The Ultimate Guide to Paying Off Big Grad School Loans

Posted June 4, 2018 5:19 a.m. EDT

A graduate degree can open up new doors and may lead to higher annual earnings. But earning a degree generally isn’t cheap.

According to the College Board, as of the 2016-2017 academic year, the average graduate student borrowed $42,710 in federal student loan to pay for that year’s schooling — more than six times the $6,590 that the average undergrad borrowed. (Although, on average, parents also borrowed $15,880 to help pay for a child’s undergraduate education.)

And that’s not including any private loans students may have obtained along the way. By the time graduate students finish their degree, they may have a combination of undergraduate and graduate student loans to repay.

Tackling these student loans can be a daunting task, but having a plan could help diminish some of the fear or anxiety that may arise. Here’s a guide to help you navigate the process. You may even learn a few tips or strategies that could save you money or make your monthly payments more affordable.

Understand your loansLoan forgiveness and repaymentDesign your repayment road mapGetting ahead of graduate student debt

Get organized and understand your grad school loans

Getting a clear understanding of all your student loans can be an important first step. You may want to start listing your student loans alongside important information for each loan.

Write down the name of the loan servicer, the loan type, the loan amount, remaining amount due, your monthly payment, the loan’s interest rate and whether the loan has a fixed or variable interest rate. Using a spreadsheet could be helpful, as you can then quickly arrange the loans by different criteria, such as the remaining amount due or interest rate.

You may then want to separate your loans into two groups — federal and private student loans — and further separate your federal loans by the federal loan type. These can be important distinctions and you may want to take different approaches to different types of loans.

The different types of student loans

You may have one or more of the following types of student loans:

Private student loans. A variety of institutions offer private student loans, including banks, credit unions, schools, states and online lenders. If you applied for a student loan without first filling out the Free Application for Federal Student Aid (FAFSA), then you took out a private student loan.

Some private student lenders outsource their loan servicing to a third party and the company you make your monthly payments to may not be the same company that lent you the money. You may need to contact that loan servicer, review a recent statement or check your account online to get information on your private student loans.

Federal student loans. The Department of Education offers federal student loans to undergraduate and graduates students, as well as parents of students. The federal government funds the loans, and there have been several different federal student loan programs over the years.

You may have different types of federal loans, including ones from your undergraduate degree. Some of the federal student loans also go by several names. Your loans could include:

  • Direct loans, which may be direct subsidized loans, direct unsubsidized loans, direct consolidation loans, and direct PLUS Loans (also known as grad PLUS loans when offered to a graduate or professional student).
  • Perkins loans
  • Federal Family Education Loan (FFEL), which may include subsidized and unsubsidized Stafford loans, FFEL PLUS loans, and FFEL consolidation loans.

Your federal student loans may be serviced by one or more of the 10 loan servicers that the education department contracts to collect payments. However, you can log into the National Student Loan Data System (NSLDS) to get an overview of all your federal student loans.

Know your options

Once you’ve got your loan information organized, learn about your options for loan forgiveness and repayment. You may be able to use one or more of the programs below to help manage your payments and ultimately get rid of your graduate school debt.

Federal student loan forgiveness programs

Several loan forgiveness programs are exclusively for federal student loans. However, your eligibility may depend on the type of federal loan you have, and you may need to meet other requirements to qualify.

For example, the federal Public Service Loan Forgiveness (PSLF) is only available for direct loans. With PSLF, you’ll have to make 120 qualifying monthly payments while working full time at a qualifying employer to get the remainder of your direct loan forgiven. Our guide to applying for PSLF has more details on determining if your loans qualify and how to get started.

Consolidate your federal loans

You may be able to consolidate your federal student loans into a direct consolidation loan. Consolidation lets you combine multiple loans into a new loan that’s part of the direct loan program.

Consolidating your loans may not save you money because the new loan has the weighted average interest rate of your existing loans. In some cases, since your loan term could be extended, it may even result in you paying more in interest over the lifetime of the loan.

However, consolidation could make managing your loans easier since you’ll have fewer monthly payments to manage, and it could give you access to repayment plans and forgiveness or cancellation programs that are only available to direct loans.

Federal repayment plans

Although you may wind up paying more in interest in the long run, switching repayment plans could lower your monthly payments and make managing your finances a little easier.

Student loans start with a 10-year standard repayment plan. You could change to a graduated repayment plan, which also has a 10-year term but the payments start low and gradually increase. The extended repayment plan, which has a 25-year term, is another option.

There are also income-driven repayment plans that base your monthly payment amount on how much money you earn. An income-driven plan could greatly decrease your monthly payments if you’re not making a lot of money. Plus with four of the plans, the education department will forgive your remaining balance after you make payments for 20 or 25 years on an income-driven plan.

Career-based forgiveness programs

You may be eligible for a variety of loan forgiveness or repayment programs from government or private organizations. Unlike the federal forgiveness programs, your private student loans may also be eligible for some of the programs.

The career-based programs can help you repay undergraduate and graduate degree loans, but they are generally limited to a few qualifying professions, some of which require an advanced degree. These are often service-oriented jobs, such as teachers, attorneys, military members and healthcare professionals.

You may also need to work in a high-need area, such as a federally designated health professional shortage area, for at least a year to qualify for loan repayment assistance.

Employer-based repayment programs

Some employers offer student loan repayment assistance programs (LRAPs) as an employee benefit. The specifics of the programs and the amounts vary, but some employers offer monthly payment toward your private or federal student loans.

Design your repayment road map

Once you know your options, you can start designing your plan for repaying grad school loans and any remaining undergrad debt. Here are a few of the questions you may want to ask yourself:

Which loans should you try to pay off first?

