How to Manage Student Loan Debt

August 23, 2012

If you’re like two out of three college graduates over the last five years, your education was financed at least partially by student loans. As tuition costs have soared and middle-class incomes have stagnated, borrowing has become the means to an end for most individuals pursuing a higher education. And for many of those graduates, the lingering impacts of the 2008 recession have made one thing clear -- borrowing the money for your education was much easier than paying it back.

Know what kind of loans you have. There are two types of student loans - government and private, sometimes referred to as “subsidized” and “unsubsidized” loans. Before you can start the process of figuring out repayment options, you need to determine what kinds of student loans you have. Check the paperwork. If there’s a reference to the Federal Direct Loan Program, Federal Family Education Loan Program, Stafford Loan, or Perkins Loan you have a government loan, which provides more flexibility in repayment. Private loans, on the other hand, are usually restricted to the repayment terms you agreed to when you borrowed the money.

Understand your repayment options on government loans. The standard repayment plan on most government student loans allows 10 years for repayment, but there are extended repayment plans which may go up to 25 years. Consolidating a number of loans (see #3 below) will sometimes result in even longer periods available for repayment. Keep in mind that the 10-year plan will have higher payments, but you’ll pay less interest overall. Longer repayment periods will decrease your monthly payments, but you’ll pay significantly more in interest over the longer period.

Opting for the 10-year plan makes more financial sense over the long-term, provided you can afford the payments. Paying off your student loans in a shorter period also means that you can redirect those funds to other financial goals such as saving for your children’s college educations, buying a home, and your retirement.

Consider consolidating your government loans. Most borrowers have multiple loans from multiple sources, and conventional wisdom suggests that consolidating your loans is the right thing to do. After all, having all those smaller payments due to a variety of sources makes it much more likely that you’ll overlook a payment at some point.

But the Federal Department of Education’s web site cautions that borrowers should “carefully consider whether loan consolidation is the best option” for their situation. Consolidating could result in the loss of certain benefits tied to specific individual loans. Their site includes a Consolidation Checklist you should complete before making this decision.

Be aware of special loan forgiveness and cancellation programs available to public employees. The majority of the provisions to forgive or cancel government student loans are designed for employees in public sector jobs. Here’s a short list of the types of employment that can eliminate some of your student loan debt:

  •  Teachers in low-income elementary or secondary schools or at an eligible education service agency
  • Highly qualified math, science, or special education teachers
  • Employees with 10 years of employment at certain public service employers after 2007
  • Certain employees in public health/nursing
  • You can review detailed information and qualifications for loan forgiveness on the U.S. Department of Education’s Web site, Student Aid on the Web. Be aware of your options on government loans if you run into financial trouble.

Become familiar with the circumstances which may qualify you for a deferment of payments or forbearance. Essentially, both of these result in a temporary postponement of payments due to financial hardship, poor health, or similar issues. Deferments are also granted for re-enrollment in school. Deferments are of more benefit to you because interest stops accruing on the loan during the deferment period. Interest accrues during a period of forbearance. For more detailed information check out the official government website, Student Aid on the Web.

Don’t forget to deduct student loan interest at tax time. Unlike mortgage interest, if you meet the IRS qualifications, you don’t need to itemize deductions to claim student loan interest. It’s actually an adjustment to your income. See IRS Publication 970 for the details, and consult a tax professional for advice.

In the end, it’s your responsibility to educate yourself about the ins and outs of student loan repayments. By utilizing all the available resources and doing your homework, you can ensure that your student loan repayment plan gets an A!

The Department of Education has a comprehensive website on federal student loans. Here you’ll find a wealth of information and helpful links to other student loan sites. Information is also available at

If you’ve wondered how far the government will go to collect student loan debt, Smart Money’s website recently featured an item on the increasing number of Social Security checks that are being reduced to pay for defaulted student loans. Click here to read more.