What's the Best Way to Pay Off Student Loans?

There's no one-size-fits-all solution when it comes to paying off your student loan debt. The best way to pay off student loans depends on factors like how much you owe, your income, your interest rate, your budget and your profession.

Whether you're moving back in with your parents to save money or have accepted a high-paying job right out of college, here's what you need to know about the various ways to manage and pay off student loans.

Average student loan debt

The average student loan debt is currently $39,351 per borrower, and the average borrower has a monthly payment of $393. Because these amounts are averages across all student loans, many borrowers often have higher balances and monthly payments than this amount—especially if they took on loans for advanced degrees.

The average student loan debt for graduate school ranges from $58,300 for a master's degree from a public institution to $160,000 for a law school degree and $241,600 for a medical school degree.

Types of student loans

Your student loans may be federal, private or a combination of the two. Different loan types may have features—and some potential benefits—that can impact whether you'll benefit from refinancing. You can find your federal student loans on the US Department of Education's website, and both federal and private student loans will appear on your credit report.

Federal student loans are made by the government and have terms set by law. They typically offer benefits like fixed interest rates and income-based repayment options, which can adjust or suspend payments based on your income and employment status.

Student loan payoff challenges

The best way to pay off student loans depends on the specific loan payoff challenges you face. These potential challenges are covered in more detail below.

Your balance

Generally, you can expect a higher balance to translate to a higher monthly payment. But if you have certain federal student loans, you may qualify for an income-based repayment plan or a pay-as-you-earn plan. These plans limit your payment to a fraction of your income, keeping your payments relatively low.

These alternative payment methods increase your repayment term from 10 years up to 20 or 25 years. However, you can switch to a higher monthly payment later if your financial circumstances change.

Your interest rate

As of April 2022, the average interest rate for all student loans was 5.8%. Assuming a 10-year repayment plan, this interest rate would mean that a borrower with a $10,000 loan would pay just over $3,200 in interest during the life of the loan, making the total cost of their student loan $13,200.

While federal student loan interest rates are fixed, private student loans may offer variable rates. Depending on your lender, a variable interest rate could change monthly, quarterly or annually. Although variable rates may seem lower at first glance, fixed rates are generally the safer bet. This is because your interest rate impacts your monthly repayment amount. A variable interest rate can unexpectedly change your required payment amount. Also, your interest rate determines how much the debt will ultimately cost you. With a variable rate, you can't accurately predict the total cost of your loan.

Your income

Ideally, your monthly income leaves more than enough room for your minimum monthly student loan payment. But if your income barely allows you to make the minimum payment, it'll be challenging to pay off your loan in a timely manner.

If you face a period of unemployment or other economic hardship, it can be difficult to make payments at all. Missing payments or going into default can have serious consequences for your repayment plan, credit and finances as a whole. Fortunately, federal student loans have a few options available if your income takes a major hit.

Buying time: Forbearance vs deferment

Federal student loan borrowers have access to two methods of pausing monthly payments in the event of economic hardship: forbearance and deferment.

With forbearance, you can apply for a pause of up to 12 months at a time, and there's no requirement for a qualifying special event to be eligible. However, under ordinary circumstances interest will continue to accrue while your loan is in forbearance—meaning your balance will increase while your payments are paused.

Deferment, on the other hand, pauses payments for varying lengths depending on the type of deferment you apply for. In some cases, there's a 3-year limit to your payment pause via deferment. In others, you can take the deferment for as long as you need it. There must be a triggering event—like unemployment, military deployment or at least half-time enrollment in school—for you to be eligible for a deferment. If you have a subsidized federal student loan or Perkins loan, it will not accrue interest during deferment. Keep in mind, though, that other types of federal student loans accrue interest.

Ways to pay off student loans

The best way to pay off student loans starts with an understanding of your monthly income and expenses. With this in mind, you can start the process and figure out how to tackle your loan. Here's how.

Make a budget

First, set up a budget to see how much money you can afford to dedicate to loan repayment each month. This is an effective strategy to pay off student loans quickly. Tally up your living expenses, including:

• Rent
• Utilities
• Car payments or transportation
• Food
• Healthcare
• Necessary clothing
• Any debt payments you're already making, including the current payment toward your student loans

Next, compare the total with your monthly take-home pay. The portion of your income that's left over after you've covered expenses is your discretionary income—what you'd otherwise use as spending money. Instead of spending it all or putting it into savings, you can take some of it and put it toward your loans.

