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7-step strategy for paying off student debt

Having trouble paying your student loans? You're not alone. Even as consumers have managed to beat back delinquency rates on other types of debt, the rapid rise in student loans is fueling a debt crisis among graduates, with nearly one-third of student borrowers in delinquency or default.

Some 43 million student borrowers now owe $1.3 trillion, and 13.3 million of them are delinquent or in default on their loans. Millions more borrowers are likely to be in deferment or forbearance periods in which they're allowed to forestall repayment or are enrolled in flexible repayment options that could cause their loan balances to grow, according to the National Foundation for Credit Counseling.

The high delinquency and default rates are a particular travesty because the government has taken numerous steps in recent years to offer consumer-friendly repayment plans.

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"Part of the challenge for borrowers is that every situation is so unique," said Matthew Ribe, director of legislative affairs at the National Foundation for Credit Counseling. "One of our counselors ran all the possible repayment options and found there were 18,000 possible permutations, given the different types of loans, interest rates, changes based on graduation dates and so on."

Indeed, student loan repayment rules can be dizzyingly complex. The Department of Education lists five different repayment options on its website: standard, extended, graduated, income-sensitive and income-based. However, dive in more deeply and you'll find that the only repayment plan that's simple is the "standard" plan, which involves repaying loans in equal installments over a 10-year period. However, it's also likely to be the least affordable plan for new graduates who are deeply in debt.

"Extended" repayment, which can spread payments out over periods as long as 25 years, is open only to those with more than $30,000 in debt, and certain types of student loans don't count in the total. Graduated and income-sensitive repayment plans are all based on the borrower's income, but they use different formulas to determine your payments. And income-based repayment -- the best option for many heavily indebted borrowers -- has four different plans, all calculated with different formulas and all governed by slightly different rules.

What's the best way to manage this morass? Given the complexities, let's break down the process into seven simpler steps:

Determine how much you owe

Step 1 is to figure out just how much you owe and to whom. The good news is that this step is easy because the Department of Education operates the National Student Loan Data System, which tracks all federally guaranteed student debt. Sign in to get a full listing of loan details -- amounts, interest rates and the type of debt, i.e. Perkins loans, subsidized or unsubsidized Stafford loans, PLUS loans and so on.

If you took out loans that aren't federally guaranteed -- a.k.a. "private loans" -- they won't be listed in this database. To get information about them, order a free copy of your credit report at, which will pick up these other debts, suggested Ribe, whose group just launched a student loan counseling program.

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Rank loans by rate and type

Student loans are not created equally. Some, such as Perkins loans and subsidized Stafford loans, are decidedly better than others. Why? If you go back to school or lose your job, you can put these loans on hold, deferring repayment until you regain employment, and the government will pay the interest while you wait. The loan balance will not rise. You can defer most other student loans, too. But if you do, interest will accrue and boost your outstanding balance.

Moreover, Perkins loans qualify for a wide array of borrower forgiveness programs. If you join the military or Peace Corps, become a firefighter, law enforcement officer, nurse or work with special education kids or the disabled, you may be able to have a portion of your Perkins loan balance wiped away for each year you work in a qualifying profession.

Direct loans also can be forgiven if you work in eligible professions.

Unsubsidized loans and so-called PLUS loans have many of the same characteristics: They're flexible debts with a myriad of borrower protections, so they would vary mainly by interest rate.

Private loans, on the other hand, guarantee few consumer protections. And many charge high and sometimes variable rates of interest.


All things being equal, you would want to first pay off your highest-cost debts and those with the least flexible terms. That would mean private loans and PLUS loans, which are often issued at rates as high as 8.5 percent, would have first priority.

But, you say, you need to pay on all your loans. True. However, if you plan your repayments wisely, you can stretch out repayment of the lower-cost and more flexible loans, while accelerating payment of the high-cost debts.


If you have Perkins loans or subsidized Stafford loans, keep those separate. If you consolidate these loans with other, unsubsidized loans, you lose the right to have the government pay interest on them if you had to defer payment for some reason.

Also separate out your private loans and high-rate PLUS loans.

Consider taking the rest of your federal student loans and consolidating them into one debt in the government's Direct Loan program. By consolidating this way, you don't lose the borrower protections, such as the ability to put payments on hold if you go back to school, become ill or lose your job. You also don't lose the benefit of the low rates on many of these government debts.

Direct loan consolidation simply gives you one payment that's based on the weighted average interest rate on all the consolidated loans, rounded up to the nearest one-eighth of 1 percent.

Estimate payments

Now go to the government's repayment estimator tool to figure out your payments on each loan. If paying under the standard formula would leave you with no discretionary cash, stretch out the payment on the consolidated loans either by signing up for the "extended" repayment or the most flexible of the income-based repayment programs -- the Revised Pay As You Earn program (REPAYE). This will reduce the payment on what's likely to be your biggest debt, allowing you to spend more of your income paying down the higher-cost loans.


Next, look at your highest-cost loans and pick the one with the smallest balance. Make a point of using any available discretionary income to pay that loan off completely as quickly as you can. When that loan -- and its payment -- is gone, take the amount you would have paid on that debt and apply it (and any other discretionary cash) to the balance of the second-most-costly loan, until all of your high-rate debts are gone.

When you make these extra payments to reduce the principal balance of these loans, be sure you make that clear to the loan servicer. The Consumer Financial Protection Bureau has found that some servicers hold the additional principal payments aside and act as if they're simply to be used for the next payment.

You want these payments to reduce the principal balance, so use the CFPB's form letter that gives the servicer specific instructions on how the payment is to be applied. Be sure to check that it's been applied correctly. If it hasn't, report the problem to the CFPB.

You can then do the same with your less-costly student debts or simply use more of your discretionary cash to invest in, say, your company's 401(k) plan. Either way, getting rid of your highest-cost debts and those that don't allow for deferment or forbearance should make the rest of your student debts more manageable.

Get help

Finally, if you're befuddled or already in trouble with your student loans, contact the National Foundation for Credit Counseling and sign up for its student loan counseling program. If you have problems with your loan servicer, contact the CFPB, which is scrutinizing the industry's practices and promises to crack down on lenders that misapply payments or make it impossible for graduates to get into budget-friendly repayment plans for which they're qualified.

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