Knowing what your discretionary income is (and how to calculate it) can help you make decisions about how to best repay your federal student loans. The U.S. Department of Education calculates discretionary income as your adjusted gross income in excess of a protected amount.
The “protected amount” is typically a percentage of the federal poverty guideline appropriate to your family size. The Saving on a Valuable Education (SAVE) Plan, for example, defines discretionary income as any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size.
When it comes to individuals who are considering repaying federal student loans with the SAVE Plan or any other income-driven repayment (IDR) plan, discretionary income can be a major factor in how much they’ll owe each month. That’s because the federal government typically uses a borrower’s discretionary income to determine their monthly payments.
Below we’ll discuss different IDR plans and the ins and outs of discretionary income, so you can figure out a repayment strategy that works for you and your budget.
What Is Discretionary Income?
As mentioned above, the Department of Education calculates discretionary income as your adjusted gross income in excess of a protected amount defined by a federal IDR plan.
Discretionary income under the SAVE Plan, for example, is any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size. You’ll have a $0 monthly payment under the SAVE Plan if your annual income doesn’t exceed the protected amount of $32,805 for a single borrower and $67,500 for a family of four in 2023.
If you don’t qualify for a $0 monthly payment on the SAVE Plan, your monthly payment beginning in July 2024 will be set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.
Discretionary income as defined by the Education Department is different from disposable income, which is the amount of money you have available to spend or save after your income taxes have been deducted.
How Is Discretionary Income Calculated?
Here’s how federal student loan servicers may calculate your discretionary income:
• Discretionary income under the SAVE Plan is generally calculated by subtracting 225% of the federal poverty guideline from your adjusted gross income (AGI).
• Discretionary income under the Income-Contingent Repayment (ICR) plan is generally calculated by subtracting 100% of the federal poverty guideline from your AGI.
• Discretionary income under the Income-Based Repayment (IBR) and Pay As You Earn (PAYE) federal IDR plans is generally calculated by subtracting 150% of the federal poverty guideline from your AGI.
If you’re filing jointly or you have dependents, that will impact your discretionary income calculations. For married couples filing together, your combined AGI is used when calculating discretionary income. Under an income-driven plan, filing with a spouse can drive up your income-driven monthly payments because of your combined AGI.
So, let’s say you’re in a one-person household and have a 2023 AGI of $40,000. If you are considering the SAVE Plan, you would subtract 225% of the 2023 poverty guideline ($32,805), to get an official discretionary income of $7,195. Monthly, that is a discretionary income of about $600, and your monthly payment beginning in July 2024 will be set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.
Borrowers are generally expected to make required loan payments when due. The 2023 debt ceiling bill officially ended the three-year Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1, 2023, and payments to resume in October 2023.
💡 Quick Tip: Ready to refinance your student loan? You could save thousands.
What Income-Driven Repayment Plan are You Eligible For?
There are four federal IDR plans that have different eligibility criteria and terms. These income-driven repayment plans can reduce monthly payments for people with incomes below a certain threshold.
It should be noted that federal IDR plans don’t apply to private student loans. They’re only an option for federal student loans.
Income-Driven Repayment Plans for Federal Student Loans
The federal Department of Education offers the following four IDR options for eligible federal student loan borrowers:
• Saving on a Valuable Education (SAVE) Plan
• Pay As You Earn (PAYE) Plan
• Income-Based Repayment (IBR) Plan
• Income-Contingent Repayment (ICR) Plan
All IDR plans generally use discretionary income to determine monthly payments. So, if there is a change in a borrower’s income or family size, their monthly payment could increase or decrease, depending on the change. Borrowers enrolled in an income-driven repayment plan are typically required to recertify their income and family size each year.
The SAVE and ICR plans are open to anyone with eligible federal loans. Under these two repayment plans, the amount owed each month is always tied to a borrower’s discretionary income. This could mean that if an individual’s income increases over time, they may end up paying more each month than they would under the 10-year Standard Repayment Plan.
For the PAYE and IBR plans, eligibility is determined based on income and family size. As a general rule, to qualify, borrowers must not pay more under PAYE or IBR than they would under the 10-year Standard Repayment Plan. Under these plans, the amount owed each month will never exceed what a borrower would owe under the Standard Repayment Plan.
Pros and Cons of Income-Driven Repayment Plans
IDR plans come with trade-offs. While they can lower your monthly payment and help free up your cash flow now, they may extend the life of your loan. The standard student loan payoff plan is based on a 10-year repayment timeline. An income-driven repayment plan can extend your payment timeline to up to 25 years.
This means you’ll be paying off the loan longer and possibly paying more in interest over time. If you stay on an income-driven repayment plan, the government might forgive any remaining balance after 20 or 25 years of payments — or as little as 10 years for SAVE Plan enrollees with original principal balances of less than $12,000. But the amount that is forgiven may be taxed as income.
How Does Discretionary Income Affect Student Loan Payments?
Income-driven repayment plans generally use your discretionary income to dictate the amount you’re required to repay each month. In the case of borrowers enrolled in the SAVE Plan, any required payments beginning in July 2024 will be set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.
Recommended: How Is Income Based Repayment Calculated?
How Else Can Borrowers Lower Their Student Loan Payment?
Another potential way for borrowers to reduce their student loan payment is by refinancing student loans. When you refinance your student loans, you take out a new loan with new terms from a private lender. The new loan is used to pay off your existing student loans.
Depending on your financial profile, refinancing could result in a lower interest rate or a lower monthly payment depending on which terms you choose. You may pay more interest over the life of the loan if you refinance with an extended term.
Refinancing federal student loans with a private lender also forfeits your access to federal IDR plans, Public Service Loan Forgiveness, and Teacher Loan Forgiveness.
💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.
The Takeaway
The government uses discretionary income to calculate your federal student loan monthly payments under a qualifying IDR plan. The SAVE Plan may not provide the lowest monthly payment for eligible borrowers with high salaries.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Editor’s Note: On June 30, 2023, the Supreme Court announced its decision to reject the Biden-Harris Administration’s Student Debt Relief Program on the grounds that it required Congressional approval. Previously, it was announced that interest accrual on federal student loans will resume on Sept. 1, while loan payments will be due starting in October. Borrowers will learn their new monthly payment amount and due date at least 21 days in advance.
After graduation and your six-month federal student loan grace period, it’ll be time to start paying your dues. If you are on the Standard Repayment Plan, you’ll pay at least $50 a month for 10 years. But there are other ways to pay back your student loans: through income-driven repayment plans.
Not all of these plans have the same repayment strategy, and not all federal loans qualify for income-driven repayment. We’ll help you find the one that aligns with your financial situation before you commit.
How Does Income-Driven Repayment Work?
The U.S. Department of Education offers four income-driven repayment (IDR) plans for holders of federal student loans:
• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)
• Pay As You Earn (PAYE) Plan
• Saving on a Valuable Education (SAVE) Plan
For most IDR plans, your monthly payment is calculated as a portion of your discretionary income. The Department of Education defines discretionary income as your adjusted gross income in excess of a protected amount.
Discretionary income under the SAVE Plan, for example, is any adjusted gross income you have above 225% of the federal poverty guideline appropriate to your family size. You’ll have a $0 monthly payment under the SAVE Plan if your annual income doesn’t exceed the protected amount of $32,805 for a single borrower and $67,500 for a family of four in 2023.
If you don’t qualify for a $0 monthly payment on the SAVE Plan, your monthly payment beginning in July 2024 will be set at 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average if you have both.
On the IBR plan, your monthly payment is typically set at 10% to 15% of your discretionary income above 150% of the federal poverty guideline appropriate to your family size. But unlike the SAVE Plan, a borrower’s monthly payment on the IBR plan will never be more than what you would have paid through the Standard Repayment Plan.
IDR Loan Forgiveness
All federal IDR plans can end with your remaining loan balance being forgiven after 20 or 25 years, but some borrowers may receive forgiveness sooner under the SAVE Plan. Beginning in July 2024, federal student loan borrowers with original principal balances of less than $12,000 can have their remaining loan balance forgiven after 10 years of monthly qualifying payments on the SAVE Plan.
For more details on federal IDR debt relief benefits, check out our Guide to Student Loan Forgiveness.
Your personal circumstances and goals may dictate which student loan repayment plan is right for you. You can estimate how much your monthly payments will be through the federal Loan Simulator calculator. 💡 Quick Tip: Ready to refinance your student loan? You could save thousands.
The Difference Between Income-Driven Repayment Plans
Deciding which IDR plan is right for you (and that you may qualify for) depends on your financial situation and your loan type(s). Here’s what they all mean:
• IBR (Income-Based Repayment). This plan is based on your income and family size. The potential IBR payment must be less than what you would pay under the Standard Repayment Plan to qualify. Any remaining balance is forgiven after 20 or 25 years.
• ICR (Income-Contingent Repayment). Under this plan, your monthly payment is adjusted based on your income (sometimes set at 20% of your discretionary income above 100% of the federal poverty guideline appropriate to your family size). It might not lower your payments as much as other plans, but it’s the only IDR plan that allows Parent PLUS Loans. Any remaining balance is forgiven after 25 years.
• PAYE (Pay As You Earn). With this plan, you’ll never pay more than the fixed Standard Repayment Plan amount. Payments are typically set at 10% of your discretionary income above 150% of the federal poverty guideline appropriate to your family size. Any remaining balance after 20 years of payments is forgiven.
• SAVE (Saving on a Valuable Education). This IDR plan replaced the former REPAYE Plan. Anyone with qualifying student loans can enroll into the SAVE Plan. However, you could end up paying more per month under this plan than the Standard Repayment Plan. You’ll have a $0 monthly payment under the SAVE Plan if your annual income falls below 225% of the federal poverty guideline appropriate to your family size.
Alternatives to Income-Driven Repayment Plans
The 2023 debt ceiling bill officially ended the three-year Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1, 2023, and payments to resume in October 2023.
Aside from the Standard Repayment Plan, there are a few options to consider instead of IDR:
Consolidation
If you have federal student loans, you can get a Direct Consolidation Loan. This will move all your eligible federal student loans into one monthly payment. Your new interest rate is the weighted average of all your loans, rounded up to the nearest eighth of a percent.
