Paying for School: What the Debt-Free Do Differently

Of the 43 million Americans with student loans, nearly one in five is in default, and millions more are behind on their payments, according to the Pew Charitable Trusts. These are the stories we tend to hear about in the media—yet many borrowers repay their student loans without a problem.

What distinguishes these borrowers from those who have a hard time paying for school? Surprisingly, it isn’t a matter of how much money gets borrowed: Borrowers who owe the least—often less than $10,000—actually default at higher rates than borrowers who carry larger loan balances, Pew reports.

So why do people have trouble paying for school? Key themes that emerged from the Pew research were financial instability, difficulty early in repayment, and lapses in payment. How can you avoid such pitfalls?

Finish your degree.

Students who complete their degrees or certificate programs are at least 20 percentage points more likely to pay down their loan principal every year after leaving college than students who don’t complete their degrees, according to the think tank Third Way.

The type of institution you attend and the program you complete also factor into how likely you are to repay your loans, Third Way suggests. Students who attend for-profit institutions are less likely to be able to repay their loans, as are those who complete only a two-year program.

Understand your repayment options.

In focus groups with student loan borrowers, Pew researchers found that many who struggled to repay their loans didn’t fully understand all the options available to them.

If you take out federal student loans, you’re automatically enrolled in a 10-year loan repayment plan unless you choose an alternative. This is generally the cheapest option in the long run, the New York Times reports. But if your monthly payment under this plan is too high, there are several options for lowering it.

For instance, you could pick a repayment plan with a longer term, but you’d end up paying more interest over the life of the loan. You could also pick an income-driven repayment plan, which links payments to your earnings—usually about 10 percent of your discretionary income each month, the office of Federal Student Aid says. However, this can be complicated to maintain, as you need to recertify your income every year.

Whatever you choose, make sure it’s the best option for you, and don’t be afraid to revisit your choice if your circumstances change.

Defer if necessary—but keep paying interest.

One advantage of federal student loans is that they come with consumer protections that most private loans don’t have, such as income-driven repayment options and the right to pause repayment through deferment or forbearance.

You can defer payment on federal student loans, for example, if you lose your job and can’t find suitable full-time employment, according to the office of Federal Student Aid. But beware, advises the nonprofit Institute for College Access and Success: Interest still accrues on all types of loans during forbearances and on some types of loans during deferment.

According to Pew, the accrual of interest during periods of nonpayment can create psychological and financial barriers that make it harder to pay off student loans. If you defer payment on your loan principal, continue paying the interest each month if you can.

Look into loan forgiveness.

In certain situations, according to the office of Federal Student Aid, you can have your federal student loans forgiven—that is, you’re no longer required to pay the balance of your loan. Loans can even be forgiven if you pursue a career in a particular field, such as public service, teaching, or nursing. If you’re considering these fields, loan forgiveness programs are a great option.

Paying for school can be challenging, and growing balances can be overwhelming and discouraging. But if you follow this advice, you’ll likely pay off your student loans without any problem.