In our series of articles focused on student loans found here, we have discussed a lot and provided different tips on how to take care of your student loans. You will also know if you qualify for a student loan and the different types available to you.

In this article we are going to talk about pay off your student loan in college, is it a good idea or not. What are the factors to consider when thinking of paying off your student loans? Find out below.

• Can you pay off Student Loans While in College?
• Is Paying off Student Loans Early Worth it?
• Tips for paying off student loans the right way
• What Happens if you Never pay off your Student Loans?
• Why is Student Loan Interest so high?
• How to Managing High-Interest Rate Student Loans?

Can you pay off Student Loans While in College?

As your student loan servicer, we at Nelnet are available to make sure you have the best student loan experience possible.

Read Also: What are the Best Companies to Refinance Student Loans

While you don’t have to make payments on your loans while you’re in school, you have the option to pay down your student loans including paying down interest on any unsubsidized loans, which will save you money in the long run.

Going forward, we’ll be here to process your payments, answer your questions, figure out repayment plans, and whatever else you may need.

We’ll communicate with you via mail and email when you need to know the latest about your loans, so please keep your mailing and email addresses up to date at Nelnet.com and know that we look forward to helping you in any way we can.

Working with Your School’s Financial Aid Office

Once you’ve taken out a loan and entered school, we encourage you to meet with a financial aid counselor at your school to make sure you understand the financial aid your school awarded you.

Student loans are a serious responsibility, and as with any loan, you are expected to pay it back on time, even if you don’t graduate or find a job right away.

When your school determines your financial aid award (which includes scholarships, grants, work-study, and loans), it uses a standard budget to estimate your expenses, or your cost of attendance (COA).

If you can reduce your expenses below the estimated COA, you may not need to borrow the entire amount of loans the school has awarded, saving you money in the long run.

Your school may have requirements in place to maintain your eligibility for financial aid. Often these requirements relate to academic performance, academic load, or credit on existing student loans. Make sure you understand your school’s eligibility policy and can maintain it.

Tips to Help you While You’re in School

Create a Budget

Get an exact number of what tuition, room and board, books, and lab fees will cost you. Once scholarships and grants are applied, you’ll need to either use saved money or borrow loans to fill in the gap. Never borrow more money than you can afford to pay back.

Some student loans accrue interest while you are in school, and some do not. Consider paying any interest as it accrues to avoid paying a larger total over time. Use this calculator to determine how much money you’ll need for school.

Stay Financially Fit

Develop healthy habits for a secure financial future with these resources from Nelnet. Find more financial literacy articles and tips on Facebook and Twitter!

Look for Free Money First

Always search for free money, like scholarships, grants, and work-study options, before taking out student loans.

Scholarships

Depending on your field of study or level of athleticism, you may qualify for an academic or sports scholarship at your school. Many scholarships are also available from sources other than your school.

Check out state offerings, local community groups, essay contests, and online scholarship searches. The criteria vary; some are even awarded based on heritage, hair color, and hobbies.

Grants

Grants are offered by the Department of Education and by some states and schools to students who fit certain criteria and in most cases don’t have to be paid back, so look into these options when considering all of your financial aid options.

Reapply for the FAFSA

Each year that you plan to take classes, you will need to resubmit the FAFSA^®. Filing online makes it easy to adjust your financial information and resubmit.

Is Paying off Student Loans Early Worth it?

Being debt-free sounds appealing, especially if you’ve been making payments on your student loans for years. However, if you’re thinking about paying off your student loans early, there are a number of factors to consider.

Student loans generally have lower interest rates than other kinds of debt, like credit card balances, so before you decide to pay off your student loans, think about what other debt is on your personal balance sheet. Paying off student loans early could be the right option for some people, but it does come with some downsides.

Whether or not you should pay off your student loans early depends a lot on your specific circumstances. On the one hand, the longer you spend paying off your loans, the more you’ll be paying in interest.

On the other hand, making extra payments could detract from other savings goals. Here are some of the benefits and drawbacks of paying back your loan early.

Pros

• Pay less over the life of the loan: Because your student loan, like most other debt, accrues interest when you carry a balance, it’s cheaper if you pay off the loan earlier. It gives the debt less time to accumulate interest, and that means you’ll pay less money in the long run.
• Get a head start on other financial goals: With one less monthly payment to worry about, you’ll be able to use the funds you would apply to your student loans for other purposes, like saving for a house or retirement, paying off a mortgage or taking a vacation.