It's also generally a good idea to sign up for automatic payments of your student loans. Federal student loan borrowers get a 0.25% interest rate reduction if they enroll in automatic payments, and many private lenders offer similar incentives for automatic payment enrollment.

Pay off your loans faster

Ideally, your budget leaves more than enough room for your minimum monthly student loan payment. In this case, the best way to pay off student loans is to pay off more than you need to each month. You can do this by making extra payments or making a larger payment than you owe. Just check with the lender to confirm that the additional money you pay is going toward reducing your balance, not toward next month's payment.

Paying off your loan faster reduces the amount you spend on interest over the course of the loan. To save as much as possible, you may want to prioritize paying off higher-interest loans first and make only the minimum payments on your lower-interest loans.

Choose the right repayment plan

Federal student loans offer various repayment plans that can work with many career paths, income situations and long-term financial goals.

Standard repayment

Standard repayment plans offer fixed payments over a fixed term. Although the payments under this plan might be higher than other plans, you'll save more in interest because of the shorter repayment term. Your payments will depend on the amount you borrowed and the term is fixed at 10 years, except for specific types of federal consolidation loans.

Graduated repayment

Your payments will start off lower and increase every 2 years. The payment amount will always equal at least the amount of interest accrued since your last payment. Graduated repayment plans are usually for 10 years unless you have a federal consolidation loan.

Extended repayment

If you have a student loan balance of more than $30,000 and need lower payments over a longer term than the standard repayment plan, an extended repayment offers you a fixed term of 25 years and lets you determine whether your payments are fixed or graduated.

Income-based repayment

With each of these repayment plans, borrowers are required to make payments for a maximum of 20 to 25 years, depending on the program. After this time, any outstanding balance is forgiven, but borrowers will have to pay income tax on the forgiven loan amount. There are four types of income-based repayment plans:

• Pay as you earn
• Revised pay as you earn
• Income-based
• Income-contingent

Ask about employer matching

Some employers will match your student loan payments up to a certain amount. Others offer a monthly payment or will reimburse you for part of your payments. This job perk can help you afford your monthly loan payment while also speeding up your repayment timeline.

With the additional funds your employer provides, you can pay down your loan principal, shaving time off your repayment term and thereby lowering the overall amount you'll pay for your loan.

Refinance or consolidate

Refinancing your student loan involves taking out a new loan with a new lender. You'd use the new loan to pay off your student loans and make payments to the new lender. Your new loan may give you a lower interest rate, lower monthly payment or more time to pay off your loan. However, you may need a good credit score to qualify for a favorable refinancing offer. Also keep in mind that if you refinance federal student loans, income-based repayment options are no longer available.

You may also be able to consolidate the outstanding balance from multiple student loans into a single one, which could give you peace of mind that you have just one loan with a single interest rate and monthly payment.

It's also important to note that federal student loan consolidation doesn't necessarily lower your interest rate, but it can switch you from a variable to a fixed interest rate and potentially reduce your monthly payment by extending your repayment term.

Consider federal loan forgiveness

You may be able to get part of your student loans forgiven through the Public Service Loan Forgiveness program if you're working for a government agency or an eligible nonprofit organization—or you may have it forgiven entirely after a period of time if you start a career in public service. You may also qualify for partial loan forgiveness if you're volunteering through the Peace Corps or AmeriCorps government programs. There are loan forgiveness and loan cancellation programs for teachers at the federal level and in certain states as well.

President Biden also recently announced up to $10,000 in federal student loan relief for single borrowers who earn less than $125,000 annually and joint filers who earn less than $250,000 annually. This relief jumps to $20,000 for borrowers who also had Pell grants. The presidential order also extended a moratorium on payments, interest and collections on defaulted loans through December 31, 2022. After this time, borrowers may be required to make payments again.

The bottom line

There are many paths you can take to reach debt payoff. The best way to pay off student loans will be the one that reduces your monthly costs, overall expenses and financial worries while increasing your options for financial planning and wealth building.

Ultimately, finding the right path for you means knowing your options and making savvy choices.