Paying Your Way Out of Student Loan Hell

Last Updated May 28, 2010 10:12 AM EDT

I recently got a cry for help from Amanda, a 25-year-old living in Indiana. She wrote to me, frustrated by the fact that she's been unable to make a dent in her student loan debt. It's roughly $20,000, split between two private loans, each carrying interest rates of more than 10 percent. She's been paying the minimum each month of about $300 for the past four years, but she feels she's on a treadmill to nowhere. "The [debt] hasn't gone down a bit, probably only $1,000 on each loan," she writes. "I am a pretty frugal person and to make no progress is really killing me. Do you have any advice?"

I sure do. I also tapped some other loan experts for more insight. We all agree that the bottom line for anyone who is trying to eliminate private student loan debt - as fast as possible - is to make larger monthly payments towards the principal. Period. You can't just pay the minimum if you want to break free from the debt any time soon.

There aren't a lot of good alternatives. Private loans are exceptionally difficult to refinance these days. And while you can try to transfer the debt to a personal loan with a lower interest rate (which will lower your monthly minimums), you'll need exceptional credit to do so, says Mark Kantrowitz, student loan expert and publisher of FinAid.org - and at a young age, you may not have the credit history to qualify for a private loan.

There's another problem with refinancing: Even if you do qualify, the new loan could actually be a disincentive to get out of debt as soon as possible. "The harm is that [with a lower monthly minimum] people usually don't pay it off quickly that way; it becomes a rationalization to not pay it off," says Zac Bissonnette, the author of the upcoming book Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents.
Again, the hard and fast truth is - pay off the debt as much as you can, as fast you can. But I know: Easier said than done. So here are six strategies to help you along the way.

1. The Key Word is 'Principal'
When you want to pay more money each month towards your debt, make sure you clarify to your lender that you want the extra money to go towards the loan's principal. "Otherwise, [the bank] will hold it as a payment on reserve for future payment," which will include interest, says Kevin Walker, CEO of SimpleTuition.com. This is something borrowers don't always realize, he says. In fact, it happened to me once when putting an extra payment towards my mortgage. Because I didn't specify I wanted to lower my principal, more than half of the extra payment went toward next month's interest.

2. Lower Your Term
Maybe you can't get a lower interest rate on the loan, but see if the bank will reduce the term or repayment period. The upside is that you'll get out of debt faster. The tricky part: You'll need to come up with more money each month. But lowering your loan's term may be the exact kick in the pants you need to commit to paying down the debt more aggressively.

3. Use Your Windfalls
Financial windfalls - birthday money, tax refunds, holiday cash gifts, or a surprise bonus or raise - should all be used wisely. I recommend putting at least 50 percent of any and all windfall money toward your debt. (And remember - put it toward the principal.) In 2007 I used part of my book advance to completely pay off my graduate student loan from Columbia. The feeling was quite victorious and that night, I slept a little better.

4. Deduct It
Take advantage of the student loan interest deduction, advises Kantrowitz. You can deduct up to $2,500 in student loan interest from your taxable income, which may save you some money come tax season - which, of course, you can then use to pay down your debt.

5. Boost Income
Getting a raise may not be in your cards this year, given the unemployment picture. So do it yourself. Boost your income by freelancing. What can you do for 10 hours a week during nights and weekend that will provide an extra revenue stream? Earning even an extra $50 a week and putting that toward your loan's principal can take years off your life-in-debt.

6. Narrow Your Wants
I saved the most obvious for last. To shore up more cash each month, spend less on your wants - things like dining out, vacations, shopping sprees, etc.

Think of it this way: If getting a part-time job didn't work out, you can make saving a part-time job. Track your spending for 7 days, and identify the expenses that you could easily do without or substitute with a more affordable alternative. Then aim to reduce your "want" spending by 20 percent that month.

And to give your savings an extra boost, check out SmartyPig.com, which at last check was offering a competitive 2.15 percent savings rate on account balances under $50,000. The site encourages savers to identify savings goals and allows them to invite friends and family to directly deposit cash in your account to support your goals. Hmm. Perhaps a strategic alternative to getting gifts this holiday season?

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    Farnoosh Torabi is a personal finance journalist and commentator. She is the author of the new book Psych Yourself Rich, Get the Mindset and Discipline You Need to Build Your Financial Life. Follow her at www.farnoosh.tv and on Twitter at @farnoosh.

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