This can be helpful if you have many smaller loans that each have a minimum monthly payment. It typically won’t lower your monthly payment, however, but it can make it manageable and easier to keep track of. Only federal loans are eligible for a Direct Consolidation Loan.
Refinancing
Refinancing is similar to consolidation. You get one loan to replace all of your other loans, but it’s a new loan with a new interest rate from a private lender or bank. Your credit report and other personal financial factors are considered to see if you’re a responsible borrower. If you previously had a co-borrower, such as a parent, you can look into refinancing without a cosigner.
Many lenders allow you to refinance all of your student loans, not just federal student loans. So if you have a mix of private student loans and federal student loans, refinancing will create one new loan with one payment to replace them.
If you qualify for a lower interest rate and a shorter term, it could reduce the amount of money paid in interest over the life of the loan. You may pay more interest over the life of the loan if you refinance with an extended term. You can explore different scenarios with our Student Loan Refinance Calculator.
You may ask, “Should I refinance my federal student loans?” Refinancing federal student loans with a private lender forfeits your access to Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and federal IDR plans. You can weigh the pros and cons when determining whether student loan refinancing is right for you. 💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
How Do You Calculate Income for an Income-Driven Plan?
The Department of Education considers three different components when calculating a borrower’s income. While this may seem needlessly complicated, it actually benefits borrowers:
Annual Income
Any income that’s taxable counts toward the Education Department’s calculation. That means regular wages, plus interest and dividends from savings and investments, unemployment benefits, etc. On the flip side, any income that isn’t taxed doesn’t count: gifts and inheritances, cash rebates from retailers, child support payments, and so on.
Spouse’s Income
If you and your spouse file a joint tax return, then their income must also be factored in. If you file separately, only your income counts.
Family Size
Your family size is the number of people who live with you and receive more than half their support from you. This includes children but also dependent adults, such as an older parent.
The Takeaway
There are four income-driven repayment plans for federal student loan holders, including IBR, ICR, PAYE, and SAVE. No new PAYE enrollments will occur after July 1, 2024, although current PAYE enrollees can remain on the plan after that date.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income based repayment plans or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
When it comes to higher education, Native Americans face obstacles. Educationdata.org says that postsecondary attendance among American Indian and Alaska Native students “has been in decline since 2010.” Only 0.7% of college students identified as American Indian or Alaska Native in 2022.
“Research has found that American Indians and Alaska Natives have a much lower rate of college completion than the population as a whole,” the Department of Education’s (DOE) Federal Student Aid (FSA) says on its website.
The soaring cost of college could have something to do with this: The average annual cost of tuition at a public 4-year college is 23 times higher than in 1963. The average cost of college for in-state students at a four-year institution in 2022-23 was almost $11K. Students at private nonprofit four-year institutions paid over $39K on average.
According to the DOE, loan forgiveness (or cancellation) is generally the term used if you are no longer required to make payments on some or all of your student loans.
While there are some specific programs to help with Native American student loan forgiveness, it’s important to also research what financial aid, including scholarships and loans, is targeted toward American Indians and Alaska Natives.
Recommended: Student Loan Forgiveness: Programs for Relief and Mass Forgiveness
Picking a Career With Loan Forgiveness
One very important resource: The Bureau of Indian Education provides a list of scholarships and grants available to Native American students, such as the American Indian College Fund.
Many states offer financial aid to Native American students attending college. Some individual colleges and state schools also offer free tuition and room and board to Native American students. For instance, Native American students who are Montana residents can qualify for a tuition waiver at Montana State University.
Keeping a career in mind when pursuing an education can make a big difference in financial aid and forgiveness options. 💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.
Health Services
One of the programs that gives priority to Native Americans is the Indian Health Services Loan Repayment Program. This program, part of the U.S. Department of Health and Human Services, provides funds for health professionals to help repay eligible education loans.
In 2023, the program announced an increase in the maximum annual award amount to $25,000 per year for new awards and extensions starting in Fiscal Year 2023. You can find details about the new award amount here.
In exchange, health professionals agree to an initial two-year service commitment practicing in areas that serve American Indian and Alaska Native communities.
Priority enrollment in this program is given to American Indians and Alaska Natives. Professions across the healthcare spectrum, including behavioral health, dentistry, and dietetics, are available.
The organization says that available opportunities are based on the greatest staffing needs in Native American health facilities. Participants are also eligible to extend their contracts annually until their qualifying student debt is paid.
Public Service Loan Forgiveness
This program, offered by the DOE, is open to all qualified students, not just Native Americans. The careers that may qualify for Public Student Loan Forgiveness Program (PSLF) range from forestry and natural resources to teaching and law enforcement.
To receive loan forgiveness for work in public service, applicants must work full-time for a qualifying government agency or certain nonprofits. After 120 on-time, qualifying payments in an income-driven repayment (IDR) plan, the remainder of the student debt can be forgiven.
The Department of Federal Student Aid offers a PSLF Help Tool to start work on the Employment Certification Form to apply.
Serving as a full-time AmeriCorps or Peace Corps volunteer also counts as qualifying employment for the program. Loans that may be eligible to be forgiven under PSLF include any non-defaulted loans that you received under the Direct Loan Program from the government. Private loans are not eligible for any federal forgiveness plans.
Recommended: A Look Into the Public Service Loan Forgiveness Program
Teacher Loan Forgiveness Program
For students interested in pursuing a career in teaching, the DOE’s Teacher Loan Forgiveness Program is key. If you teach full-time for five years straight in a low-income school or educational service agency, you might be eligible for up to $17,500 for certain subject areas.
Even if you don’t teach math, science, or special education, you could still receive up to $5,000 in loan forgiveness if you are a qualified full-time elementary or secondary education teacher.
This might be another option for Native American students looking for student loan debt forgiveness by giving back to a community in need.
To qualify, the school or educational agency must be listed in the directory, published by the DOE, for the years you were/are a teacher. 💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to career services, financial advisors, networking events, and more — at no extra cost.
Lowering Your Student Loan Payments
While student loan forgiveness is often a great solution for debt relief, sometimes you might not qualify for career-based programs. One solution is income-driven relief (IDR) for federal student loans.
The Saving on a Valuable Education (SAVE) Plan is the newest income-driven repayment plan. Like other IDR plans, the SAVE Plan calculates your monthly payment amount based on your income and family size. In addition, the SAVE Plan has unique benefits that will lower payments for many borrowers.
The SAVE Plan lowers payments for almost all people compared to other IDR plans because your payments are based on a smaller portion of your adjusted gross income (AGI). Your payment for federal undergraduate loans could be as low as 10% of your discretionary income -– and that percentage could decrease to 5% in 2024.
The SAVE Plan has an interest benefit: If you make your full monthly payment, but it is not enough to cover the accrued monthly interest, the government covers the rest of the interest that accrued that month. This means that the SAVE Plan prevents your balance from growing due to unpaid interest.
Recommended: The SAVE Plan: What Student Loan Borrowers Need to Know About the New Repayment Program
Refinancing Student Loans
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance NOTICE: The debt ceiling legislation passed on June 2, 2023, codifies into law that federal student loan borrowers will be reentering repayment. The US Department of Education or your student loan servicer, or lender if you have FFEL loans, will notify you directly when your payments will resume For more information, please go to https://docs.house.gov/billsthisweek/20230529/BILLS-118hrPIH-fiscalresponsibility.pdf https://studentaid.gov/announcements-events/covid-19
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income based repayment plans or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
While the principal of a student loan isn’t tax deductible, the interest you pay on it can be — and that includes refinanced student loans. If you’re eligible, you may be able to deduct up to $2,500 from your taxable income.
The amount you can deduct is dependent on your income; as you earn more, the amount you can deduct is decreased and eventually eliminated. You also must have paid interest on a qualified student loan – that is, one taken out to pay for qualified higher education expenses, such as tuition, books, or room and board.
Here’s what to know about refinanced student loans and tax returns, including when interest on student loans is tax deductible, how tax deductions differ from tax credits, and how refinancing can affect taxes.
What Is a Tax Deduction?
For starters, it’s helpful to review what a tax deduction is: A tax deduction lowers your taxable income by reducing the amount of your income before you or a tax professional calculates the tax you owe.
For example, a $100 exemption or deduction reduces your taxable income by $100. So it would reduce the taxes you owe by a maximum of $100 multiplied by your tax rate, which can range from 0% to 37%. So your deduction could reduce your taxes between $0 to $37.
And before considering how refinancing affects your taxes, it’s helpful to review what happens when you refinance a student loan: Your lender “swaps out” (or “pays off”) your existing loans and gives you a new loan with new terms. A student loan refinance may be beneficial if you get a lower interest rate and/or a lower monthly payment, which can save you money in the long run. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)
If you’re considering refinancing federal student loans, however, it’s important to understand that you would lose access to certain federal benefits and protections, such as Public Service Loan Forgiveness, federal deferment and forbearance as well as income-driven repayment options. 💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.
The Difference Between a Tax Deduction and a Tax Credit
Keep in mind that a tax deduction is not the same as a tax credit. While a tax deduction reduces your taxable income, a tax credit directly reduces your taxes.
Tax credits give you a dollar-for-dollar reduction on your taxes. In other words, if you qualify for a $2,000 tax credit, the tax credit lowers your tax bill by that exact amount — $2,000.
Recommended: Tax Season 2022: A Guide to Understanding Your Taxes
How Does Paying Student Loans Affect Taxes?
If you paid qualified student loans during the year, you may be eligible for the student loan interest tax deduction. This deduction can reduce your taxable income by the amount of student loan interest you paid during the year — up to $2,500.
Note that the interest on student loans is tax deductible, not your total payment amount (which includes the principal). You can claim it without having to itemize deductions on your tax return because it’s taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040.
Who Is Eligible for the Student Loan Interest Deduction?
The student loan interest deduction is an “above the line” deduction, which means that it is deducted to calculate your adjusted gross income (AGI).
