Tips For Avoiding and Reducing Student Loan Debt

Nowadays so many kids are graduating college with a mountain of student loan debt. Not only can this wreak havoc on your finances but could greatly effect your credit score too. For some, debt can't be avoided but there are ways to help out with the cost. There are things you can start doing before you even start college as well as after to help reduce the burden.

Tips for saving before you head off to college

How you plan to pay for college is something that should be given thought to well before graduating high school. If you were fortunate enough to have a college fund started for you when you were young, you are way ahead of the game.  With that being said, even if you don't have one, there are ways to help minimize the amount of student loan debt you incur.

Get a job and save

As soon as you are of working age you should start looking for a job. This can be after school or on the weekends. You should also pick up a job during the summer. By federal law, you need to be at least 14 to get a paying job at a business. States vary on age requirements so check before applying anywhere. 

Some businesses will want you to be at least 16 since there are strict rules on the hours you can work.  If you are under 16, you are not able to work before 7am or after 7pm on school nights. You also can’t work more than 18 hours per week, and no more than three hours per day during the school year.

Once you have secured a job, you need to put together a savings plan for your money. Figure out how much money from each check you will save for college and how much towards other expenses. You will want to think about where you keep your savings as well. You may think in your sock drawer is the best place but you want to put your money to work for you. Here are some options to consider.

Get an education savings account (ESA)

With an ESA, you can contribute up to $2,000 of after-tax money and it grows tax free. This is a nice option since you will get a much higher rate of return than you would with a regular savings account. Keep in mind though that the funds must be used for education expenses only.

Pros:

  • Variety of investment options
  • Grows tax-free

Cons:

  • You must be within the income limit to qualify
  • Contributions are limited to $2,000 per year
  • The funds need to be used by age 30

Look into a 529 plan


These are typically operated by a state or by a university. Some plans offer no federal tax on earnings and state income tax deductions. The max contribution limit depends on the plan you choose, but it is usually higher than the ESA. Watch out for plans that can freeze your options or automatically change your investments based on age. Also, look for a plan that will give you the option to transfer the beneficiary to another family member. If your one child decides not to attend college, you can you use it for another child.

Pros:

  • Contributions can go as high as $300,000 depending on your state.
  • Most plans don't carry age restrictions or income limits.
  • Tax free growth

Cons:

  • There may be restrictions to transfer the funds to another child.

Open a savings account

A basic savings account does not offer you any tax advantages, but you also are free to use the money as you wish. The rate of return is not there but these accounts are federally insured, so they are a low risk option for saving for school.

Open a Roth IRA

Usually a Roth IRA is a retirement tool, but there is an option that lets you withdraw up to $10,000 for college with no penalty. If you have had the account for more than five years, you do not have to pay taxes on the amount you withdraw.

Do your best in high school

If you are serious about your higher education, you need to take your high school years serious as well. Stay on top of your grades and if you need a tutor, get one. When it comes to the SAT or ACT, make sure you prepare. Take classes and if you need to retake them in hopes of a higher score, do it.

Aside from your grades, colleges look for applicants to be well-rounded in their extracurricular activities. With that being said, you don't want to spread yourself too thin by signing up for every club. Select a few that truly interest you and focus on those. If you are talented in a sport or other area like art or music, there could be the option of a scholarship. If you can score one along with grants, you are looking at a big decrease in your college costs.

Take AP courses in high school

If you are able to, take as many advanced placement (AP) courses as you can. Also make sure to take the exam at the end of the year. Colleges vary, but many offer course credits if you get high scores on your AP tests. You need to score above a 4 with 5 being the highest. If you can do this, you may be able to skip up to a semester of general education courses depending on how many tests you score high on. This will take a nice chunk off your total costs.

Fill out the FAFSA ASAP

Your first step in the process of applying for financial aid is to fill out the Free Application for Federal Student Aid (FAFSA). There are many myths surrounding the FAFSA.  A big one being that your parent's income is too high. For this reason, many students don't end up applying. The reality is that most students do actually qualify for some form of student aid. So definitely take the time to fill out your application.

There are a number of FAFSA deadlines that you need to meet. Be sure to check out the  Federal Student Aid website to stay in the loop and for any FAFSA application changes they may make.

Look for every possible scholarship

There are so many scholarships available today. You just need to take the time to search for them. Everything from religious organizations to local rotary clubs may have a scholarship they are offering. Also take a look at your bank or credit union and any organizations that may be affiliated with your field of interest.  Aside from doing a google search, speak with your guidance counselor or financial aid officer from the colleges you have applied to.

Rethink your college plans

College is expensive, there is no way around it. With that being said, the cost of attending college varies by school. You may have your heart set on an IVY league school but graduating with tons of debt may not be worth it. There are options to help circumvent some of the high costs of attending a four year university. Here are a couple of other options to consider:

Start out at a community college: As much as you may want to start off at a four year university, it may not make financial sense for you. Starting off with community college and then transferring to a university is always an option. You will still get your four year degree but at a fraction of the cost.

Attend a State School: Private schools are always more expensive. Stick to your state universities to avoid the high price tag.

