How Can I Lower My Student Loan Debt?

06/22/2015 04:03 pm ET | Updated Jun 22, 2016

It's a great question, and you should start by really understanding whether you have a healthy level of student loan debt. Then, even though there's no "right" answer for every scenario, you can choose from a few different options in order to make the best choice for your personal situation.

Where to start?
Know your debt to income ratio (or DTI). Your DTI is how much you owe on debt payments every month as a percentage of your monthly income. DTI includes all debt, including your student loans, car loans, and minimum credit card payments.

What's a good level of debt or a bad level of debt?
If your DTI is higher than 20%-30%, you might want to lower your debt obligations each month, especially by targeting your student loans.

You can lower your student loan debt obligations in two ways: (a) refinance to a new loan with a longer term to lower your monthly payment, or (b) refinance to a loan with a lower rate that offers greater savings over the life of the loan.

Why the choice between (a) lower monthly payments every month or (b) lower interest paid over the life of your loan? It's tied to the length of your loan.

• To reduce each month's payment, you can choose a longer loan term to spread out the amount you owe over the life of your loan. For instance, moving your $80,000 loan from a 10-year, 5.99% fixed rate loan to a 15-year, 6.09% fixed rate loan saves you just over $200 on your payments each month. That said, it will increase the amount of interest you pay over the life of the loan.
• To reduce the total amount of interest you pay over the life of the loan, you might want to choose a shorter loan term, which typically comes with lower rates due to the reduced risk to your lender.

Should I choose: a) lower monthly payments or b) less interest payments over the life of the loan?

Again there's no right answer so here are some examples to help you think through the trade-offs:

Scenario A: Longer term, lower monthly payments. You're an entrepreneur, a small business owner, or even someone who has not yet built up his or her emergency fund, and you need spending flexibility in the short term. It's okay to opt for lower monthly payments now. And you can do that by refinancing to a lower rate and a longer term.

Scenario B: Shorter term, lower interest paid over the life of the loan. Your goal is to save as much as possible on student loan interest payments, and you have some excess cash now. You may also choose to prepay your loans (i.e., pay more than your monthly bill) in order to save on interest payments in the long run (because you're lowering the principal owed on your loan by prepaying it early). And don't worry about getting hit with a fee for prepaying - it's illegal for any lender to charge you for paying off your education loan early. By prepaying and/or refinancing to a lower rate, shorter term loan, you can save thousands on your loan payments overall.

Final thoughts on lowering your debt obligations
You'll hear many experts tell you to tackle whichever debt has the highest interest rate first in order to minimize how much you're paying in interest. (If you have credit card debt with a higher rate than your student loans, for instance, get rid of that debt first before paying extra on your loans.) And we tend to agree.

For a more personal perspective on paying off student loans, check out this blog post about paying off grad school debt by CommonBond's very own, Nate Howard. He explains his thought process about how aggressively to pay off his student loans.

Kaitlin Butler is Content Manager at CommonBond, a student lending platform that provides a better student loan experience through lower rates, exceptional customer service, a simple online application, and a commitment to community. CommonBond is also the first company to bring the 1-for-1 model to education and finance.