As mentioned earlier, the interest paid must be for a qualified student loan that you take out for yourself, your spouse, or a dependent for qualified undergraduate or graduate education expenses, such as tuition, books, or room and board. In addition, the expenses must have been incurred within “a reasonable period of time” prior to or after taking out the loan, according to the IRS.
For taxable years beginning in 2023, your modified adjusted gross income (MAGI) must also amount to less than $80,000 ($160,000 if filing a joint return). Your amount will be phased out (reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).
You cannot claim the deduction at all if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). You also will not qualify for the deduction if you are married and filing separately.
Recommended: How Income Tax Withholding Works
Are Refinanced Student Loans Tax Deductible?
Yes, you can get a tax deduction on the interest you’ve paid on refinanced or consolidated student loans as long as the new loan refinanced qualified student loans.
Refinancing affects your taxes only insofar as the refinancing might change how much interest you pay in a given year – and thus, how much you can deduct. For instance, if refinancing lowers the amount of interest you pay below the $2,500 deduction amount, then that would mean you can’t deduct as much on your taxes. Still, refinancing may save you more money in the long run than a student loan interest deduction because it’s a deduction, not a tax credit. It’s important to do the math or consult a tax professional before you make a final decision.
Recommended: Where Is My Tax Refund?
Refinance Qualifications
It’s also worth taking a look at common eligibility requirements for a refinance. For most borrowers, the soonest you can refinance is usually after graduating. In addition to a degree, you often need to have:
• A debt-to-income (DTI) ratio under 50%: Your DTI refers to how much of your income goes toward debt and how much goes toward your regular income. It’s best to keep your DTI under 50%, but being over doesn’t necessarily mean you won’t qualify for a student loan refinance.
• Minimum credit score of 650: Your credit score is a three-digit number that shows how well you pay back debt. It’s best to have a minimum credit score of at least 650 to be eligible for student loan financing. Again, your personal situation will be considered before determining whether you qualify for a refinance.
• A steady job and/or consistent income: You may need to prove that you have a steady job and have enough savings to be able to pay for at least two months’ worth of regular expenses.
• A certain balance amount: In most cases, lenders will require you to have a certain minimum balance on your student loans in order to qualify for a refinance.
Refinancing Your Student Loans With SoFi
If you’re thinking about refinancing your student loans, SoFi offers flexible terms with fixed or variable rates. You can apply online, and there aren’t any fees.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
What refinance costs are tax deductible?
When it comes to refinancing and taxes, lenders usually don’t charge any upfront fees to refinance your student loans, which means that there aren’t any refinance costs to deduct.
When you make payments on a qualified student loan — including refinanced student loans — you may be eligible for the student loan interest deduction.
Is it worth it to claim student loan interest?
Yes, when it comes to student loans and tax returns, you may be able to deduct up to $2,500 from your taxable income if you’re eligible.
To be able to claim the deduction, your modified adjusted gross income (MAGI) must be less than $80,000 ($160,000 if filing a joint return). You’ll also experience a phased-out deduction if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). It disappears entirely at MAGIs above $90,000 and $180,000 for joint filers.
Are student loan payments tax deductible?
Only the interest you pay on your student loans is tax deductible. Whole student loan payments (which include principal) are not tax deductible.
Student Loan Refinancing If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
As borrowers gear up for federal student loan bills resuming this fall, they face a revamped landscape that includes a new repayment plan, servicer switches and long call wait times. Another imminent concern: scammers who want to take advantage of the moment.
“Whenever there’s confusion in the marketplace, that’s when the criminal fraudsters get active,” says Clayton LiaBraaten, senior executive advisor at Truecaller, an app that blocks spam calls.
Borrowers need to protect themselves, even as regulators crack down on scammers. In August, the Federal Trade Commission (FTC) caught a group of scammers who brought in roughly $8.8 million with false promises of “Biden Loan Forgiveness” in exchange for hefty upfront fees. The group claimed to be affiliated with the U.S. Department of Education and primarily targeted borrowers via calls and texts, the FTC said.
If you receive an unsolicited call or text about your student loans, it’s probably a scam. Here’s how to spot and avoid a student loan repayment scam — and what to do if you think you’re a victim of one, according to experts.
What to watch out for
Student loan scams vary widely, but they often contain a few key ingredients. Here are some common red flags.
Advertising from the ‘government’
Scammers will often use the word “federal” in their communications, LiaBraaten says. They might claim federal or government affiliation, or they could claim to be connected with the Education Department or your student loan servicer.
Aggressive advertising language can also indicate that communication isn’t from the government.
“If you are a student loan borrower, you need to be aware that the federal government isn’t soliciting you,” says Leslie Tayne, a financial debt attorney. “If it sounds like a sales pitch with guarantees and promises, that’s not coming from the federal government.”
Relief that costs money
If someone asks you to pay an upfront or monthly fee to access debt relief, it’s a scam.
It’s always free to enroll in or benefit from any legitimate federal student loan relief, such as income-driven repayment (IDR) plans, borrower defense to repayment, Public Service Loan Forgiveness and the IDR account adjustment.
And if you have questions about your loans or repayment options, you can call your servicer for free guidance.
Promises that are too good to be true
Keep your guard up if you receive calls with promises of instant student loan relief. Most federal relief programs require at least a decade of payments to qualify — and no company or person has the ability to negotiate a special deal with your loan servicer or the government, warns the Education Department.
“Legitimate loan forgiveness programs usually have these strict eligibility criteria, so any sort of instant forgiveness is a red flag,” says Ally Armeson, program director of the nonprofit Cybercrime Support Network. Scammers see an opportunity with people panicking around repayment and try to position themselves as saviors, she says.
How scammers reach you
Student loan scammers can get creative with their contact methods. Here are a few to watch out for.
Robocalls
Think twice if your phone rings with an unknown number. In the first half of September, scammers placed more than 350,000 student loan-related robocalls, according to Transaction Network Services, a financial infrastructure firm.
“Beware of unsolicited calls or communication,” Armeson says. “That is the number-one way that a scammer will weasel into your life.”
Snail mail
Scammers may also send letters through the mail. Read them closely. Even if it seems official or formal, a scam letter will often include grammatical or spelling errors, the Education Department says.
Texts and social media
Increasingly, scammers are also targeting borrowers with texts and social media messages, Tayne says. Scams that began on social media have accounted for $2.7 billion in reported losses since 2021, more than any other contact method, the FTC said earlier this month.
Official Education Department text messages will only come from the numbers 227722 or 51592.
Email
Scammers may try to sneak into your inbox. If an email looks suspicious, double-check the sender.
Legitimate emails from the Education Department will only come from these senders:
Protecting yourself from a student loan scam
Don’t engage if you receive a call about your student loans out of nowhere. Hang up if it’s a robocall; if a person is on the other side, quickly end the call.
“If someone says they are from a specific agency, department or loan servicer, just say, ‘you know what, let me hang up and do my research, and I’ll go from there by myself,'” Armeson says.
If you get an email or text about your student loans, don’t click on any links.
Use strong passwords and enable two-factor authentication on all of your online financial accounts, including your StudentAid.Gov and student loan servicer accounts, LiaBraaten says.
Never share your login information. With just your username and password, scammers can sign legally binding student loan documents electronically and make changes to your federal student loan account.
The Education Department and your servicer will never ask for your password.
What to do if you’re a student loan scam victim
If you believe a scammer has targeted you, immediately stop communicating with them. Then, take the following steps to get help and protect yourself from any further harm:
Contact your student loan servicer. Call your servicer and tell them what happened. Check the status of your loan and ask if the scammer did anything to your account.
Call your bank and credit card company. Ask them to stop any payments to a scammer.
Change your passwords. Change all passwords associated with your financial accounts and student loans, like your StudentAid.gov and servicer accounts.
Monitor your finances. Check to see if anyone has opened an unauthorized account or line of credit in your name.You can check your credit report for free each week on AnnualCreditReport.com.
Consider freezing your credit. If you think the scammer may have personal information, like your Social Security number, freeze your credit to prevent identity theft and fraud.
Save all communication records. If the scammer has texted or emailed you, save these records to send the information to the FTC and other law enforcement agencies.
Report possible scams to the FTC, which may use the report to spot trends, educate the public and bring cases against fraudsters in partnership with more than 2,800 law enforcement organizations.
If scammers took your money, the FTC will also give you advice on how to recover it. “The quicker you act, the better your chance of getting your money back,” the FTC website says.
You can also report the student loan scam to your state’s attorney general’s office or the Consumer Financial Protection Bureau for further assistance and investigation.
These days, a college education is considered a luxury for many American families. For the 2022-23 school year, a full-time student can expect the sticker price on a public, four-year, in-state school to be $10,950, according to the College Board’s 2022 Trends in College Pricing report . That’s $190 higher than the previous year, or an increase of 1.8% before adjusting for inflation.
For a private non-profit university, the annual cost jumps to $39,400, an increase of $1,330 over the previous year.
Multiply that by four years, add out-of-state or private school tuition, or pursue an advanced degree, and it’s easy to see why so many students and their parents have to borrow money to cover the cost of tuition and related school expenses. In fact, 43.6 million borrowers have federal student loans, which equates to 93% of all student loan debt.
You might be one of them, or have a family member or close friend who is. But how much do you really know about student debt? After all, it can rank right up there with politics and religion on the list of topics that no one wants to bring up.
Any idea which states have the highest student loan balances? Or how much Americans owe in total on their student loans? What about how common it is for people to stop making payments?
We’ve gathered those answers and more, and the numbers may surprise you. Because whether you see it as a private struggle or a national crisis, student loan debt is a big deal.
1. Americans currently owe over $1.7 trillion on their student loans.
That was the cumulative student loan balance among American consumers as of August 2023. A decade ago, that figure was closer to $1.1 trillion. Student loans are now the largest form of consumer debt in the U.S. other than mortgages — exceeding car loans and credit card debt.
Want some good news? This debt crisis has been getting some attention. Though the Biden administration was unsuccessful in implementing a nationwide student loan forgiveness program (at least for now), it has forgiven more than $116 billion in student loan debt via more targeted forgiveness initiatives. It has also made improvements to how payments toward forgiveness under income-driven repayment (IDR) and the Public Service Loan Forgiveness (PSLF) program are counted. Plus, it implemented a new, improved IDR program known as Saving on a Valuable Education (SAVE). 💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.
