How to Manage and Pay Down Student Loan Debt

7 min read
May 20, 2015

Pay Down Student Loan Debt

According to CNN Money, 40 million Americans now have student loans. That’s up 84% since 2008. The average owed by borrowers has also jumped from $23,000 to $29,000 in the past 7 years. That totals to a whopping 1.16 trillion dollars’ worth of student loan debt needing to be paid.

In other words, you're not alone in your struggles with debt!

Michele Raner, vice president of analytics at Experian, has some interesting insights as to why so many Americans are burdened with this type of debt. Raner says that “Student loans are the only credit vehicle where a lender continues to extend credit year after year without knowing the person's ability, or even willingness, to pay.”

Therefore, it makes sense you’re seeking advice on how to manage and pay down student loan debt. It’s time to create a plan for managing and eliminating your loans.

What’s Your Current Money Situation?

Nightmares of college finance courses may be rushing into your head at this point. But don’t let those negative thoughts enter your mind! Looking at your money situation is simple. It’s enlightening. It’s freeing. There are only 3 simple steps:

Step 1: What’s Your Net Worth?

The reason it’s important to look at your net worth is because of a little thing called opportunity cost. Opportunity cost basically means optimizing your time and money.

As an example, let’s say you have two jobs. You enjoy them both equally. You can choose how many hours you work at each place. One job pays $15 per hour; the other pays $20 per hour. This means, for every hour you spend at the $15 per hour job, you have a $5 loss in opportunity. Not good. The same idea should be considered when examining your net worth.

Again, as a hypothetical example, say you have some bonds given to you by family members for a milestone birthday when you were younger. Those bonds may only be yielding 2%. If your student loan interest rates are higher than 2%, it may be wise to sell your bonds so you can pay down your debt.

To determine your net worth -- and to understand where all your assets are -- add up those assets. Account for the following items:

  • Cash: paper cash, savings accounts, checking accounts
  • College savings plans (like the 529)
  • Bonds
  • Annuities
  • Stocks
  • Mutual funds/exchange traded funds

At this point, tally up all debt besides student loans. Account for credit cards, car payments, cash advances, and even loans from family members. We’ll add up student loan debt in a minute.

Step 2: How Much Income Do You Have?

Tally up your income on a monthly level. Student loans are paid back on a monthly basis so it only makes sense to look at your income this way, too. It will help determine what's available to pay on your debt each month.

Take your paycheck into account, of course -- but count other income sources, too. Don’t forget about occasional odd jobs, side hustles, or part-time work.

Step 3: How Much Do You Have in Expenses?

Look at your current spending. If you're not already tracking it, use something like -- or just hang onto paper receipts and create an Excel spreadsheet that you can keep up with each month.

Most of us have three areas of expenses:

  • Fixed expenses like bills -- this would include your rent, utilities, insurances, and so on.
  • Flexible expenses like costs of living -- think groceries, transportation, personal care items. These are things you do need to purchase, but you have some control over how much they'll cost you each month.
  • Discretionary expenses -- this is all your entertainment, meals out, shopping, etc.

Tally up all your expenses to understand how much cash is going out each month.

Step 4: Fix the Weaknesses

If you completed steps 2 and 3, you’ve probably discovered some areas you would like to change. Perhaps you're not happy with your monthly income and would like to increase it. Maybe your monthly pizza budget is as much as your buddy spends to insure his Lexus each month.

It’s a good idea is to create a bare bones budget. How much money do you need to live? For this assessment, start from the ground and work your way up.

What kind of housing situation do you need? Can you get away with living in a less expensive neighborhood? Could you bike to work instead of driving a car? Do you really need a car payment at all? Is your food budget too high? Fixing your finances means practicing self-control.

Alternatively, are you satisfied with what you earn? Or are you falling short on your earning potential? If the latter is true, ramp up your income. Either work more hours at your current job, work toward a raise, or think about starting a side hustle.

Taking these actions can free up or create more money in your accounts each month so you can put more toward your debt. If you pay more than the minimums, you'll pay down student loan debt faster and save money on interest charges.

