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Student debt got you down? Join the still-growing and uber-stressed club. One in five Americans is carrying student loan debt. The average balance they’re carrying is about $37,000—yikes!—and about 15% of them are behind on their payments. And there’s more bad news for new borrowers. The federal government, which extends more than 90% of all student credit is about to raise the interest rate on its Direct Loan program by 34%. That’s not a particularly sunny forecast for students.
If you’re about to take on some student debt or looking to reduce the debt you have, it’s time to become better versed in the subject of educational financing. Don’t know where to start? Here are 5 tips that can put you on a path toward saving money on student loans.
Table of Contents
Tip #1: Compare multiple student loan institutions.
If you’re thinking of taking out a student loan, the first thing to keep in mind is that the world is full of institutions that extend credit for education. The federal government is chief among them. The vast majority of student credit is extended by the government—more than 90%. And federal loans do come with some important advantages. Lower interest rates, income-based payments, and, when times get tough, potential loan deferment are among the perks of taking out federal student loans. But it pays to be a comparison shopper and look into loans issued by private institutions, as well.
The internet makes that pretty easy to do. Do some digging into the financial press to find reviews of the best student loan companies. Lenders who operate 100% online sometimes offer the most competitive rates, because they pay less in overhead than banks that have physical branch offices. But don’t ignore your local credit union. Credit unions are not-for-profit institutions and often offer very low rates for creditworthy borrowers.
Tip #2: Research several loan scenarios.
While you’re comparing lenders, you might look into different loan terms, too. You can agree to pay off your loans in a single year if you choose. But you can also take up to twenty years. (Longer terms are rare.) Your monthly payments will be smaller with a long-term loan. But the lifelong cost of your loan will be higher as a result. That’s because you’ll have to pay interest on the amount you owe as long as you carry a balance. In addition, shorter-term loans typically come with lower interest rates from the get-go.
Tip #3: Do everything you can to raise your credit score.
The interest rates lenders will offer you depend largely on your credit score. The higher your score, the lower the rates you’ll be offered. If you’re young and haven’t established a credit history, credit bureaus don’t know what to make of you. You may not even have a credit score. That’s when it makes sense to look for a co-signer: someone who agrees to take on your student debt with you. The ideal co-signer has a high credit score. Many students start out by asking their parents to co-sign on their loans.
But let’s say you have a credit score. Maybe it’s sub-par, say lower than the average credit score of 698. Your best strategy is to wait until you can raise your credit score before applying for a student loan.
Tip #4: How to Raise Your Credit Score
Five primary factors determine your credit score. Some are more important than others, but you can work on optimizing all of them. Here’s how the factors break out:
Here’s how you can achieve your optimal credit score.
The fastest way to improve your credit score is the bring all of your credit accounts up to date. Pay at least the minimum payment due on all your accounts and, thereafter, make it a habit of paying on time every time.
Credit utilization is a ratio that compares all of your credit balances to your credit limits. The secret to lowering your credit utilization ratio is to pay down as many credit balances as you can—starting with high-interest credit cards. No need to pay more interest than you have to. Paying high-interest loans down first will help you lower your overall monthly budget, too. One alternative strategy, if your credit score is already pretty good, is to request higher credit limits on your credit cards. Having higher credit limits affects your credit utilization ratio, too. Just be sure not to use all the extra credit extended to you!
Length of Credit History
This is a tough one. Some students graduating from high school, for example, don’t have any credit accounts. If you’re in that position, it’s time to apply for a credit card or two. You may want to start with a secured credit card. You’re pretty much guaranteed to be approved for one and the payments you make against secured cards count toward building your credit history. Gas credit cards and store charges are also pretty easy to get. Use your cards to make small purchases and pay off your entire balance on time each month to establish a strong credit history.
Credit bureaus are interested in how you manage two types of credit. The first is revolving credit, the type if credit you get when you have a VISA or store charge. With revolving credit, there’s no set payment amount. You can choose to make any size payment that meets the minimum amount due each month. The other type of credit is installment credit. Auto loans and mortgages fall into this category, Ideally, you’ll have a mix of both. So if you have a car payment to make every month, adding a credit card to the mix can help your credit score and vice versa. We’re not advising you to go out and buy a car willy-nilly, of course. But long-term, try to diversify the kinds of credit payments you make. If you take out a student loan, that will count as an installment credit in your credit profile.
Having a credit history is important. But opening too many credit accounts too quickly can damage your credit score. Each time you apply for credit, a creditor will perform a hard credit inquiry. Hard credit inquiries cause your credit score to drop temporarily so apply for credit slowly and judiciously. Don’t open a bunch of retail credit cards in rapid succession, as tempting as those “save 10% when you open an account” offers may be. Hard credit inquiries that are three to six months apart won’t have a significant effect on your credit score.
Tip #5: Strategies for Lowering Your Current Student Debt
You may have some options when it comes to lowering the total amount of student debt you owe. Consider these tactics for reducing the amount you pay on your loans:
- The first is refinancing your student loans. If you took out your student loans when interest rates were high, refinancing into a lower-interest loan can reduce your monthly payments and the life-long cost of your loan. If you’re in a better financial position or your credit score has improved since you took out your loans originally, that’s another reason to consider refinancing. You may be able to secure a better rate now.
- Another way to reduce your student debt is to ask your employer to help you pay it off. As the employment market has grown more competitive, employer student loan assistance is becoming a more common employee benefit. Now through 2025, your employer can provide up to $5250 a year in educational assistance. Their contributions won’t raise your taxes and your employer can take a payroll tax credit by providing assistance. Your company may not even be aware of the advantages of offering this benefit. Currently, fewer than 10% of employers offer the program. But there’s no harm in advocating for yourself—and your fellow employees. Contact your employee benefits manager and start a conversation.
- Be sure you are taking advantage of student loan tax credits. There are several tax credit choices available to you. Under some IRS rules, you can deduct up to $2500 per year from your taxable income while you’re paying off your student loans. Too many students overlook this opportunity to save, particularly if they prepare their taxes by themselves. If you haven’t been filing federal tax forms because your income is very low, it makes sense to start filing them as soon as you begin paying off your loans. If you have a co-signer on your loans, he or she is also eligible to claim a deduction on your behalf.
- Finally, if you’re in a position to do so, pay more than your required monthly payments on your loans. The more you lower your balance, the less you’ll pay in interest over the years.
Take the Long View on Student Loans
Education is expensive, no matter how you slice it. But remember, the student loans you take out are likely to start paying you back immediately. College grads typically earn hundreds of thousands of dollars more in a lifetime than high school grads. That higher income potential starts as soon as you enter the job market. So take every opportunity to lower your student loan costs, yes. But never underestimate the value of your education. It’s something you can keep in your pocket for years to come. How you use it is up to you. Keeping up with fashion trends? Taking a fabulous vacation? Continuing your education? That’s the beauty it. When you’re in charge of your finances, you’re in charge of you.
Author Bio: Susan Doktor is a journalist and business strategist who writes extensively on personal finance. Her contribution comes to us courtesy of Money.com.