2. The average student loan balance is more than $37,000.
The average federal student loan borrower today owes $37,718. .Borrowers with private loans owe even more: as high as $40,449, on average.
When divided up by generation, Baby Boomers carry the highest average balance at $45,136. Gen Xers come in second, with balances averaging $43,438. Millennials have the next-highest average balance of $33,173, followed by Gen Z with $14,315.
3. Individual debts vary widely.
The average debt is just that — the average. Recent figures show that student loan balances are as varied as age, state and program statistics. Total balances can range from less than $1,000 to more than $200,000, depending on the borrower.
This may not come as a surprise when compared to the total costs of attending college. For the 2022-23 school year, Kenyon College in Ohio topped the list of most expensive schools at $66,490 a year for tuition and fees, according to U.S. News and World Report . On the other hand, a handful of schools, including Berea College in Kentucky and College of the Ozarks in Missouri, offer free college tuition to students who qualify.
4. Current student debt varies widely by state and college.
While not technically a state, Washington, D.C. topped the list of states with the highest student debt, with an average of $54,945 — more than $12,000 higher than the next-highest state, Maryland, which averaged $42,861. The bottom of the list (or perhaps the top, depending on your point of view), includes North Dakota, South Dakota, and Iowa, all with less than $31,000.
Likewise, the program students pursue can have a huge impact on the amount of student debt facing graduates. The cost of graduate school can vary widely by program. Specialized degrees — medicine, law, or pharmacy, for example — could leave students facing even higher debt burdens, sometimes upwards of $100,000.
5. Student loan debt disproportionately impacts women and borrowers of color.
Student loan debt can have a number of devastating consequences for borrowers of all backgrounds. It’s shown to make major life milestones such as buying a home and starting a family less attainable. And for those who can’t afford their payments, student loan default can wreak havoc on their credit and overall finances.
However, certain borrowers are disproportionately burdened by student loan debt. For instance, Black college graduates owe an average of $25,000 more in student loan debt than white college graduates. And four years after graduation, Black students owe an average of 188% more than what white students borrowed.
Additionally, Hispanic and Latino borrowers were the most likely to delay getting married and having children due to student loan debt.
Further, 64% of student loan debt is held by women, with the highest average amount of debt belonging to Black women.
6. Americans with student debt are likely to have multiple loans.
The Department of Education currently contracts a few different loan servicers . The federal student loan will be assigned to a loan servicer when it is disbursed. For borrowers with multiple student loans, it is possible that they’d have multiple loan servicers. That could be a lot to juggle, and one reason borrowers may consider federal student loan consolidation.
7. The number of borrowers defaulting on their student loans is in the seven figures.
As of 2023, one out of every 10 Americans has defaulted on a student loan, and 5% of all student loan debt is currently in default. About 4 million student loans enter default each year.
Risk factors for student loan default can include having other forms of debt, such as a credit card balance, car payment, or mortgage. And defaulting on loans can also put borrowers at risk for having other bills, such as medical expenses, end up in collections as well.
What’s to be done? Even if you just stop paying on your student loans, they won’t go away (though the new SAVE Plan can bring your payment down to $0 if your income is low enough, and may eventually lead to forgiveness if your income remains low.) And in the meantime, interest will continue to accrue and, in some cases, capitalize (along with penalties and other downsides to nonpayment, like being sent to collections).
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
Student Loan Refinancing If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
There are several options for teachers seeking to reduce their federal student loan debt, including loan forgiveness and cancellation. For example, teachers may qualify for the Teacher Loan Forgiveness program, Public Service Loan Forgiveness program (PSLF), and/or the Perkins Loan Cancellation for Teachers. Also, there are state and local loan forgiveness, cancellation, and grant programs. We’ll discuss these options in more depth below.
Teacher Loan Forgiveness Program
Amount forgiven:
Up to $5,000 or up to $17,500, depending on the subject area you teach.
Which loans might qualify:
Direct (or Stafford) Loans, both subsidized and unsubsidized, and FFEL Program Loans. For borrowers with Direct Consolidation Loans, the outstanding portion of the consolidation loan that repaid an eligible Direct Subsidized Loan, Direct Unsubsidized Loan, Subsidized Federal Stafford Loan, or Unsubsidized Federal Stafford Loan may qualify as well. Learn more here .
Qualifications:
• Teaching at a low-income school; you can search for a school in this directory
• Teaching for five complete and consecutive academic years
• Existing student loans cannot be in default
Details:
The maximum amount that can be forgiven under this program depends on the role and subject the borrower teaches. Teachers are eligible to receive up to $17,500, if they are considered “highly qualified” as defined by the program and are full-time math or science teachers in an eligible school. Teachers working in special education that meet specific requirements may also qualify to have $17,500 forgiven.
Teachers are eligible to receive up to $5,000 if they are a “highly qualified” full-time elementary teacher or a full-time secondary school teacher in all other subject areas.
What does “highly qualified” mean? That the borrower has a bachelor’s degree, full state certification as a teacher, and their certification or licensure requirements were not waived on an emergency, temporary, or provisional basis.
If you apply for Teacher Loan Forgiveness, you can’t also apply for Public Service Loan Forgiveness (PSLF) for the same period. So if you receive Teacher Loan Forgiveness, the five-year period of service that supported your eligibility will not count toward PSLF.
How to apply:
Teachers are not eligible to apply until they have completed the five years of service. After completing this requirement, borrowers can fill out the Teacher Loan Forgiveness Application. (It may be helpful to get acquainted with the application now, because it clearly explains who qualifies for what amount of forgiveness.) 💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Public Service Loan Forgiveness Program
Amount forgiven:
Up to 100% of the remaining loan balance.
Which loans qualify:
Direct Loans, also known as Stafford Loans, and Direct Consolidation Loans.
Qualifications:
• Must be in certain public sector jobs and employed full-time
• Must have made 120 qualifying payments (this takes 10 years if the borrower makes them consecutively)
• Payments must be made as part of an income-driven repayment plan
• Existing student loans cannot be in default
Details:
Unlike with the Teacher Loan Forgiveness Application , teachers don’t need to teach for a low-income school or within a particular academic subject when applying for the Public Service Loan Forgiveness Program (PSLF).
To be eligible for this program, the borrower must be employed by the local, state, or federal government, or work for certain nonprofit organizations that provide a qualifying public service — such as general education services.
To qualify for PSLF, borrowers must be on an income-driven repayment plan. With an income-driven repayment plan , borrowers are only required to pay a certain percentage (between 10 and 20%) of their discretionary income toward their monthly student loan payments.
Recommended: A Look into the Public Service Loan Forgiveness Program
Sometimes, there is confusion about whether forgiven loan balances are taxed. If a borrower meets the qualifications for PSLF, the forgiven amount will not be taxed. For borrowers who are on an income-driven repayment plan and expect their loans to be forgiven after 20 or 25 years (but are not participating in the PSLF program), it is possible that the forgiven amount will be taxed as income. To understand more about these tax nuances, consult a licensed tax advisor.
To qualify for PSLF, the 120 qualifying monthly payments do not need to be consecutive. For example, if a borrower has a period of employment with a non-qualifying employer, they will not lose credit for any prior qualifying payments made with a PSLF-approved employer.
While it is possible to partake in both the Teacher Loan Forgiveness Program and PSLF, it’s not possible to do so concurrently. Your five years of service under the Teacher Loan Forgiveness Program does not count toward your qualification for PSLF — you will have to qualify for PSLF under a different period of teaching service. Furthermore, payments made when working toward the Teacher Loan Cancellation Program will not qualify for PSLF — you will have to make 120 additional qualifying payments for the PSLF program.
To apply:
Borrowers may want to fill out the Public Service Loan Forgiveness (PSLF) form with the PSLF Help Tool to be certain that their employment qualifies for the program. Once received by the Department of Education, the borrower will receive a response telling them whether or not they qualify, and if they don’t, what needs to be done to qualify. If the borrower does qualify, the DoE will tell them how many qualifying payments have already been made and how many need to be made.
Every time a borrower changes jobs, they’ll need to send in an updated Employment Certification form. Otherwise, borrowers will be required to submit an Employment Certification form for each of their previous employers when they apply for forgiveness.
Once a borrower has received notification that their PSLF Employment Certification has been approved, they’ll need to continue making those on-time student loan payments. After making 120 payments, they can apply for forgiveness.
Perkins Loans Cancellation for Teachers
Amount forgiven:
Up to 100% of the loan, done in increments over a five-year period.
Which loans qualify:
Federal Perkins Loans (The Federal Perkins Loan program expired in September 2017, but loans disbursed through the program may still qualify.)
Qualifications:
A minimum one year of teaching and at least one of the following requirements:
• Teaching at a low-income school; search for a school in this directory
• Teaching science, math, foreign languages, bilingual studies, or special education
• Teaching a subject that has a shortage of qualified teachers in your state
• Teaching in a school operated by the Bureau of Indian Affairs or on a qualifying Indian reservation
Details:
Those who are eligible for the Perkins Loans Cancellation for Teachers may have all of their Perkins Loans forgiven. Cancellation happens in stair-step increments over five years. Here’s how the incremental forgiveness system works:
• 15% of the original Perkins loan balance is canceled per year for the first and second years of service
• 20% is canceled in both the third and fourth years
• 30% is canceled in the fifth year
In order to qualify for this program, an employee must work directly for the school system — qualifying is entirely contingent on position duties.
To apply:
Each school has its own process, so borrowers should contact the school that administered the Perkins Loan.
State and Local Student Loan Forgiveness Programs
Some states offer loan forgiveness programs for teachers, especially for those who work in subject areas in high demand. One place to start your search for a state and local teacher loan forgiveness program is through this database created by the American Federation of Teachers.
What About My Other Student Loans?
So far, all of the programs we’ve discussed only apply to federal loans. What can be done if a borrower has other loans (like private loans) that don’t qualify for federal teacher loan forgiveness?