Pay Down Your Student Loan Debt

This is when you decide how exactly you’re going to repay your debt. First, find out exactly how much debt you have with each borrower. Place that information into a spreadsheet. Next, write down interest rates beside each loan. You probably want to pay the highest interest loans first.

There are four basic plans for repaying student loan debt:

The Standard Plan: This plan is easy to understand. You pay a fixed amount each month. $50 is usually the minimum.

An Extended Plan: Unless you have more than $30,000 in debt, this plan isn’t for you. However, if you have at least $30,000 in debt, this plan may help you. An extended plan will make your student loans look like a mortgage payment. You can stretch repayment across 12 years to 25 years. Note that you may pay more in interest the longer you drag out repayment.

An Income-Contingent Plan: This payment plan tracks your income and asks you pay back a certain percentage. If you expect your income to rise significantly with each passing year, this may be the right option for you.

A Graduated Plan: A graduated plan is similar to an income-contingent plan. The payments are low for the first two years, after which, your payment schedule becomes more demanding. If you’re having a tough time adjusting to life after college, this may be a good option for you. You can get your footing in the ‘real world’ and then focus on aggressively repaying student loans.

Keep in mind, these are all basic plans and not right for you if you want to take big steps toward eliminating your student loans. An aggressive debt repayment plan may require you to:

  • Pay more than the minimums each month.
  • Pay biweekly.
  • Pay down more than one loan at a time, or balance debt repayment with other financial goals.

It's helpful to talk with a financial planner about what options make the most sense for you and your situation. A planner can also help you create a plan to get you to success.

What About Forgiveness?

Student loans are virtually impossible to discharge – even in bankruptcy. Nearly 24% of millennials expect their loans to be forgiven but that’s just a dream for most. You may qualify if:

  • Your school closes before you can complete your program. (This only applies to students in attendance within 90 days of closure.)
  • Your loan signature was forged.
  • Your loan was falsely certified (which means the school did an improper job certifying your eligibility to receive the loan).
  • You become a public service employee.
  • You’re a member of the US military. If you service in a hostile fire or imminent danger area, your loans may be forgiven.

Additional Resources

40 million Americans have student loans. Which is why this article isn’t the only resource you have for paying back your student loans! Therefore, it’s worth mentioning the other resources to help you dominate your student loans:

ReadyForZero: This tool helps you track student loan debt as well as credit card debt (which is handy if you’re like the typical college graduate). ReadyForZero is like a personal finance coach. The user interface is extremely fun and interactive. ReadyForZero also sends out email notifications you actually look forward to receiving! The emails are really uplifting. It’s a very positive user experience. Were you a statistics major in college? If so, this is the tool for you. With over ninety charts to map out your repayment strategy, a smart college graduate will appreciate the sophistication of this site. But this site isn’t all suspenders and pocket protectors. You can also receive ‘gifts’ through the site. Yes, instead of getting silly gift cards to obscure stores for your birthday, ask friends and family for a gift towards repaying your student loan balance. It may not be the most fun gift but it’s definitely meaningful.

Student Loan Hero: Within minutes of signup, you can see all your student loans on its easy to use dashboard. The tool also suggests tips for quickly reducing your balances. For instance, a tip may arise suggesting you use ACH direct payments to save .25% on interest.

Gradible: With this tool, you perform online tasks to earn credits which you can use to pay off your loans! The tasks are easy to perform if you’re a college graduate. Tasks include social media surveys, online research, and more. It’s kind of like TaskRabit for recent graduates.

iontuition: This is a holistic college financing experience. It moves you through every step of the college financing experience. If you find out about this service early enough, it can usher you all the way from choosing a college, to repaying your loans. I think this is really cool considering no one else really sticks by your side like that – except maybe your parents. You usually deal with one financial aid counselor in high school and then switch when you arrive at college.

If you’re one of the 40 million Americans with school loan debt, help is out there – and lots of it! Use the steps for managing and repaying debt as outlined in this article. Student loan debt isn’t as insurmountable as it may first appear.

And stay positive! As the famous investor Warren Buffett has said, “The best investment you can make is in yourself.”