to greater financial freedom in the future. You will have more cash to spend, and you will improve your debt-to-income ratio. With less debt, you can access lower-cost financing later, for example, when buying a car or a home.
First Horizon can support your efforts with low-interest personal loans to help you consolidate your debt. We also have tools to help you plan. Our student loan calculator shows you the feasibility of your student loan repayment with your anticipated future income.
Parental Plus loans are low-interest federally insured loans available to graduate and professional students. Our Parental (Plus) loan calculator tells you what payments you can expect. Lastly, our mobile app can help you track your expenses and budget wisely.
Get in touch with First Horizon today and find out how we can help you pay down your student loans.
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1 Education Data Initiative. “Student Loan Debt by Age." Updated August 3, 2023, accessed November 6, 2023.
2 IRS. “Reminder to employers and employees: Educational assistance programs can be used to help pay workers' student loans; free IRS webinar will offer details." Updated August 24, 2023, accessed November 6, 2023.
3 Federal Student Aid. “Did you know that the Internal Revenue Service (IRS) provides tax benefits for education?" Accessed November 6, 2023.
4 Experian.com. “How Can Student Loan Autopay Save You Money?" Published June 14, 2022, accessed November 6, 2023.
5 Federal Student Aid. “Public Service Loan Forgiveness (PSLF)." Accessed November 6, 2023.
6 Education Data Initiative. “Student Loan Debt by Age." Accessed November 6, 2023.
7 Federal Student Aid. “Interest Rates and Fees for Federal Student Loans." Accessed November 6, 2023.
8 IRS. “Topic No. 456, Student Loan Interest Deduction." Updated November 2, 2023, accessed November 6, 2023.