One option is to look into refinancing the student loans. When a borrower refinances a student loan or multiple loans, they are essentially paying those loans off with a new loan from a new lender. Ideally, the new loan has a more competitive interest rate than the existing loan(s), which could potentially save the borrower money over the life of the loan.
Borrowers can refinance both private and federal student loans, so it is an option for teachers who don’t have loans that qualify for one of the federal forgiveness or cancellation programs.
If you refinance your federal loans, you will lose access to federal loan benefits such as access to the PSLF program and the Teacher Loan Cancellation Program. There’s always the option to refinance your private loans while keeping your federal loans separate.
The Takeaway
Teachers with federal student loans may be able to pursue loan forgiveness through programs like Teacher Loan Forgiveness or Public Service Loan Forgiveness programs. Borrowers who hold Perkins Loans may also be able to pursue Perkins Loan Cancellation for Teachers. If you also have private loans, refinancing may be a good option, though as stated above, refinancing federal loans disqualifies borrowers from government forgiveness programs.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
Student Loan Refinancing If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Editor’s Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
What happens if I miss a student loan payment? That’s the question on many borrowers’ minds as federal student loan payments resume after more than three years of emergency forbearance.
Missing payments on student loans can have a variety of negative consequences, including damage to your credit score and wage garnishment. However, the Biden administration is offering a temporary “on-ramp” to ease the transition back into repayment. Until the end of September 2024, borrowers will not have to worry about their student loans falling into default or damage to their credit score if they miss payments.
Interest will continue to accrue during this time, though, and any missed student loan payments will be due eventually. Rather than ignoring your student loan bills, take some time to review your options for making them more affordable. The Department of Education offers various plans to help struggling borrowers get back on track.
What Happens if I Miss a Federal Student Loan Payment?
Missing federal student loan payments typically leads to delinquency and default, but from October 2023 through September 2024, borrowers who miss a payment will avoid these consequences. Here’s a closer look at what this student loan on-ramp entails, followed by what typically happens when you miss payments.
Understanding the Student Loan On-Ramp
Federal student loan borrowers have been exempt from student loan payments and interest since March of 2020. With the end of this emergency forbearance, the Biden administration is offering a one-year on-ramp for borrowers to adjust to the new reality. Until Sep. 30, 2024, borrowers won’t face the usual consequences if they miss payments.
For example, your loans won’t fall into delinquency or default, and missed payments won’t be reported to the credit bureaus. Your loans won’t go into collections, and you won’t have to worry about garnishment of your wages, tax refund, or Social Security benefits.
What’s more, the interest that accrues during this year won’t be capitalized, or added onto, your principal balance when the on-ramp expires. This on-ramp gives borrowers time to start making payments again after the lengthy pause.
However, interest will still accrue during this time, and you’ll still have to pay back your loan eventually. Instead of skipping payments over the next year, you may be better off applying for an income-driven repayment plan for more affordable monthly bills.
What Normally Happens When You Miss a Student Loan Payment
Normally, your student loan is considered delinquent the day after you miss a payment. Even if you start making the next payments, your account will remain delinquent until you make up for the missed payment or receive deferment or forbearance.
Once 90 days pass, your loan servicer will let the major credit reporting agencies know that your loan is delinquent. Your credit score will take a hit, making it more difficult to qualify for good terms on loans or credit cards or to rent an apartment.
If you continue not paying, your loan will go into default. For federal loans, the government will wait 270 days. Defaulting on your student loan has serious consequences. The entire amount you owe on your loan, including interest, becomes due immediately.
You won’t be able to take out any other student loans, and you’ll no longer qualify for deferment or forbearance or be able to choose your own mortgage, car loan, or other forms of credit. The government may take your tax refund or federal benefits to pay off your loan. You may also have your wages garnished, meaning your employer will take part of your paycheck and send it to the government to be applied toward the loan.
It’s rare, but the government can also sue you at any time — there’s no statute of limitations. You may also be responsible for collection fees, attorney’s fees, and other costs. In other words, you do not want to default on your student loans. (If you do, options exist for getting out of default, such as the Fresh Start program.) 💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
What Happens if I Miss a Private Student Loan Payment?
Private lenders usually give you much less leeway than the federal government. Exactly what happens if you miss a payment depends on the company’s policies and your loan terms. A private lender can tack on late fees and transfer your loan to a debt collection agency.
Also, private lenders can sue you if you stop paying your student loans. If they win, a court can sign a judgment allowing them to garnish your wages. States set the statute of limitations for lawsuits about payment of private loans; the time period usually ranges from three years to a decade. But the lender can continue trying to collect the debt for as long as they want. Plus, certain actions can reset the statute of limitations, such as making a payment or even acknowledging that the debt belongs to you.
Will My Loans Eventually Go Away if I Can’t Pay?
If you stop paying your student loans, they will not go away. However, it may be possible to discharge student loans in bankruptcy or qualify for student loan forgiveness or discharge.
For example, federal student loans can be discharged if you suffer from a total permanent disability or your school closes while you’re attending or soon after you leave. You can also pursue student loan forgiveness programs, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness.
Student loan cancellation from an income-driven repayment plan may also be an option. Income-driven plans will discharge your remaining student loan balance at the end of your term. While the term is 20 or 25 years for some plans, the new SAVE plan will offer forgiveness after 10 years if your original principal balance was $12,000 or less. On all the income-driven plans, it’s possible that your monthly payment could be $0, depending on your discretionary income.
For instance, borrowers who earn less than $32,800 as individuals or $67,500 as a family of four in most states could have $0 monthly payments on the SAVE plan. If this describes you, you could essentially stop paying your student loans and see them go away after anywhere from 10 to 25 years on the plan, depending on how much you borrowed and whether you took out the loans for undergraduate or graduate school.
However, you’ll have to apply for income-driven repayment and recertify your income annually to stay on the plan and keep making progress toward loan cancellation. If you give the Department of Education permission to access your tax information, it can recertify your plan automatically each year.
What if I’m Experiencing Financial Hardship?
If you are having a tough time with your finances or are putting off making a late student loan payment, don’t just ignore your loans; instead, approach your lender or loan servicer to discuss your options.
For federal loans, an income-driven repayment plan could help. Income-driven plans, which include SAVE, PAYE, Income-Based Repayment, and Income-Contingent Repayment, adjust your monthly payments based on a percentage of your discretionary income. Most also extend your loan terms and offer loan forgiveness if you still owe a balance at the end. The new SAVE plan particularly has the most generous terms for borrowers.
You might also be able to qualify for a deferment or student loan forbearance, allowing you to temporarily stop or reduce payments. If you’re in deferment, depending on the type of loan you have, you may not be responsible for paying the interest that accrues during the deferment period. Among other reasons, you can apply for deferment if you’re in school, in the military, unemployed, or not working full-time.
You can apply for forbearance if your student loan payments represent 20% or more of your gross monthly income, if you’ve lost your job or seen your pay reduced, if you can’t pay because of medical bills, or if you’re facing another financial hardship, among other things. Private lenders are not required to offer relief if you’re facing hardship, but some, including SoFi, do.
Will I Be Sent to Collections if I Do Not Pay My Student Loans?
It is possible that if your student loan is in default it may be sent to a collections agency. Federal student loans in default are managed by the Department of Education’s Default Resolution Group. The Default Resolution Group oversees collections for all federal student loans that are in default, so they are not sent to a private collections agency.
The Department of Education is temporarily offering a Fresh Start program for student loans in default. By calling your loan servicer or logging into myeddebt.ed.gov, you can get your loans back into active repayment, enroll in a new repayment plan, and have the record of default removed from your credit report. You’ll also regain access to federal financial aid.
Private student loans may be sent to a collection agency as soon as the loan enters default, which is generally after 90 days of non-payment.
What if I Don’t Expect My Situation to Change Anytime Soon?
Deferment, forbearance, and relief offered by private lenders are temporary solutions. If your financial hardship looks like a long-term issue, you’ll need a permanent fix.
With federal loans, you may be eligible for an income-driven repayment plan. The government currently offers four plans that aim to make payments affordable by tying them to your monthly income.
On most plans, the payments range between 10% and 20% of your discretionary income, and if you make them on time, the balance is eligible to be forgiven in 20 or 25 years.. As mentioned, though, the new SAVE plan may offer loan forgiveness after just 10 years, depending on your original loan balance. Plus, starting in July 2024 it will cut monthly payments on undergraduate loans in half. For most borrowers, the SAVE plan will likely offer the most affordable monthly payments. However, parent loans are not eligible for SAVE. If you’re a parent borrower, your only option for an income-driven plan is Income-Contingent Repayment.
Private student loans are also not eligible for income-driven repayment, and most private lenders don’t offer this option. If you’re struggling to afford your private student loan bills, though, it’s worth explaining your situation to the lender and seeing if they can work with you on a feasible repayment plan. It’s in their interest to continue collecting even partial payments from you, rather than seeing payments stop altogether and having to go through the trouble of lawsuits or referrals to collection agencies.
Why You May Want to Consider Refinancing
Another potential long-term solution to unaffordable payments is student loan refinancing. With a private lender like SoFi, you can refinance federal student loans, private loans, or both. Refinancing involves obtaining a new loan to pay off all of your old ones and committing to the new terms and interest rate.
Refinancing your student loans can make sense if you qualify for a lower interest rate, which, depending on the term you choose, may be able to cut down the money you spend in interest over the life of your loan. Or, if you choose a longer term than you originally had when refinancing, you could lower your monthly payments, which can make the loan more affordable for you now. You may pay more interest over the life of the loan if you refinance with an extended term.
When you refinance with SoFi, you won’t pay any origination fees to refinance, and if your financial situation improves down the line and you want to pay off your loan faster, you won’t face prepayment penalties. It takes just two minutes online to figure out whether you qualify and the potential rates you can obtain.
The Takeaway
Missing student loan payments can have serious consequences, including entering default and damaging your credit score. Fortunately, borrowers have some leeway through September 2024 as they adjust to making payments on their federal loans again. However, private student loans offer no such benefit.
