The BEST Strategies for Paying Off Federal Student Loans FAST

What's the best way to pay off your federal student loans fast? I'm Travis Hornsby. I founded a company called Student Loan Planner that helps people figure out how to get out of debt the fastest way possible. And if you use these strategies for getting out of your federal student loan debt as fast as possible, it's going to get you free as fast as possible at the cheapest cost. So I can't wait to go into some of these strategies as to, you know, how you're going to get out of debt and not have to spend any more day, even one day longer, being in debt when you don't need to be. So first let's talk about federal student loan strategies, right? Federal student loan strategies for getting out of debt as fast as possible hinges on using the best repayment plan first. That's the first thing to think about. Now when you're trying to figure out what repayment plan do I use, you should know about the revised Pay As You Earn program, the REPAYE program is the acronym for it. Who's eligible for this? You need to have direct federal loans and Parent PLUS loans cannot be included in that. So you have to have direct student loans from the federal government, then you can sign up for the revised Pay As You Earn program. Now you can, when you graduate, consolidate your debt and speed up the process of entering into the revised Pay As You Earn program. That's going to give you payments of 10% of your income. Now it's always based on the prior year's tax return. So if you graduate, your income as a student is usually zero, so your income-based payment for the first 12 months on the repayment plan would be zero. Now why would that help you? Why would that help you get out of federal student loans as fast as possible? The revised Pay As You Earn plan offers interest subsidies if your required payment is less than the interest accruing every month. So for the first 12 months when everyone graduates, basically your payment would be zero and that means that all of the interest would be accruing and the way the repayment plan works is the government pays 50% of all the accruing interest that your required payment doesn't pay. Meaning that if your required payments on repay are zero, you will get a 50% interest subsidy on the revised Pay As You Earn program on all your unsubsidized loans and 100% subsidy on all the subsidized loans. That's a big deal. That's going to save you money and allow you to put more of your payments towards principal instead of interest. Now you might ask, well when should I be abandoning this plan if I want to get out of debt as fast as possible? The thing you need to know is when to refinance. When to refinance is when your revised Pay As You Earn plan, your repay plan, is not giving you any interest subsidy or very little interest subsidy. So for example, if in continuing years your repay plan number goes up and your required payment on repay covers the interest, then you're not getting any interest subsidy at all. And if you're not getting any interest subsidy at all, you'd be better off on a private loan that's a refinanced loan. So you take the federal loan, the private lender basically pays it all off, and now you owe the private lender. And the private lender's going to give you a lower interest rate. That's the only reason you would do it. If they weren't giving you a lower interest rate, there'd be no reason to do it, right? So you transfer your federal loan to a private loan, and who should do that? It's people who have a debt to income ratio below 1.25 to 1, meaning that you earn $100,000, you owe less than $125,000, you work in the private sector, and you have an emergency fund. If those things are true about you, you could choose to refinance your federal student loans now or really at any time is probably a good time just because you can lock in a lower interest rate long term, which is going to result in big savings. Now who should not refinance their federal student loan that is wanting to get out of debt as fast as possible? You know, if you owe more than twice of what you earn and you're expecting that to continue, forgiveness is probably a better option. And if you're somewhere in between these two debt to income ratios, somewhere between 1.25 and 2 for your federal student loan burden, then it's kind of a toss up. You could probably go either way in terms of paying your student loans off as fast as possible or going for forgiveness. There's no right or wrong answer in actuality. It's basically based off of what your feeling is. Now there is a right answer from a math perspective, but the thing is, is we know that so much of finance is personal and behavioral, and so you're going to have a higher savings rate by paying down the loans. And so that's why a lot of people might be better off choosing to pay back the loans directly rather than rely on these forgiveness programs, even if the forgiveness programs might be a little cheaper. And that's just simply because we know that people have a higher savings rate when they're paying off debt than when they're taking that money and trying to put it into mutual funds. So in terms of refinancing the loans, once you've decided that, yeah, I want to refinance my federal loans for a lower interest rate and get out of federal student debt as fast as possible, a strategy I want you to know about is the student loan refinancing ladder. The student loan refinancing ladder strategy is something we'll put in the description of this YouTube video. And how it works is you start off with a 20-year refinancing, then you go to a 10-year refinancing, and then you go to a five-year refinancing. Why does this help? It's because the 20-year refinancing is going to have the highest interest rate, then the 10-year is going to have a lower rate, and then the five-year is going to have an even lower rate. And again, you might say, well, why don't I just start at the lowest interest rate? Why don't I just start at the five-year loan term? And the reason for that is because your required payment, if you start with a five-year, it's going to be really, really high. So how high, you might ask? Well, it could be, it's approximately 2% of your balance. So if you owe $100,000, a five-year loan term is going to be a $2,000 a month payment. If you do a 20-year, it's about 0.6% of your total balance. So a 20-year fixed rate on 100K would be about a $600 a month payment. Now, I want to paint a picture for you. A $2,000 a month payment might get in the way of you taking a vacation, of buying a house, of paying for daycare, different things that might come up in life, right? Whereas that $600 a month payment, the 20-year fixed rate, is probably not going to interfere with as many things. So regardless of how much debt you have, what you might do is start off with a long-term loan refinancing, and then when you get a bonus, or you have extra money, or you don't have any extra expenses that month, or your bonus doesn't break down, right, and you've got some extra cash, throw it on the loan, and then once you pay that loan down by about half, then you refinance to the 10-year rate. And the required payment, because they re-amortize the loan when you refinance, that required payment on the 10-year rate is going to be about the same as it was on the 20-year. So perhaps, maybe you're able to pay down your loan really aggressively by half, down from 20, basically maybe down by about half of principal balance in only one or two years. If that's the case, you take your 20-year loan, refinance it to a 10-year. Then let's say you're able to pay down that 10-year loan by about half as well, so it's about a quarter of the original balance. Now you can refinance to a 5-year term, and the payment will be about the same as what you started with for the 20-year. So the real reason to do this is to control your risk. When you refinance, you have to pay whatever they ask you to pay every month. There's some forbearance terms if you lose your job, but in general, you have to be prepared to pay what you're committed to pay, and like a federal loan where if something bad happens you can pay a percent of your income, which might be a lot less. So this refinancing ladder strategy controls your risk, it cuts your interest rate significantly, then you can make extra big prepayments with no penalty, and then you're able to get a lower interest rate by refinancing multiple times, and on steelloanplanner.com, you can get multiple cash refinancing bonuses of as much as $1,000 or more every time you refinance. So there's also a, it doesn't cost you money to do this, you actually get paid to do this. So the refinancing ladder strategy is really quite critical. So if you are interested in learning more about the different federal repayment plans and strategies of how to get out of debt as fast as possible, we've got another video for you, and if you are using different strategies to get out of debt as fast as possible, please post them in the comments, we'd love to see, and others would love to learn from it too, and subscribe if you want more videos like this with the best strategies for getting out of student loan debt. I'm Travis from Student Loan Planner, thanks for watching.