Stay away from private student loans

Private student loans don’t carry the same borrowing limits as federal student loans.  For this reason, it can be easy to take on more debt than you can handle. Not to mention the interest rates tend to be higher and they typically don't offer any flexibility with their repayment plans or deferment of your loans.

Ways to lower your student loan debt

Student loan debt can be overbearing. Especially when you are just out of school with no job. So, whether you are struggling with your payments or worried about how you will afford to make the necessary payments in the future, there are options to help offset the debt you owe.

Refinance your student loans

Whether you have one or multiple student loans, you have the option to consolidate and refinance them into one loan. Any private and federal loans would become one payment and usually with a lower interest rate. Do keep in mind that you will be extending the term of your loan. So, if you have a steady income and good credit, this could work for you.

There are a couple of caveats to be aware of if you decide to consolidate your loans.

  1. If you have a federal loan and you refinance them into a private loan, you will not be eligible to participate in any income-based repayment programs.
  2. Even with a lower interest rate, if you extend the term, you may wind up paying more in total interest.

As you can see, consolidating your loans does come with some loss of benefits. You want to look closely at the current status of your loans before you move forward with anything.

Look into an income based repayment plan

If you have zero income, low income, or your future income is not clear an  IBR program may be for you. Here is an overview of how the plan works:

  • Eligibility is restricted to federal student loans only.
  • Monthly payments go by your income not on the amount you owe.
  • If you don't find a job after graduation, you are able to make $0 monthly payments.
  • Once you are enrolled in an IBR program, they will take care of the interest that has accrued on your account for up to three years.
  • 20-25 years is the usual repayment term.  After that the remaining balance is forgiven.
  • If your current loan is not a federal one, you may be able to consolidate your student loans into one new loan that is eligible.

Keep in mind that you will be required to submit your income and family size each year.  If you don’t, your payment can go up or you may be removed from the program.  

When it comes to tax time, any loan amount that is forgiven is now considered income and subject to taxation.  Many people forget this or are unaware and then they are caught by surprise when they owe money to the IRS.                                                          

Contact your lender about forbearance and deferment options

Another option for some temporary relief from student loan payments is either forbearance or deferment.  With forbearance, you can stop making payments on a temporary basis for up to 12 months.  If you have become unemployed or you are just having income issues, this is a popular option.  Keep in mind, though, that interest will still accrue during this period.  

Deferment is another option, thought not as popular since it is not easy to be approved.  With this option, both principal and interest payments on your student loans are temporarily postponed. In limited cases, either of these options are available for both federal and private loans.  

Research debt settlement

If you have a private loan, there are no forgiveness options available.  With that being said, debt settlement could be an effective alternative.  You will either work directly with the lender or a debt settlement company to help reduce your payments or the principal balance.  The process is long and complicated so most find that the best route is to work with a company.  If you do go this route, keep these caveats in mind.

  • You will most likely get a tax bill
  • Collection agencies will be contacting you during the settlement process.  

Research forgiveness programs

The federal loan program offers a number of forgiveness programs.  This means you don’t have to pay your loans back after a certain amount of time, as long as you meet certain requirements.  Not all loans are eligible, and it typically takes years before you qualify for one.  Furthermore, these programs are offered to those working in nonprofit settings or in some other area that has a focus on improving the greater good.

Here are some of the available programs:

  • Teacher Loan Forgiveness:  This program is open to people that took out a loan after October 1998. In order to be eligible, you need to be working as a full-time elementary or secondary school teacher for at least five consecutive years. In addition, the school must qualify for Title I funding, be for low-income students, and also be listed in the Annual rectory of Designated Low-Income Schools for Teacher Cancellation Benefits. With this program, up to $17,500 of your loans can be forgiven.
  • Teacher Loan Cancellation: If you took out a Perkins loan, up to 100% of your loan balance can be cancelled out.  This means you don’t have to pay back your loan.  In order to be eligible, you need to be a special education teacher, teach in a low income school or teach a subject that is lacking in teachers. In addition, you have to be a full time teacher for an entire school ear.  During your first and second years of teaching, you are eligible to have up to 15% of your loan cancelled.  During years three and four, up to 20% can be cancelled.  Year five, you can cancel up to 30%.
  • Public Service Loan Forgiveness:. If you work at a public service job (such as those within non profit or with a government organization), after 10 years and 120 on-time payments, the remaining balance on your loans can be forgiven. Your loans need to be on a qualified repayment plan, this includes a standard repayment plan as well as income-driven plans.

Generate side income

Loan forgiveness programs are great, but only for those that are working within public service positions. Not to mention they require years to kick in.  If you are not within that group and your job does not pay you much, it is a good idea to get a side job.  This can be anything from dog walking to becoming an uber driver.  The best set up would be to pay your bills and add to your savings from your main job and whatever you make from your side job can go straight to your student loan debt.  

Final Thoughts

Most people today are graduating college with some sort of student loan debt.  Coming up with the money to make payments can prove difficult for many.  Chances are you are not working a high paying job right after graduating.  With that being said, there are options available to help offset the cost. The above tips will help you plan ahead for the costs as well as help reduce your student loan payments once they come through. 

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