How to Minimize Student Loan Debt

By Elaine Rubin Updated on May 3, 2021

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Live like a student while you are in school, so you don’t have to live like a student after you graduate.

Students who graduate with too much debt tend to delay important life events, such as buying a car, buying a house, getting married, having children and saving for their own retirement. They feel pressure to take the job that pays better, instead of the job that is a better match to their career goals. They may even be forced to adopt an austere lifestyle and to move back in with their parents. However, there are ways to minimize your student loan debt so that you don’t have to put your life on hold after graduation.

How to Reduce Student Loan Debt

It may seem impossible, but there are actually several things you can do to reduce your student loan debt.

Exhaust Free Sources of Money

Exhaust sources of free money, such as grants and scholarships, before turning to student loans. File the Free Application for Federal Student Aid (FAFSA®) and start searching for scholarships ASAP.

Save as Much as Possible Before College

Save as much as possible before enrolling in college. Every dollar you save is a dollar less you’ll have to borrow. It is cheaper to save than to borrow. You will pay interest on every dollar you borrow. Using savings reduces how much you will have to borrow and how much extra you’ll end up paying back.

Enroll at a Less Expensive School

Enroll at a less expensive college. Many students choose to complete their first two years of college at community college, and live at home to keep the costs down. Here are some other aspects to consider when looking to minimize your student loan debt.

• Enroll at an in-state public college. Students who receive a Bachelor’s degree from an in-state public college graduate with about 20 percent less debt than students who graduate from a private non-profit college. The rate of return on a college investment is also highest at in-state public colleges, due to the lower cost. Most public colleges offer a high quality education at bargain prices.
• Enroll at a college with a "no loans" financial aid policy. There are about six dozen elite colleges with generous financial aid packages that replace loans with grants. While students can still borrow for the family’s share of college costs, the average student loan debt at graduation is much lower at these schools.

Use a Tuition Payment Plan

Use a tuition payment plan instead of long-term loan debt. Tuition installment plans split the college bills into 9-12 equal monthly installments for a nominal up-front fee and no interest. This allows you to save and pay as you go, removing the need to borrow.

One word of caution with some of these plans, understand the players in this type of agreement. While many schools offer this as an actual payment plan through the university. Read the terms and conditions of what happens if you unable to continue making the payments. Some schools will require you to withdraw and withhold transcripts until you pay your balance (making it a bit difficult to transfer your credits).

Some schools may use a third-party service. If your school uses a third-party with their payment plan, read all the paperwork! Understand what happens if you are unable to pay, you withdraw, or your school closes.

Work While In School

Students can work part-time during the term and full-time during the summer to earn money to pay for school. If you work a job under the Federal Work-Study program, your income would not be counted in your FAFSA application.

Pay Interest During School

Pay the interest while in school to keep your loan amount from growing. Most student loans use the simple daily interest formula, meaning the interest on your loan is being calculated on your principal balance and not on any unpaid outstanding interest. Once your loan enters repayment, any outstanding interest is capitalized (added to the principal balance) which mean your principal balance will increase. Your new, higher, outstanding principal balance will now be used to calculate your interest charges on your loan.

More >>> How Does Student Loan Interest Work

Pay Interest During Grace Periods

Paying interest during your loan grace period is a great way to prevent it from capitalizing, especially for federal student loans. With federal student loans, students have a six month grace period after leaving college, graduation, or falling below part-time enrollment before their loans come due. During this time, though you don’t have to make payments, interest is still accruing on your unsubsidized loan funds.

At the end of your grace period, that interest will capitalize (be added to the principal amount) on your loan and you will now be paying interest on this new balance. If possible, paying the interest off during the grace period will prevent capitalization and keep your loan balance lower.

Graduate On Time

Graduate on time. According to CNBC, just 41% of college students graduate in four years. Each additional year of study adds an additional year of debt. Transferring to another college or switching academic majors can add a term or two to your college career. Do your best to finish in four years to keep your overall costs down.

Save on College Related Expenses

College comes with related expenses, but these expenses are not fixed and offer students a lot of wiggle room when it comes to saving money.

Textbooks

Students can buy used textbooks, and rent textbooks or sell textbooks back to the bookstore or an online bookstore at the end of the academic term to save money. Also look to your school’s library to potentially borrow the texts you need, and digital versions of textbooks which may be more affordable.

Room and Board

Living on campus can be expensive. Some students save money by living off campus with roommates in an apartment that is less expensive that on-campus housing. Other students may choose to go to school near home and live at home while in college. This can result in substantial savings and have a noticeable impact on how much you’ll need to borrow.

Transportation

Factor in transportation costs no matter what college you are looking at. If you live at home or off campus you will likely need to rely on a car or public transportation to get back and forth to school. If you go to school out-of-state or far from home, you will need to factor in the costs of traveling home for breaks and holidays, and adjust your plans accordingly to keep transportation costs within your means.

Miscellaneous Expenses

Yes, you can use student loans to cover living expenses, but those expenses should be necessities. Things like streaming services, spring break trips, and nights out should never be paid for with student loan funds. In addition, you can save more money to put toward your college expenses by being frugal and cutting unnecessary items like entertainment expenses.

Before You Borrow

Before you borrow student loans you need to plan ahead. Think of the immediate future and the future after you graduate. Keeping an eye on your future finances can help prevent financial stress down the road.

Budget

You should budget before you borrow. This will help you borrow only what you need. Often times, loan limits are higher than what you actually need to borrow. Having a budget ready ensures you don’t over borrow and in return, over spend.

Plan for Repayment

Think about the future before you borrow. Do you know how you will repay your student loans? Do you have an estimate of what your student loan payment will be? Having an idea of your future financial situation and how you plan to repay can help guide your borrowing decisions and ensure you don’t borrow more than you can afford. When student loans enter repayment, you may be interested in exploring student loan refinancing. This process simplifies repayment and can potentially save you thousands over the life of the loan.

Balance Student Debt With Income

Be realistic about your earning potential after graduation. Ideally, your total student loan debt will be less than your expected annual starting salary. However, if your debt to income ratio is high, you may struggle to repay your debt and may need to look into alternate repayment plans such as extended repayment or income-based repayment.

Extending your repayment term can make your monthly payments more affordable, but increases how much money you will end up paying to pay back your loans over time. For example, increasing the repayment term from 10 years to 20 years cuts the monthly payment by about a third, but more than doubles the total interest paid over the life of the loan.

What to Do After College

Target High Interest Loans for Repayment

Target the highest-rate loans for quicker repayment. There are no prepayment penalties on federal and private student loans. So, after making all of the required payments, make an extra payment and ask the lender to apply it as a payment to principal on the loan with the highest interest rate, not to a future loan payment.

Sign-Up for Auto Debit

Many lenders offer an interest rate reduction of 0.25% or 0.50% to borrowers who sign up for auto-debit, where the monthly payment is automatically transferred from the borrower’s bank account to the lender.

Take Advantage of the Student Loan Interest Tax Deduction

The student loan interest deduction allows up to $2,500 in federal and private student loan interest to be deducted on federal income tax returns.