Cons

• Higher monthly payments: Especially if you’re early in your career or not making much money, you may struggle to pay off your student loan early. It’s important to keep some money in your savings in case of an emergency, so you should only increase your student loan payments if you can afford to do so without making undue sacrifices.
• No opportunities for student loan forgiveness: If you’re eligible to have your student loans forgiven after a certain amount of time based on your career, it doesn’t make sense to repay your loans early. You’re better off making minimum payments until the debt is forgiven.

Factors to consider

Before paying off your student loan debt early, consider whether or not there are other financial priorities you should be focusing on.

Other debt

If you have other kinds of debt, you should prioritize paying down whatever balances carry the highest interest rates, like credit cards. Those will cost you more the longer you hold on to them, and they almost certainly have higher rates than your student loans do.

The average credit card interest rate is around 16 percent as of late July 2020, but federal undergraduate loans can have interest rates as low as 2.75 percent.

Retirement savings

If paying off your student loans will prevent you from getting an early start on saving for retirement, you should consider waiting. Just like with your loan interest, retirement savings accounts will grow more the longer you hold on to them. You want to start contributing to your retirement fund early and often.

“Time is your greatest ally when it comes to compounding your money. Every dollar you invest in your 20s could be $15 by the time you retire, but only half as much if you wait 10 years to get started.

Straining to pay down low rate debt — especially federal student loans that have unique provisions like income-based repayment or debt forgiveness — should take a back seat to socking money away for retirement that has 40 years or more to grow,” says Greg McBride, Bankrate’s senior financial analyst.

He adds that a good rule of thumb is to save 15 percent of your income, with 10 percent going toward retirement and the rest into a rainy-day fund.

Homeownership

The burden of paying off student loans can have an adverse impact on homeownership. Many college graduates can’t afford mortgage payments and student loans at the same time, but sinking extra money into student loan payments may put off homeownership even further — especially considering how much you’ll have to save for a down payment.

If you are on the path to homeownership, keep in mind that the average monthly mortgage payment is over $1,000 a month, but the average student loan payment is just a few hundred dollars per month.

Lifestyle expenses

Vacations with family, fancy cars, dinners with friends and family – we call these lifestyle costs, although you might know them as experiences.

The truth is that all of the time and money you spend paying off your student debt leaves you little time to actually make the most of your life. If paying off student loan debt early would significantly decrease your quality of life, it may not be worth it.

Emergency expenses

Having an emergency fund is essential; if you lose your job or get hit with a large medical bill, having savings in the bank may help you avoid taking on even more debt. In general, you should aim to have at least three to six months’ worth of savings in an emergency fund.

Since student loans have relatively low-interest rates, prioritize building up your emergency savings before making extra payments on your loans.

Tips for paying off student loans the right way

Paying off student loans can cost you more than just a portion of your income – it can take you time and come at the expense of more exciting life experiences. If you’ve built up your savings and are contributing to your retirement accounts, here are some of the best ways to go about paying off your student loans early.

Pay more than the minimum

One of the most straightforward ways to pay off student loans early is to bump up your payments. Say you have $40,000 in student loans with a 5 percent interest rate. Using a student loan calculator, you can see that under the standard 10-year repayment plan, your monthly payment would be $424.

If you add $100 to each payment, you’d shave two years off of your plan. If you add another $100, you take off an additional two years.

This also decreases the amount of interest you’ll pay. Under the standard plan, you’d pay $10,911 total in interest. Adding $100 to each monthly payment brings the total interest down to $8,239, and adding $200 to each payment brings interest down to $6,630.

Make an extra loan payment each month

Another trick to paying off student loans faster is to make extra loan payments each month. One good way of doing this is by setting up biweekly payments instead of monthly.

Before proceeding, contact your lender to let it know that the extra payments you plan on making are above the monthly minimum. Otherwise, this extra payment could be rolled over to the following month’s bill.

Put down a lump-sum payment

If you have come into some money — perhaps through tax returns or a cash gift — consider putting it toward your student loan repayment. Dropping a significant one-time lump sum into your principal balance could help you pay off your loans sooner rather than later.

Refinance for a lower rate

Finding the best refinance rates can help you pay off your loan more quickly, if you can find a lower rate. Lowering your interest rate can potentially shave months off the length of time it takes to pay off your loans.