If you’re focused on paying off your graduate student loan debt ahead of schedule, you may want to organize your loans based on which one you want to pay off first.

For example, you could try to pay off the higher rate loans first, which could save you money on interest in the long run. Or, you may want to focus on your private student loans first, since those generally offer fewer options to borrowers who are having trouble making payments.

Should you consolidate your federal student loans?

Consolidating your federal student loans could be a good first step, but there are several pros and cons to consider.

Pros to consolidating your federal loans

  • It may be easier to manage your monthly loan payments if you only have one loan.
  • You can choose your new loan servicer.
  • Non-direct loans, such as FFEL loans, could be eligible for PSLF after consolidation.
  • The consolidated loan may be eligible for more income-driven repayment plans than your previous loans.
  • You may be able to take a loan out of default by consolidating it.
  • The consolidated loan will have a fixed interest rate (some previously issued federal student loans had variable rates).

Cons to consolidating your federal loans

  • If you consolidate all your federal loans, you won’t be able to make extra payments on the loan that has the highest interest rate.
  • You may lose progress you’ve made toward a federal loan forgiveness program.
  • If you consolidate all your loans, and then default on your loans, you won’t be able to consolidate again to take them out of default.
  • Consolidating could increase your loan term, and may lead to paying more interest over time, unless you make more than the required monthly payments.
  • You may lose interest rate discounts or rebates that you had on your loans.

Consider the pros and cons, as well as your circumstances, before rushing to consolidate your federal student loans. You can also pick and choose which loans you want to consolidate. For example, you could only consolidate your relatively low-interest-rate loans. Then, you can still make extra payments on your higher-interest loans.

Does it make sense to refinance any loans?

Private lenders offer student loan refinancing, which involves taking out a new loan to pay off one or more of your existing student loans. Depending on the lender and your creditworthiness, you may be able to qualify for a lower interest rate, which could save you money.

Even if you considered refinancing in the past, and weren’t able to get a good rate, you may want to revisit the option. Your credit score may have risen if you’ve been making your credit card and loan payments on time, and your debt-to-income ratio may be lower if your graduate degree helped you secure a higher paying job. Both of these factors can help you qualify for a better rate.

When you refinance, you can often choose your new loan’s term. A longer term can lead to lower monthly payments, but also paying more in interest over the lifetime of the loan. A shorter term could help you get a lower interest rate, but your required monthly payments could increase.

Keep in mind, there’s no prepayment fee for student loans. So, even if you refinance with a longer term and have a lower required monthly payment, you could pay extra and repay your loans early.

Your new loan may maintain its status as an educational loan, which means you may still be eligible for a tax deduction. However, once you refinance a student loan, it will be a private student loan. As a result, the loan won’t be eligible for any of the federal loan forgiveness, cancellation, discharge or repayment programs.

One option could be to only refinance your private student loans. Or, you may find it makes sense to refinance a few federal loans that have a higher interest rate, such as your grad school loans, while leaving other federal loans untouched.

If you do decide to refinance your student loans, comparing lenders can be a good idea since different lenders may offer you different interest rates, loan terms and benefits.

Strategies for getting ahead of graduate student debt

Being proactive and following through on your road map could help you repay your loans early. Here are a few strategies and tips that could help:

Create a budget and look for ways to save

A budget is a tally of your income and expenses broken down by category, and many free and inexpensive apps can help you with the tracking and organization. Knowing where your money comes from and goes to each month can be an important step in getting your finances in order, and may provide insights into savings opportunities.

For instance, you may find that you’re spending a lot of money eating out each month or paying for subscription services you rarely use. Cutting back on these expenses could help you free up money that you can then put toward your student loans.

Increase your income: negotiate a raise, change jobs or find a side gig

While saving money can help you pay down loans, there’s usually a limit to how much you can cut back. On the other hand, you may be able to greatly increase your income, maintain your standard of living and make big strides in paying down your debt.

While it’s not necessarily a quick or simple process, negotiating a raise is one way to increase your income. Alternatively, you may be able to get a higher pay increase if you’re open to changing companies or finding a new job in your field.

In the meantime (or in addition) you could get a side gig to earn extra money. There are a number of opportunities, ranging from turning a hobby into a source of income, to using one of the many “sharing economy” apps. You also may be able to leverage the specialized knowledge you obtained while earning your graduate degree, and use the side gig experience to build your resume or help make your case for why you deserve a raise.

Make (targeted) extra payments

Research how your student loan servicer will apply additional payments to your loans before you send a payment. Some servicers may split the payment amount between all your loans or use the money to prepay next month’s bill unless you specify how you want them to apply the payment. And, even if you don’t owe anything next month, they may still withdraw money from your account if you signed up for autodebit.

Whether you’re paying extra each month, or get a large gift, bonus or tax refund that you want to use to repay student loans, you want to make sure the payment aligns with your strategy. Ask your loan servicer how you can ensure this happens, and check your loan balances after you send in payments to make sure they were applied correctly.

Ask for help if you are struggling

While your aim may be to quickly pay down your grad school loans, you could find yourself falling behind on payments or struggling to meet all your financial obligations. If this happens, reach out to your student loan servicer and ask about your options.

You may be able to switch repayment plans, or the servicer may allow you to temporarily stop making payments while you get your finances in order. However, if you miss a payment, you may wind up having to pay late fees and hurting your credit.

Keep your entire financial situation in mind

You might be focused on paying off your grad school debt as quickly as possible, and that’s a commendable undertaking. However, consider your grad school loans within the context of your entire financial situation.

In some cases, you may want to start by paying down other, higher interest debt before your student loans. Doing so could free up the money you’d been spending on interest payments, which you can then use to pay off your student loans.

Building an emergency fund could also be a priority, as it can help you weather a financial setback without having to take on additional high-interest debt.

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