Refinancing could be an option to consider for borrowers looking to secure a lower interest rate. Consider SoFi — where there are zero fees for refinancing student loans and qualifying borrowers can secure a competitive interest rate.
Hoping to get a handle on your student debt? Look into whether refinancing your student loans with SoFi could help you lower your payments or save money in the long term.
FAQ
What happens if I’m late on a student loan payment?
If you are late on a student loan payment, the loan may be considered delinquent. The loan will remain delinquent until a payment is made, or other arrangements — such as deferment or forbearance — are made. Through Sep. 30, 2024, missing payments on your federal loan payments won’t cause them to go into delinquency or default thanks to the student loan on-ramp.
Does a late payment on a student loan affect credit?
A late payment may have a negative impact on your credit score. With the exception of the student loan on-ramp through the fall of 2024, federal loans are normally reported to the credit bureau if they remain delinquent for 90 days. Private student lenders may report a late payment to credit bureaus after 30 days.
What happens if you miss a student loan payment by 270 days?
If you fail to make payments on your federal student loan for 270 days, the student loan will enter default (again, with the exception of the temporary student loan on-ramp). Consequences of default can be serious, such as the total balance of the loan becoming due immediately.
Private student loans may be considered in default after 90 days.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Student Loan Refinancing If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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Editor’s Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
Student loan debt is at an all-time high, with more students graduating with debt than ever before. Consider this: Almost 44 million borrowers have federal student loan debt and they owe, on average, $37,338. As recent graduates begin their careers, it can be overwhelming to figure out how to make monthly student loan payments.
Ignoring your payments may seem like an easy way out, but student loan default can have extreme consequences. If you’re struggling with student loan payments or are already in default, there are ways to recover. For instance, you could consolidate defaulted student loans. Or you could refinance them. This guide will help you figure out your best option.
What Is Student Loan Default?
If your student loan is in default, it means you have failed to make payments on your student loans for several months in a row. However, there are a few steps that occur before defaulting on student loans.
Federal student loans are considered delinquent once you miss a student loan payment. After 90 days of delinquency, your loan servicer can report the missed payments to the three major credit bureaus. Generally, after 270 days of nonpayment, your loan will go into default.
If you have private student loans, they can go into default even sooner. Typically, after you miss three payments or 120 days, your private student loans go into default. Different lenders have different terms when it comes to default, however, so be sure to check with yours to get the specifics.
How Common Is Defaulting on Student Loans?
Defaulting on student loans is fairly common. The latest data from EducationData.org finds that one in 10 student loan borrowers has defaulted on a loan. In fact, roughly 4 million student loans go into default every year, and about 7% of loans are in default at any given time. As of 2021, the median loan balance among delinquent and defaulted borrowers was $15,307.
What Are the Consequences of Student Loan Default?
Defaulting on your student loans can have some steep consequences. For starters, the entire balance of your student loans could become due in full.
If you default on your student loans, your lender may eventually turn your debt over to a collection agency who will usually start calling, emailing, and even texting you to try and collect on your debt. You may even have to pay collection fees on top of everything else.
If you default, you may lose eligibility for programs that could help you manage your debt, such as deferment, forbearance, or Public Service Loan Forgiveness.
Once your student loans are in default, your loan servicer or collection agency will report your default to the three major credit bureaus, which will negatively impact your credit score.
And if your servicer can’t collect the money you owe on your federal student loans, they can ask the federal government to garnish a portion of your wages or your tax refund. 💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
How Can You Recover From Student Loan Default?
If you failed to make payments on your student loans and they’ve gone into default, you don’t have to let it ruin your financial future. Here are some steps you can take to get back on track.
Loan Rehabilitation
One option for getting out of student loan default is student loan rehabilitation. To rehabilitate your loan, you work with your loan servicer and agree in writing to make nine reasonable and affordable monthly payments over a period of 10 months.
In order to rehabilitate a Direct Loan or FFEL program loan, your monthly payments must be no more than 20 days late. Your loan servicer will determine the new monthly payment, which is 15% of your discretionary income.
When you have successfully rehabilitated your loan, the default may be wiped from your credit history. Note that any late payments reported to the credit bureaus before the loan went into default will remain on your credit reports.
Private student loans are not eligible for rehabilitation.
Repaying Your Loan in Full
Another option to get out from under the shadow of student loan default is to repay your loans in full. Of course, if you had the funds to do so, you probably wouldn’t have defaulted in the first place. That said, you could look into ways to cover the balance due, such as borrowing from a family member or close friend.
Options for Private Student Loans
If you have private student loans that are in default, you can contact your lender and see what possibilities are available. Some lenders may have hardship options similar to the federal programs. As mentioned, the time it will take for your unpaid private loan to go into default depends on the lender — but the timeframe could be relatively short, even just 120 days.
However, if you’ve only recently missed a payment, you can start making payments again (and repay the missed payment) to try to prevent your loan from going into default.
Is Refinancing an Option for Defaulted Student Loans?
If your student loans are currently in default, refinancing your loans can be difficult. When you refinance your student loans, you take out a new loan with a private lender to pay off the existing loans. When you apply for a refinancing loan, lenders will use your credit score and financial history, among a few other factors, to determine if you qualify.
If your loan is already in default, your credit score has likely decreased significantly and will likely impact your ability to get approved for a new loan. If you have a family member or friend who is willing to cosign the loan, however, you may be able to refinance your student loans that way.
Another possibility for refinancing your student loans would be to rehabilitate your loans first. A lot of lenders might turn you down for having a defaulted loan on your credit history, but others might be willing to look past that and onto your education and income potential to approve you for a loan.
Can you Consolidate Defaulted Student Loans?
Another way to recover from student loan default is to consolidate your student loans in default. If you have federal loans, you can pursue defaulted student loan consolidation with the Direct Consolidation Loan program. This program allows you to combine one or more federal loans into a new consolidation loan.
To be eligible, you must either make three full, on-time, and consecutive payments on the defaulted loan or agree to make payments on an income-driven repayment plan.
Private student loans aren’t eligible for Direct Consolidation Loans. However, you can consolidate these loans with a private lender by refinancing.
Tips for Consolidating Defaulted Student Loans
Wondering how to consolidate defaulted student loans? To consolidate federal student loans, first gather all the documents you need. This includes your personal information such as your name, address, email, Social Security number, and FSA ID; financial information such as your income; and details about your loans, including amounts, account numbers, and loan servicers.
Next, go to studentaid.gov to fill out the Direct Consolidation Loan application. You’ll need your FSA ID to log in. Specify the loans you want to consolidate.
Then, choose one of the income-driven repayment plans if that’s the option you prefer. Review the plans in advance to determine which one is the best option for you.
Filling out the application typically takes less than 30 minutes.
Pros and Cons of Student Loan Consolidation
Choosing to consolidate defaulted student loans has advantages and disadvantages you’ll want to weigh before you move forward.
Advantages include:
• One loan and one monthly bill. This means there will be less for you to keep track of.
• Lower payments. When you consolidate, you can choose an income-driven repayment plan or to lengthen the term of your loan, which could lower your monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)
• Fixed interest rate. You’ll get a fixed interest rate for the life of your loans with Direct Loan Consolidation. The new rate is a weighted average of all your federal loan rates, rounded to the nearest eighth of a percent.
• Access to forgiveness programs. With a Direct Consolidation Loan, you might be able to get access to programs you weren’t eligible for previously, such as Public Service Loan Forgiveness.
Disadvantages include:
• Longer repayment period. You could end up repaying your loans for an extra year or two, which will cost you more overall.
• Pay more in interest over the life of the loan. With consolidation, the outstanding interest on your loans is added to the principal balance, and interest may accrue on that higher balance.
• Possible loss of benefits. Consolidating loans other than Direct loans could mean giving up perks you have with those loans, such as rebates or interest rate discounts.
This comparison chart of the pros and cons of student loan consolidation can be helpful as you consider the question of should you refinance or consolidate your loans.
Pros of Student Loan Consolidation
Cons of Student Loan Consolidation
Simplified payments with just one bill to pay each month.
Longer repayment period means paying more overall.
Monthly payments may be lower.
Pay more in interest over the term of the loan.
Fixed interest rate.
Could lose benefits associated with current student loans.
Possible access to certain forgiveness programs.
How to Manage Student Loans Without Going Into Default
If you’re struggling to make student loan payments but haven’t yet defaulted on your loan, taking action now could help prevent financial issues in the future. Here are some options that could help you take control of your student loan debt and avoid going into default.
Take Advantage of the Temporary Grace Period
Federal student loan payments and interest accrual has been paused since March 2022 in order to alleviate some of the financial challenges created by the coronavirus pandemic. However, the latest debt ceiling bill officially ended the payment pause, requiring interest to begin accruing again on Sept. 1. and payments to resume on October 1.
The Department of Education understands that restarting student loan payments after such a long pause will put many borrowers in a difficult financial position. So to prevent struggling borrowers from facing the harsh penalties of defaulting on their loans, there will be a 12-month ramp-up period to help borrowers adjust to repayment.
During this period, which takes place from Oct. 1, 2023 to Sept. 30, 2024, federal student loan borrowers who don’t make their payments on time and in full will not be reported to the credit bureaus, have their loans placed in default, or be referred to debt collectors.
Forbearance or Deferment
If you’re unable to make payments on your student loans due to a sudden and temporary economic change, you might consider applying for student loan deferment or forbearance. Both allow you to temporarily pause your loan payments.
If your loans are in forbearance, which is granted for 12 months at a time, you will be responsible for paying accrued interest during the forbearance period. If your loans are placed in deferment, which can last up to three years, you may not be responsible for accrued interest during the deferment period, depending on the type of loan you hold.
While your loans are in deferment or forbearance, you do have the option to make interest-only payments on the loan. If you choose not to, the accrued interest on most loans will be capitalized, or added to the principal balance. You’ll then be charged interest based on the larger loan amount.
Applying for Income-Driven Repayment (IDR)
Another option to help manage your student loans is income-driven repayment. There are four income-driven repayment plans available to federal student loan borrowers. Depending on the type of plan you qualify for, your monthly payments will be anywhere from 10% to 20% of your discretionary income. (Beginning in July 2024, the new SAVE plan will adjust payments to 5% of discretionary income.)
