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How to Decrease Student Loan Debt

Secrets to Paying Off Student Loans — and 1 Thing You Should Never Do

$1.28 trillion. That's how much Americans have in student loan debt, which means there's a good chance you owe a piece of that. Most recent grads in the class of 2016 finished school with an average of $37,172 in debt. That's a big hole to dig yourself out of when you're just starting out.

Perhaps that's why the loan delinquency rate is 11 percent in the US. Unlike with other debilitating debts, it's nearly impossible to declare bankruptcy and get away from student loan payments. And lenders can garnish your wages. In recent years, there have even been reports of millennial Americans leaving the country to avoid repayment.

"Unfortunately, there aren't any silver bullets when it comes to repaying student loans," says Andrew Josuweit, CEO of Student Loan Hero, a site that offers tools for people in student loan debt. Josuweit says the fastest way to pay off your student loans is to focus on increasing income, reducing cost of living, and making extra payments. He has done this himself, by renting his place on Airbnb and moving from New York City to Austin, TX, to lower his cost of living by almost 20 percent.

While there is no get-out-of-debt-free card when it comes to your student loans, there are creative ways to reduce your bill. It literally pays to learn about them. Here are six you should know about — and one thing you should avoid at all costs.

Enroll in an income-driven repayment plan.

Your remaining qualifying student loan balance may be forgiven after 20 to 25 years.

Did you know that if you sign up for income-based payments and make those payments in full and on time every month, your remaining qualifying student loan balance may be forgiven after 20 to 25 years? No, this is not too good to be true. It's fact. Income-driven repayment (IDR) plans will lower monthly payments on qualifying federal loans to 10 to 20 percent of your discretionary income until they are forgiven.

"The Government Accountability Office estimates the US is on track to forgive at least $108 billion worth of student debt in the coming years through income-based repayment plans," says Jennifer Barrett, chief education officer at microinvesting site Acorns, which will let you invest your spare change and get on better financial footing. The Department of Education currently offers four income-driven repayment plans. Not all loans qualify. But over the past three years, Barrett says, enrollment has tripled for the REPAYE program specifically, giving many borrowers a chance to make realistic payments based on how much they earn.

Josuweit cautions that anyone considering this path should learn all the details, including the tax implications: "Any amount forgiven under the 20- to 25-year forgiveness clause will be viewed by the IRS as taxable income," he explains. "Many folks will likely get stuck with a hefty tax bill if they choose this path." In other words, if you are forgiven $10,000 in loans, you will have to declare that you made an additional $10,000 that year and pay the appropriate taxes come April 15.

In addition, Josuweit believes that it's better to use income-driven repayment plans as a short-term tool, since you'll end up paying more in interest. "Many people sign up for IDR plans to lower monthly payments and don't realize that their student loan is increasing." (Student Loan Hero has a calculator to help you figure out whether it makes sense for you.) Josuweit says only use an IDR plan if you can't afford your monthly payments and need to avoid late fees, penalties, negative credit score history, or default. If you're in that boat, this is a good option to have.

Check your employee benefits package.

Some major companies — including Fidelity, PwC, Aetna, and Staples — now offer employees help with student loan repayment, according to Barrett. They might also provide tuition reimbursement options that will help you avoid future debt as well. Setting up a meeting with HR, or at least reviewing their materials, could help you reduce your payments. And you might also want to look out for this benefit when looking for a new job.

Consider a career move.

Certain sectors offer repayment aid or forgiveness through the Public Service Loan Forgiveness Program. If you're pursuing a career in education, law, nonprofit, or government sectors, Barrett says you may be eligible. Here are the basics: if you work in a qualifying job and make 10 years of payments on time and in full through a federal income-driven repayment plan, your balance will be forgiven.

Note that nonprofit organizations that are not tax-exempt under Section 501(c)(3) of the Internal Revenue Code likely do not qualify. "You should also make sure that your federal student loan qualifies," Barrett advised, explaining that Perkins are not eligible unless you consolidate them into a Direct Consolidation Loan. There are a lot of details to consider, so before going down this path, be sure to do your research.

Set up automatic payments.

This is an easy one. Not only will this help ensure you don't miss a payment, but Barrett notes it also has other benefits: many lenders offer a small interest-rate deduction (0.25 to 0.5 percent) if you enroll in an automatic billing program.

Go beyond paying the minimum.

"The biggest mistake millennials can make when it comes to student debt is treating it like just another monthly bill," Barrett warns. She explains that if you stick to a basic 20- or 30-year payoff plan, you'll end up paying way more than the amount you borrowed. "There are so many options available to help pay the debt off faster or have some of it forgiven that can help to lower the total burden." One such way: make extra payments when you can.

Refinance to decrease interest payments.

Josuweit says that this could save you thousands of dollars. By consolidating your loans and shopping around for a better interest rate, you can decrease the total monthly payments and headaches associated with multiple student loans.

The one thing you should never do: default.

In 2015, The New York Times columnist Lee Siegel shared his decision to consciously default on his loans. But you would be unwise to follow his example. Dodging your student loan bill can come with far-reaching negative consequences and should be avoided, especially since there are other solutions like income-driven payments. Josuweit explains the multiple consequences: "First, the Department of Education can charge 16 percent to 25 percent collections fees. Second, the Department of Education can garnish your wages. Lastly, a default will likely show up on your credit report and can cause credit issues for several years."

A default happens when you are 270 days late on a payment. If you're getting close, the best thing you can do is make a payment. And if you do default, call your lender to consider rehabilitation options.

As for those people leaving the country, Josuweit believes the Feds will eventually catch up with them. "Moving internationally might only work if you plan on never coming back to the US," he says. But considering rapid advancements in digital financial technology, that might not even be good enough. "I wouldn't be surprised if an international credit score or international financial data sharing was made available soon." That would mean international banks could see if you skipped out on debt obligations back in the US. You can run, but you can't hide from your loans. Luckily, you have options.

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