What Happens if you Never pay off your Student Loans?

If you fail to pay your student loan(s), you probably won’t find a team of armed U.S. marshals at your front door, as one Texas man did. Still, it’s a very bad idea to ignore that debt.

In most respects, defaulting on a student loan has exactly the same consequences as failing to pay off a credit card. However, in one key respect, it can be much worse.

Most student loans are guaranteed by the federal government, and the feds have powers about which debt collectors can only dream. It probably won’t be as bad as armed marshals at your door, but it could be very unpleasant.

Here’s what happens.

First, You’re ‘Delinquent’

When your loan payment is 90 days overdue, it is officially “delinquent.” That fact is reported to all three major credit bureaus. Your credit rating will take a hit. 

That means any new applications for credit may be denied or given only at the higher interest rates available to risky borrowers. A bad credit rating can follow you in other ways.

Potential employers often check the credit ratings of applicants and can use it as a measure of your character. So do cell phone service providers, who may deny you the service contract you want.

Utility companies may demand a security deposit from customers they don’t consider creditworthy. A prospective landlord might reject your application.

The Account is ‘In Default’

When your payment is 270 days late, it is officially “in default.” The financial institution to which you owe the money refers your account to a collection agency.

The agency will do its best to make you pay, short of actions that are prohibited by the Fair Debt Collection Practices Act. Debt collectors also may tack on fees to cover the cost of collecting the money.

It may be years down the road before the federal government gets involved, but when it does, its powers are considerable. It can seize your tax refund and apply it to your outstanding debt. It can garnish your paycheck, meaning it will contact your employer and arrange for a portion of your salary to be sent directly to the government.

What You Can Do

These dire consequences can be avoided, but you need to act before your loan is in default. Several federal programs are designed to help, and they are open to all who have federal student loans, such as Stafford or Grad Plus loans, although not to parents who borrowed for their children.

Three similar programs, called Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), reduce loan payments to an affordable level based on the applicant’s income and family size.

The government may even contribute part of the interest on the loan and will forgive any remaining debt after you make your payments over a period of years.

The balance is indeed forgiven, but only after 20 to 25 years of payments. The payments may be reduced to zero, but only while the indebted person has a very low income.

The Public Service Loan Forgiveness Program is designed specifically for people who work in public service jobs, either for the government or a nonprofit organization. People who participate may be eligible for federal debt forgiveness after 10 years on the job and 10 years of payments. 

Details of these federal programs are available online, as is information about eligibility.It is important to remember that none of these programs are available to people whose student loans have gone into default.

A good first step is to contact your lender as soon as you realize you may have trouble keeping up with your payments. The lender may be able to work with you on a more doable repayment plan or steer you toward one of the federal programs.

One Upside

There is an upside to student debt. If you keep up your payments, it will improve your credit score. According to Experian, consumers with student loan debt on average have a higher credit score than those who are student-debt free. That solid credit history can be crucial for a young adult trying to secure that first car loan or home mortgage. 

Worst-Case Scenario

A true worst-case scenario was a man who found himself with armed U.S. marshals on his doorstep. He borrowed the money 29 years earlier and failed to repay the loan. The government finally sued.

According to the U.S. Marshals Service, several attempts to serve him with a court order failed. Contacted by phone in 2012, he refused to appear in court.

A judge issued an arrest warrant for him that year, citing his refusal to appear. When the marshals finally confronted him outside his home, he told CNN, “[I] went inside to get my gun because I didn’t know who these guys were.”

That’s how you end up facing an armed posse of U.S. marshals, with local police as backup, for failure to pay a student loan of $1,500. For the record, the man said he thought he paid the debt, didn’t know about the arrest warrant, and didn’t remember the phone call.

However, even this sorry story has a reasonably happy ending. Hauled into court, at last, the man agreed to begin paying off his ancient student loan, plus accrued interest, at the rate of $200 a month. After 29 years of interest, the $1,500 debt had grown to around $5,700.

The government and banks have an excellent reason for working with people who are having trouble paying off their student loans.

Student loan debt has reached an all-time high, with an estimated 45 million people now owing an average balance of $37,000. You may be sure the banks and the government are as anxious to receive the money as you are about repaying it. 

Just make sure you alert them as soon as you see potential trouble ahead. Ignoring the problem will only make it worse.

Why is Student Loan Interest so high?