Income-driven repayment plans also stretch out the repayment term of the loan to either 20 or 25 years, depending on the specific plan. This means that while you could pay less per month, income-driven repayment could cost you more in interest over the life of the loan. The good news is that if you have any remaining debt at the end of the term, it will be forgiven (but you may need to pay income taxes on the canceled amount).
Consolidating Your Loans
Even if you’re not in default, you can consolidate your federal loans through the Direct Loan Consolidation program. As mentioned, the new interest rate will be the weighted average of the existing loans, rounded to the nearest eighth of a percent. So you won’t lower your effective interest rate, but you’ll only have to keep track of one monthly payment.
Refinancing Your Loans
If your monthly student loan payments are difficult for you to manage, you could consider refinancing with a private lender. If you have a combination of private and federal student loans, you could refinance both types into a single, private loan.
Refinancing can give you an opportunity to qualify for a lower interest rate or lower monthly payments, and you’ll only have to worry about tracking one payment each month. You may also be able to customize your repayment term — either lengthening or shortening the term.
By lengthening the term, you could reduce your monthly payments, but you may end up spending more money in interest over the life of the loan. To see how refinancing could impact your student loans, plug your numbers into this student loan refinance calculator.
It’s important to note that if you’re thinking of taking advantage of any federal programs such as income-driven repayment or Public Service Loan Forgiveness, refinancing may not be a good idea, as you’ll lose your eligibility for these programs.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
Does consolidating student loans remove default?
No. When you consolidate your student loans, the record of the default will stay on your credit history. Another option is loan rehabilitation, which removes the default from your credit history.
Can you consolidate defaulted student loans?
Yes, you can consolidate defaulted student loans. If you have federal loans, you can consolidate them with Direct Loan Consolidation. To be eligible, you must either make three full, on-time, and consecutive payments on the defaulted loan or agree to make payments on an income-driven repayment plan. You can fill out an application at studentaid.gov. You can consolidate private student loans with a private lender.
Can you refinance student loans that are in default?
You can refinance student loans that are in default, but it may be difficult. That’s because your credit score has likely decreased, which may impact your ability to get approved for refinancing. If you have a family member or friend who is willing to cosign the loan, you may be able to refinance your student loans that way. Or, you could rehabilitate your loans first, which could help improve your odds of being approved for refinancing.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Student Loan Refinancing If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Here’s how this social worker has paid off $28,000 of student loan debt in 15 months.
Today, I have a great debt payoff progress story to share from Taylor. Taylor is a social worker who is working on paying off $277,000 of debt and retiring early. She shares tips on how she is cutting her expenses, the ways they’ve increased their income through various side hustles, house hacking advice, and how she qualified for an $88,000 student loan award.Enjoy!
Now, don’t let the title deceive you into thinking we are debt free; we most certainly are not.
As of this writing, we still have $251,195.39 of debt (all student loans).
This is our story about the debt payoff strategies we used in paying off $28,026.02 of debt and our goals for the future!
Who are we?
My name is Taylor, and I am a 29-year-old medical social worker who finished grad school in 2018. I am also a part-time social media coordinator and with both jobs combined, I make $96,000 (gross).
I live with my husband, Bret, who I have been with for 11 years and married for 3. He is a full-time student and has been in grad school since September 2020 (he has about 2 more years left). We love to travel, try new restaurants, hang out with our friends and family, and just have a good time.
I also have a blog at Social Work to Wealth.
Related articles:
How did we get here?
First, I need to give you some background before we get into the nitty gritty of our debt numbers and payoff strategies.
2012: We met when both of us were in college. I was 18 and Bret was 22. Soon after we met, Bret took a few years off from school while I finished my bachelor’s. I relied entirely on student loans, and don’t remember applying to any scholarships. When Bret returned to school to finish his bachelor’s, he did receive some scholarships and worked a summer job to pay forhousing but still needed to rely on student loans to pay the bulk of his tuition.
I will speak for myself when I say I didn’t take the time to calculate how much loan money I actually needed and blindly accepted the total amount. Looking back, maybe I would have needed it all or maybe not, but I wish I would have at least done the exercise.
We have always been open with talking about our debt and money in general, but I remember us both expressing the thought that we would probably always have our student loans. We would just live our life, pay our minimum payments, and that would be that. There was never any talk about debt payoff strategies, or any money management strategies, really.
We went through many life transitions. Living apart for two years while I went to grad school, him returning to school to finish his bachelor’s, various jobs, and a post-bach program.
2019: Bret was finishing up his post-bach program and got accepted into grad school. We were newly engaged and began planning and saving for our wedding scheduled for July 11th, 2020. Such exciting stuff!
March 2020: We got the news our wedding venue was closing for the foreseeable future due to the COVID-19 pandemic, and we decide to cancel our wedding. We switched gears and used the money we saved for a down payment on a new home. Then, we had a small intimate wedding featuring a hot-air balloon with 18 of our closest family members! We personally saved a ton and also had tremendous help from our family.
September 2020: I start a new job and Bret starts grad school. We are newlyweds and settling into our new home in a new city.
I wish I could talk more about 2020 because it was a HUGE year for us with buying a home, moving, getting married, Bret starting grad school and me starting a new job, but that’s a conversation for another day!
From frugal to spenders
When we were saving for our wedding, we were very frugal. Any extra money we had, we put toward our wedding savings (which again, ended up being used for the down payment on our house and a smaller wedding ceremony).
We went from frugal to swiping our cards left and right to prepare for our wedding and furnish our house. It was sooo nice to finally be able to spend the money we had been saving for so long! But this continued into 2020… and 2021…
We were mostly spending on eating out and experiences. We do like to buy “things” but we definitely value food and experiences a lot more. We even decided to put a trip to Hawaii on our credit card costing us around $5,000, along with other expenses, because why not? We deserved it!
We didn’t have much of a budget, our bills were getting paid, but the credit card bill kept increasing. Since I was the only one bringing in income, we took out some student loans to help with a portion of our living expenses. And the credit card bill continued to increase.
The “wake-up call”
The “wake-up call” is such a theme throughout many debt payoff stories. So, here’s mine.
I went to breakfast with two friends in December 2021, and one of them brought up high-yield savings accounts (HYSA). I had never heard of this type of account before and was shocked to learn that these savings accounts had a way better interest rate than a regular savings account.
How was I just hearing about this at 28 years old? My mind was blown!
I thought, what else don’t I know? So of course, that led me to deep dive into the world of personal finance. I consumed any book, video, blog, or podcast I could get my hands on. I read stories after stories of people paying off thousands of dollars’ worth of debt, leveraging credit card points for free travel, investing, and so much more!
It was so motivating. I was hooked! (And still am.)
Bret was open and willing for me to share with him what I was learning. We started realizing that for the last year and a half, we hadn’t been telling ourselves “No”. We had just been buying whatever we wanted, and we had the credit card bill and no savings to show for it.
We learned that we could pay off all our debt and it didn’t have to stay with us forever. We learned there was a way to use a credit card responsibly (we thought we were). We learned that we could even retire early. That one sounded real nice! We dreamed of having more time doing our hobbies, traveling and being with our friends and family. And if we ever had kids, we dreamed of being able to work part-time so we could be home more with them and available for school activities.
Knowing this, we started reining in our spending, trying to just be more “mindful”, but no major change was made.
We take on more debt
April 2022: People in our neighborhood were getting new fences. We started thinking, “Hey, we need a new fence, too…” In some areas it was broken, it hadn’t been stained so was rotting, and was 15 years old. We were also going to get an updated appraisal to see if we could get our primary mortgage insurance (PMI) removed after just two years of owning our home and thought a new fence might help.
A coworker told me she was using a home equity loan to buy a fence and to do some other home renovations. We investigated options and ended up opening a $20,000 home equity line of credit (HELOC) instead with about a 4% interest rate. We buy our fence which ends up being about ~10,000 and we were set on it…
The second “wake-up call”
When it was all said and done, we loved our fence. We still love our fence, it’s beautiful! (And it better be at that price!) We stained it and we believe it will last us for many years.
But we start talking again about our debt and how we probably didn’t need this fence right now. We know we didn’t need this fence right now. Our PMI was removed, and it could have maybe happened even without the fence. Who knows.
We began thinking we need to make some serious changes in the way we manage our money. We need to do more than just be “mindful” about our spending. We make a real plan. We plan to make an actual budget, stop taking on unnecessary debt, and take a break from using our credit cards for the foreseeable future.
May 2022: Beginning of our debt payoff journey
Since we were serious about our new money management changes, I documented how much debt we had so we could track our progress.
$277,721.41
Here was the breakdown:
$260,390.25 in student loans, Bret & I’s combined – various interest rates
$10,676.24 HELOC – 4% interest rate
$5,430.76 is from credit card spending – 4% interest rate*
$449 for furniture – 0% interest rate
$775.16 for Peloton bike – 0% interest rate
*We moved our credit card debt to our HELOC since our credit card was around a 25% interest rate.
July 2023: Current debt numbers
Our current debt balance is $251,195.39, * which are all student loans.
We have paid off a total of $28,026.02 of debt!
*Our current balance will increase to ~$255,000 once Bret gets his final student loan disbursement (more on that later).
I want to also mention that we do have our mortgage, but we aren’t trying to pay that down as quickly as possible for a few reasons: we have a 3% interest rate, we don’t plan on this being our forever home, and one day we might rent it out or sell it.
Actions that helped us pay off $28,026.02 of debt in 15 months
We found a budgeting method that worked for us
We realized we could live off my income alone and not take on anymore debt, but we would have to have a somewhat rigid budget.
Finding a budgeting method that worked for us took some time. I don’t know how many times over the years I have tried to track my expenses in a budget app or an excel sheet, only to find out it was too overwhelming and that I was still overspending!
I am a visual person and learned about the envelope budgeting method, so we decided to give that a try, but use a digital variation.
