For Americans, the average education level is on the rise. According to the United States Census Bureau, the number of people aged 25 and over with master’s degrees has doubled since 2000, amounting to 21 million. The number of doctoral degree holders has more than doubled to 4.5 million in the same time frame.
While a more educated population is a good thing, there is also rising student debt to consider. 60% of master’s students and 75% of professional doctorates had student loans. Average grad school loan balances rose from $124,700 in 2000 to $246,000 in 2016.
Furthermore, many grad school students start their programs with undergrad debt. Undergrad borrowers in 2017 owed nearly $28,000 on average according to Lendedu.
Since many will continue to rely on student loans, it may make good financial sense to rein in this debt before beginning a new program. The following are some methods to help manage student debt, whether it’s speeding up repayment or lowering monthly payments.
Federal Loan Consolidation
Through the federal direct consolidation loan program, you can combine federal student loans into one consolidated loan with a new weighted average interest rate and repayment term. Applicants have the option to select repayment terms up to 30 years.
When consolidating federal student loans, you can lower your monthly payments by extending the repayment term. When breaking out repayment over a longer period of time, monthly payments are reduced as a result. Furthermore, one monthly payment on a consolidated loan is simpler to manage moving forward in grad school.
Lower monthly payments sound great, but there are important caveats. First, the interest rate on federal consolidation loans is a weighted average of the previous loans. This doesn’t amount to a rate reduction, so it will not save money with reduced interest costs.
Furthermore, while lower monthly payments are easier to repay, extending the repayment term will increase the overall cost of the loan because more interest will accrue over time. Finally, only federal student loans are eligible; private student loans cannot be consolidated with the federal government.
Debt Avalanche Method
The debt avalanche method is a commonly used strategy for paying off multiple debt accounts. The method prioritizes loans with the highest interest rates. The general goal of the debt avalanche method is to get out of the most expensive, damaging debt first.
With the debt avalanche strategy, you start by making minimum payments on all student loans. Devote all extra cash to making larger payments on the loan with the highest interest rate. Repeat this procedure each month until the high-rate loan is paid off. Repeat the procedure with the next highest-rate loan, until all loans are paid off.
The debt avalanche method is one of the fastest ways to pay off debt out of pocket. You can rely purely on budgeting and planning to make it happen. Although it’s effective, it comes with challenges. It can be difficult managing multiple loan accounts simultaneously, and this method requires a higher income relative to student debt balance in order to make larger payments.
Debt Snowball Method
The debt snowball method is similar to the debt avalanche method, but instead of high-interest debt, it prioritizes low-balance debt. In short, it sticks to a similar procedure as debt avalanche, but it calls for making larger payments on the student loan account with the lowest balance. Once that balance is paid off, repeat the procedure with the next lowest balance.
This method can keep borrowers motivated during repayment. Being able to cross a loan off the list early on during repayment can be seen as both a financial and moral victory. It will leave you with fewer loans to deal with which simplifies repayment moving forward.
Keep in mind that you must budget carefully and manage multiple loan payments proactively. Furthermore, the snowball method requires high income relative to the student debt balance just like the debt avalanche method.
Student Loan Refinancing
Student loan refinancing is similar to federal consolidation, but it offers more benefits to graduates trying to manage their debt. When you refinance student loans, you apply for a loan from a private bank or lender instead of the government. This private loan is used to pay off any previous private and/or federal student loans, and you must pay off this new loan under a new interest rate and repayment term.
There are several benefits to consider. Student loan refinancing offers qualified student borrowers a chance to get a lower interest rate on student debt. With a lower rate, monthly payments may be reduced, and borrowers should be able to save money over the repayment period. Furthermore, graduates can move forward dealing with just one simpler monthly payment through school.
Income-Driven Repayment Plans
The Income-Driven Repayment (IDR) program is available to graduates who are paying back federal student loans. It is not offered for private student loans.
An IDR plan caps monthly payments as a percentage of a borrower’s income. For example, you could pay only 10% of your income each month under the Income-Based Repayment (IBR) plan. Payments are made for 20 to 25 years; afterwards, the remaining balance is forgiven. To someone attending grad school, this could be a great way to keep payments low.
However, there is a major drawback to consider: the cost of repayment. If income is too low, capped payments may not be large enough to pay down a significant part of the principal balance. When payments are too low, the debt balance may actually grow as interest capitalizes on the relatively untouched principal. If this is the case, you may end up paying much more than the original loan amount after 20 years on an IDR plan.
Making bi-weekly payments is a simple way to pay off debt more quickly. Typically, student loan payments are made monthly, meaning 12 full payments annually. If you make bi-weekly payments, you must make a half-payment every two weeks throughout the year.
After 52 weeks on the bi-weekly payment schedule, you will have made 26 half-payments, or 13 full payments. This is a great way to modestly expedite repayment. It does not require as much money as the debt avalanche or snowball method, and you can make an extra payment on the year.
Regardless of the strategy you choose, it’s important to think ahead if you’re going to attend grad school. There are plenty of ways to manage your student debt, but each method comes with its own benefits and drawbacks. Carefully weighing the pros and cons of each strategy is paramount to getting your debt in order before making the leap to grad school – and more student debt.
Andrew Rombach is a Content Associate for Lendedu – a website that helps consumers and college graduates with their finances. As a recent college graduate with student debt, Andrew is a proponent of a joint repayment approach using both the debt snowball and avalanche methods.