Because education is a valuable asset, and seeing as college kids are unlikely to have amassed much wealth, you’d think that student loans would have some of the lowest interest rates around.

Unfortunately, that’s not always the case. Private and federal student loan interest rates tend to be a bit higher than other kinds of “good” debt, such as mortgages or car loans.

Current rates for federal student loans disbursed after July 1, 2019, are 4.53% for Direct Subsidized and Unsubsidized loans for undergraduates, 6.08% for Direct Unsubsidized loans for graduate or professional students, and 7.08% for Direct PLUS loans for graduate or professional students or parents of undergraduate students.

Current average interest rates for private student loans are as follows: 3.64% to 13.63% for fixed-rate loans and 2.72% to 11.88% for variable rate loans.

When compared to other types of loans, these rates might still feel high. In early March 2020, the interest rate was around 3.77%  for a 30-year fixed mortgage and around 4.46%  for a 60-month new car loan.

In general, why do student loan interest rates tend to be somewhat higher than some other common loans? This (mainly) comes down to the differences between secured versus unsecured loans.

Unsecured loans, like student loans, are not tied to an asset that can serve as collateral. Secured loans, in comparison, are backed by something of value. If you don’t pay your mortgage or auto loan, the lender can seize your house or car.

But a lender can’t seize a college degree! In other words, student loan interest rates are typically higher than secured loans’ rates because the lender’s risk is higher.

How Have Federal Student Loan Interest Rates Changed?

Though interest rates on federal student loans have fluctuated over the last few decades, they’ve been fairly steady in recent years. From the 1960s to 1992, Congress set fixed interest rates for student loans that ranged from 6% to 10%.

Over the past couple of decades, federal interest rates varied depending on whether borrowers were in school, in the six-month grace period after leaving school, or in repayment.

Until 2006, rates for federal student loans were a bit all over the spectrum. After 2006, rates became fixed again, but differed based on the type of loan.

These rates hovered around 6% or 7% until the 2009 recession, then fell to 3% or 4% for undergraduate loans and closer to 5% for graduate ones. It remains to be seen what will happen in 2020 amid the coronavirus pandemic.

Compared to 2018, federal student loan interest rates have dipped. Comparing the 2018 to 2019 school year, rates for the current year are down 0.18 percentage points. (2020-2021 rates will be announced at the end of June, 2020.)

How Do Private Student Loan Interest Rates Differ From Federal Loan Rates?

Federal student loans have their interest rate set by Congress annually, based on the 10-year Treasury note. The interest rate is fixed over the life of the entire loan; meaning, if you get a federal student loan, the rate it was issued with won’t change despite Congress setting a new rate every year.

But, if you need to take out an additional federal student loan, it will be set by the current rate, not your previous one.

With private student loans, lenders can determine their own rates based on the borrower’s creditworthiness and market conditions. Unlike federal student loans, private student loan interest rates can be either fixed or variable:

•   Fixed, meaning the rate might be a bit higher than a variable rate, but it won’t change over the life of the loan.
•   Variable, meaning they typically start out lower but can change over time depending on the market.

As with any choice, there are upsides and downsides to picking a fixed versus variable interest rate loan. Depending on your financial picture and the offered interest rate on the loan, the choice will likely vary.

Since so much depends on the applicant, the rates vary widely among private lenders. Private student loan rates will fluctuate with market trends, but they’re also dictated by additional factors. When applying for a private student loan, unlike with a federal student loan, private lenders will look at factors including (but not limited to):

•   Credit history. When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to pay the loan back since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.
•   The school you are attending. Most four-year schools are eligible for private loans, but some two-year colleges aren’t. Additionally, applicants typically have to be enrolled at least half-time to qualify for private student loans.
•   The finances of your cosigner. Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history sometimes means a lower interest rate on private student loans.

In addition to the above factors, students can shop around for interest rates with private student loan providers, unlike the single rate set annually for federal student loans. Rates will likely vary at each lender based on their underwriting criteria and your financial profile.

While federal student loan rates are annually set, private student loans will vary across a variety of factors from lender to lender.

How to Managing High-Interest Rate Student Loans?

Student loan rates can be higher than that of other loans, and if you’re struggling to make your monthly student loan payments because of high interest, it might be time to consider an alternative.

Federal Repayment Plans

If you took out federal student loans, you qualify for various federal repayment plans. Borrowers are automatically placed on the Standard Repayment Plan, unless they select another option. The standard repayment plan splits repayment over 10 years.