So, for our entire money management system we have 4 checking accounts and 2 savings accounts (short-term and emergency fund). Our checking accounts include bills, food and miscellaneous, and two personal spending accounts.
This may seem like a lot of accounts to some, but it has worked tremendously for us. I love having a separate account for each major category in our budget so I can easily see how much money we have left in a certain category without having to add every expense into an app or Excel spreadsheet. We are joint owners on all of these accounts.
We then use the zero-based budget method to determine how much goes into each account.
We do have multiple cards to manage, but the pros VERY MUCH outweigh the cons here.
And with our own spending accounts, we have a certain amount of money allotted to us each month, so we individually have some spending freedom. We don’t have to feel guilty and know this money is set aside specifically for our personal spending.
Cut expenses and increased our income
I know some people are tired of hearing about this recommendation, but it’s something that really did help us! We reined in our spending a bit but mostly we had to increase our income. At a certain point, there wasn’t much more to cut.
We didn’t have many streaming services, started to limit our eating out, we didn’t have car payments, and we meal planned and prepped. We did (and still do) aaalll the things. We had to increase our income somehow.
Ways we increased our income
My income increase
I continued with my second job as a social media manager and then started dog sitting.
I have been dog sitting for about 5 years and have primarily used the Rover platform to list myself as a dog sitter. I like this app because it’s easy to use and I can specify various services to offer (e.g., house sitting, boarding, drop in visits, day care, or dog walking).
It also allows me to mark which days I am available and then people reach out to me if I seem like a good fit and my availability matches with their needs! Setting up my profile took some time, but now that it’s done, everything else is fairly low maintenance.
I now just have to respond to inquiries in a timely manner and set up a meet and greet if it seems like a good fit.
I currently only offer house sitting and on Rover and I charge $65/night. Rover takes a cut, so I end up pocketing $52. I also have private clients who pay me directly, and I have gotten those by referrals from past Rover clients. I charge my private clients $40/night.
I recently increased my rates on Rover and have been slow to increase my price with my private clients because they’re loyal.
I don’t make a ton of money dog sitting, but I am able to make a couple hundred dollars a month. My schedule is very limited, but there are people with better availability who make significantly more than I do!
I love animals and we don’t have any due to our sporadic work schedules, so it’s a great way for me to spend time with pets and get paid, too!
Bret’s income increase
Last year, Bret decided to take a break from grad school and soon after, he was offered a summer job in Alaska.
When we first started dating, he used to spend almost every summer there working for a family who owned a set-netting fishery. His uncle had spent many summers in Alaska working for this family and one summer brought Bret to work with him. They would catch salmon and sell it to a buying station in their area.
He went up there for about 6 summers in a row, until he got too busy with school and couldn’t go anymore.
He hadn’t been to Alaska in over 5 years, but someone who worked for the buying station remembered Bret, called him, and asked if he’d be interested in working at the buying station! Since he was already on a break from school, he said yes and worked up there for 8 weeks.
We were able to put every paycheck he earned towards our debt because we could manage all our expenses on my income alone. It was also a great way for Bret to spend part of his summer and I was finally able to visit as I never gotten the chance in previous years.
House hacking
We also started house hacking! We had a spare bedroom and bathroom I would use for my office and occasionally, for guests. A friend of mine and her husband are really into the real estate space and gave us the idea to rent it out.
We weren’t comfortable with the idea of having a long-term roommate, and with both of us working in healthcare, we knew there was a need for short-term and furnished housing for travelling healthcare professionals.
For us, short-term meant renting for 1-6 months, but we were open to individuals staying longer if it worked well for everyone involved!
Some questions we had to address before renting:
Did we need a permit?
How much should we charge for the deposit, rent and pets?
What furniture and amenities are important for travelers?
Where should we list the room?
How to create a lease agreement?
In our county, we did not need a permit to rent out the room if we were renting for at least 30+ days at a time.
After researching rental prices in our area, I found rooms that were of similar caliber listed for $1,100 per month or more. We wanted to be competitive and so we initially settled on $900 per month and have steadily increased it. We have now landed on $995 per month which includes all utilities and internet.
We set the deposit at $995, with an additional $300 for a pet deposit, and no ongoing pet rent.
We wanted to upgrade the furniture in the room and IKEA was a great place for us to find affordable, durable, and aesthetically pleasing furniture. We made sure the room had a bed, large dresser, bedside table, and we kept my desk in there too.
I read it’s important for travelers to have their own TV available so they can unwind in their room. We were able to find a decently priced smart TV off Facebook Marketplace.
Furnished Finder is where we decided to list our room, which started out as a platform for traveling nurses to find furnished housing. It is now used heavily by many healthcare professionals, students, and professionals in other fields.
Travelers reach out to us through the Furnished Finder website and if the dates work out, we move forward with scheduling a video interview. It’s important for us to be able to talk to the person, even if it’s just over video, and we want them to see our faces and home in real time as well.
For the lease agreement, we used ez Landlord Forms, because they have leases for each state with specific information on what’s required to include.
We don’t ask for anything major from tenants. The most important things to us are that they are respectful of our space, don’t smoke in the house, and pay their rent on time. We also added a page at the end for tenants to add two emergency contacts in case we need to call someone on their behalf.
We have had 4 renters so far with the room being occupied for 13 out of the last 14 months. It has really helped us with our debt payoff goals and we have also met some awesome people through the process! We plan to continue renting it out for the foreseeable future.
Applied for in-state student loan help
My state offered a program called the Oregon Behavioral Health Loan Repayment Program where they help minorities in the behavioral health field, or those who serve them, pay back their student loans.
This program is funded by The Behavioral Health Workforce Initiative which has the goal of recruiting and retaining behavioral health providers who, “Are people of color, tribal members, or residents of rural areas of Oregon, and can provide culturally responsive care for diverse communities.”
To apply, I had to show I was employed and actively providing behavioral health services and give them detailed documentation about my student loans. I also had to answer two essay questions related to being a part of and/or working with communities who are underserved and how my training has equipped me with supporting these communities.
I applied last year and was a recipient of an award!
As a recipient, there is a two-year service commitment which means I have to continue providing some sort of behavioral health service during that time frame (which I planned to). Over the next two years, I will be getting ~$88,000 in quarterly disbursements to put towards my student loans. So far this year, I have received ~$11,000, and it’s been life changing to say the least!
Alongside this support, I am also pursuing Public Service Loan Forgiveness (PSLF) for additional student loan relief.
Managing our mental health while paying off debt
Since I am a social worker, I often think about how money and debt affect individuals’ mental health. It’s one of the reasons why I started my blog in the first place.
I realized managing money is a universal task and many of us don’t know what we are doing because talking about money is taboo. And when you have financial stress, it can really take a toll on your mental health. So, I wanted to share our journey in hopes of helping others.
Bret and I aren’t those individuals who want to avoid eating out and fun experiences until we are debt free. And, we are also privileged to not have to take those extreme measures either. It has been important for us to make this journey sustainable and not deprive ourselves of experiences while we are going through it.
Here’s how we are making our journey sustainable:
Still going out to eat
Budgeting for personal spending money, aka fun
Setting realistic debt payoff goals
Putting aside money for travel
Not comparing and thinking other people are better than us because they’re able to pay off their debt quicker
Tracking our debt payoff progress (we use Excel). With so much debt left to pay off, being able to see our progress is really motivating
Openly talking about our debt. Avoidance is a coping mechanism for many, for us, acknowledging and addressing it has been so freeing (but it wasn’t always this way).
Talking about our dreams and reminding ourselves why we want to do this in the first place
We know that if we eliminated going out to eat, budgeting for fun, or both, we could be paying off our debt much quicker. However, that sounds miserable to us. It’s worth it to still go out to dinner, travel, or buy plants (in my case) than to deprive ourselves of the joy these things bring.
We are making great progress and we know in time, we will be debt free.
Our debt payoff journey is not linear
A few months ago, we decided to take out $6,000 of student loans. Bret currently has a full tuition scholarship, so we are tremendously lucky in that regard, but he just learned about some conferences that would be really helpful to his professional growth. We have gotten $1,500 of this loan money already which is included in our current debt balance, but we haven’t received all of it yet.
We could have pinched and saved to avoid taking on any of this debt, but that would have caused me to work more than I currently am. Again, not in line with our current goal of making this journey sustainable!
We were very intentional about how much to take out. We estimated how much he would need for a few conferences and declined the rest. We even opened a separate savings account for the money to make sure it didn’t get accidentally spent on anything.
I’m SO proud of us for that!
The goal here is progress not perfection. So cliche, I know. But we are learning how to think critically about our money, spend thoughtfully, use our money as a tool to reach our goals, and enjoy our life along the way. And right now, that meant taking on a little more debt.
We are moving in the right direction, and we know when he starts working, that will really accelerate our debt payoff journey since we have proven to ourselves we can live on my income alone.
Our plan going forward
Bret is still in school which means his loans are on deferment, so we currently have his on the back burner.
With the loan payment assistance I am receiving, it’s allowing us to put any extra money we have each month towards our savings. Our priority right now is building up a good emergency fund of about $16,000 (~4 months’ worth of expenses).
This has been difficult because of inflation and just little emergencies that keep popping up, but we are slowly making progress.
I am also prioritizing investing in my employer retirement plan, but only up to the amount that gets me my employer match which is 6% of my income.
Bret will be graduating in 2025, so at that time, we will pivot to incorporating his loans into our budget. Our goal is to be debt free by 2028.
It will take a lot of discipline and persistence, but I think we can do it. I am manifesting it!
We want to continue to learn, implement, and grow. We want to keep having transparent discussions about money and building our money foundations. And I personally want to continue sharing our journey with hopes of inspiring, encouraging and educating others. Here’s to sharing the wealth.
Do you have debt? What are you doing to pay it off?
Taylor is a social worker and personal finance blogger at Social Work to Wealth where she shares tips, resources, and lessons learned on her family’s journey to paying off $277,000 of debt and retiring early. She hopes to inspire and empower social workers with financial education so they can have a better relationship with their money. When she’s not working or blogging, you can find her traveling, gardening, trying a new restaurant, or buying too many plants.