Student Loan Repayment: When To Pay The Minimum, When To Refinance, & Everything Else You Need To Know

This post may contain affiliate links to products I’ve used and recommend. If you click on the link and purchase the product, I am compensated (at no additional cost to you). 

View my full disclosure here.

Today’s post is a quality piece that was written by Travis Hornsby of Student Loan Planner. I first heard Travis on episode 078 of the ChooseFI podcast and was really impressed at the services he provides in helping others pay back their student loan debt.

He has some valuable advice that I agree with so without further ado, here is Travis…

Student Loan Repayment

Over the past several years, I’ve been lucky enough to help hundreds of people create loan repayment plans. Whether you have $10,000 in student loan debt or over $400,000, there are strategies available that will help you deal with your debt in a smart way. 

The options that make sense for you depend on your career and financial situation, as well as your personal or family goals. 

Should you go “all in” on paying down your debt quickly? Should you only pay the minimum monthly parent and not worry about it? Are there other options you may not know about? Here are a few scenarios to help you decide what makes the most sense for your life. 

When to make minimum payments on your student loans

Many people think that if you only make the minimum payment on your student loans, you’ll owe the debt forever and get hit with tons of extra interest fees. There is some truth to that, but there are also times when it makes the most sense to only pay the minimum. 

Let me take a second to clarify that I’m referring to federal student loans. Private student loans will have a completely different strategy.

1. When you’re pursuing Public Service Loan Forgiveness (PSLF)

Maybe you’ve heard of the PSLF program. It’s been in the news a lot lately. It’s a federal student loan forgiveness program available to many borrowers. To qualify, you must work for a qualifying employer (qualified non-profit or government position) for 10 years while making 120 qualifying payments. If qualified and approved, any leftover student loan debt will be forgiven tax-free. 

If pursuing PSLF, you want as much of your debt forgiven as possible. In this case, making minimum payments before you’ve earned loan forgiveness is wise. Part of qualifying for PSLF is signing up for an income-driven repayment (IDR) plan, which could give you an even lower monthly payment. 

2. When you’re paying off high-interest debt

It’s hard to focus on two major goals at the same time. I’ve tried and it just doesn’t work out well. The same rule applies to paying off debt. 

If you have any high-interest debt, like credit cards, it doesn’t make sense to tackle your student loan balance first. You’ll end up paying more interest this way. Pay the minimum on your student loans and focus your efforts on paying off your other high-interest debt. When you’re done paying that debt, you can then work on paying down your student loans. 

3. When you’re financially insecure

Before attacking your student loan debt, you want to be financially stable. At this point, your loans are the least of your worries. You want to build up an emergency fund first. It’s a good idea to plan to save for at least six months of expenses saved. If your employer offers a retirement match, you should put money towards that as well. Once you become more financially secure, then you can worry about your student loans.

4. When you owe more than 1.5 times your income

Owing more than 1.5 times your salary may seem like a lot, but I’ve seen much worse. If you owe that much, you may be better off paying the minimum every month and pursuing loan forgiveness. This could be through PSLF or with the help of Income-Driven Repayment loan forgiveness. With IDR loan forgiveness, when you sign up for an IDR plan and make your minimum payments for 20 to 25 years, any remaining balance is forgiven. 

One thing to keep in mind is that unlike PSLF, any loan balance forgiven through IDR loan forgiveness can be considered taxable by the IRS. You may end up with a giant tax bomb when it’s all said and done. The good news is you have a long time to prepare for it. 

5. When you want to change jobs or careers or work less

Maybe you’re pursuing PSLF, but decide you would rather change jobs or work less. You need to work 30 hours a week to qualify for PSLF. Maybe you want to move from a non-profit to a private-sector career. You can still make minimum payments; just switch your repayment strategy from pursuing PSLF and instead go for IDR loan forgiveness. 

Having a huge student loan debt doesn’t mean you have to make a huge student loan payment every month. If any of these scenarios describe your situation, paying the minimum may be just what you need to do.

When to refinance your student loans

Refinancing student loans is becoming a more popular option among borrowers. If you have private student loans, this is the perfect (and only) strategy to pay down your debt. Refinancing may get you a much lower interest rate, potentially saving you thousands of dollars in interest charges over the life of your loan. 

If you have federal student loans, you need to approach refinancing, cautiously. This is because refinancing federal loans turns them into private loans. With private loans, you’ll lose access to several great federal protections, like forbearance and deferment options, as well as loan forgiveness. 

Most of the time it doesn’t make sense to refinance federal student loans, but there can be some exceptions.

1. When debt makes you nauseous

Some people are OK with debt in their lives while others can’t stand the thought of having debt. If you fall into the latter group and owe less than 1.5 times your income, refinancing is an option. If you have good credit, you might secure a lower interest rate. Once you’ve secured a lower rate through student loan refinancing, you can pour your resources into killing that debt.

2. When you have a high-interest rate

The way student loans (and any loans, really) work is that when you start paying them off, most of your payment goes toward interest, not the principal. As you make more payments, eventually more of your payment goes toward paying down the principal. 

By refinancing to a lower rate, more of your loan will chip away at the principal and allow you to pay your loan off with less interest. 

3. When financially independence depends on being debt-free

If you’re pursuing financial independence, can you truly achieve your goals before paying off your student loans? I don’t think so. If this is important to you, refinancing could help you reach your goals faster. 

Photo by JodyHongFilms on Unsplash

What else do you need to know about student loan repayment? 

In the end, your student loans become a tax (a percentage of your income) or a debt (fixed monthly payments). What you prioritize in your life should have a say in which type of repayment plan you choose to follow. 

Something I tell people a lot is that the number one thing in life is not having your loans rule your life. Prioritize your biggest goals, even if it means paying a little extra interest on your loans. Your loan interest isn’t as bad as you think so make your payment plan match what you want in life. 

Your savings rate is way more important than being debt-free. Debt-free is just an expression of a high savings rate. You don’t have to stress about your loan debt. As long as you are somewhat frugal, you’re going to be OK. 

Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.

He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He’s helped over 1,700 clients save over $80 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.

Update About Ms. Fiology

I have a couple of big announcements today. Firstly, thank you to anyone who nominated my brain health series for best series in the Plutus Awards. Brain health is one of my favorite things to research and write about. I’m quite humbled to be nominated.

Additionally, my rebrand will be going live within the week. I’m super excited!! This will be the last post on Ms. Fiology but all the content here will be transferred to my new site. There will be plenty of announcements about it on the socials and via email but I wanted to give you a head’s up here first.


Theme pic by Pang Yuhao on Unsplash

Leave a Reply