Other options extend the repayment term, which can make payments more manageable in the present, but also means that you may pay more in interest over the life of the loan.

Those struggling to make payments on the Standard Repayment Plan might consider one of the other repayment plans available to federal borrowers. These include the Graduated and Extended repayment plans and other income-driven repayment options.

There are four income-driven repayment repayment plans to choose from; here is some basic information about each of these federal plans:

•   Revised Pay as You Earn Plan (REPAYE) — In this plan, payments will be 10% of discretionary income each month. The payment amount will be recalculated each year based on income and family size.
•   Pay as You Earn Plan (PAYE) — Similar to REPAYE, your payments will be 10% of monthly discretionary income, but they will never be more than what would be paid on the 10-year Standard Repayment Plan.
•   Income-Based Repayment Plan (IBR) — To qualify for this plan, borrowers must have high debt relative to income. Monthly payments will be 10% to 15% of discretionary income and will be reevaluated annually.
•   Income-Contingent Repayment Plan (ICR) — For ICR, repayment is either 20% of discretionary income, or “the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.”
•   Income-Sensitive Repayment Plan — Loan payments will be based on the borrower’s annual income. Under this plan, a borrower’s loan will be repaid in 15 years.

Additional detail can be found on the Federal Student Aid website  , which is operated by the Department of Education. To qualify for income-driven repayment, applicants must meet specific requirements. Private student loans aren’t eligible for the repayment plans described above.

Federal Student Loan Forgiveness

In some instances, you may qualify for forgiveness on some or all of your federal student loans. Loan forgiveness is possible under a few specific circumstances, including:

Public Service Loan Forgiveness — If you work for the government or a qualifying non-profit, you might be eligible to receive some form of loan forgiveness.

You have to make 120 qualifying on-time payments on the loan and generally work full time for the organization. Unfortunately, many applicants find the process of applying for public service loan forgiveness challenging, and not all non-profits or government work qualify.

Teacher Loan Forgiveness — Similar to Public Service Loan Forgiveness, teachers who work full-time for five years in a qualifying low-income school are eligible for forgiveness on their federal loans. If you qualify for forgiveness, you may be eligible for up to $17,500 on your Direct Subsidized and Unsubsidized Loans.

These student loan forgiveness plans are only for federal student loans, not private student loans.
The Public Service Loan Forgiveness program has a strict application process that requires a lengthy commitment from applicants.

2018 data shows that 99%  of applicants were denied loan forgiveness that year. Pursuing federal loan forgiveness might require considerable attention to detail as there are many program requirements that must be met in order to get approved for loan forgiveness.

Refinancing Student Loans

If you’re saddled with high-interest student loan debt, and don’t qualify for one of the federal programs mentioned above, it might be time to consider your options around refinancing. Refinancing your student loans is one way to potentially lower your interest rate or your monthly payments.

Among many other factors that vary by lender, you could be a strong candidate for student loan refinancing if:
You’ve improved your credit score since you first took out your loans.

Unlike when you were first headed into college, you may now have a credit history for lenders to take a look at. If you’ve never missed a payment, and continually grown your credit score, you might qualify for a lower interest rate.

Read Also: 5 Common Student Loan Scams and How to Avoid Them

You have a stable income. Being able to show consistent income to a private lender may help make you a less risky investment for them to lend to, which in turn could also help you secure a more competitive interest rate.

As we mentioned above, all student loans issued from the federal government after 2006 were offered as a fixed interest rate, whereas private refinancing can be offered as either a fixed or variable interest rate.

Be mindful of the fact that when you refinance with a private lender you can be offered both fixed and variable rate options. Be sure to understand which makes sense for your financial situation before choosing.

Also note that if you are refinancing federal loans with a private lender, you’ll give up all federal student loan protections such as forbearance, or benefits like income-driven repayment programs. Refinancing won’t be the right fit for everyone, but for qualified borrowers, it could help them secure a more competitive interest rate.

Finally

Paying off student loans early isn’t always the best idea — after all, student loans typically have relatively low interest rates, and it’s usually best to focus on paying back your highest-interest debts first. It’s also not a good idea to sacrifice retirement or emergency savings for the sake of getting out of student loan debt.

However, if you already have a solid financial plan in place, it may be worth strategizing ways to pay down your student loans more quickly in order to put them behind you.