Enlist the three musketeers in your student loan quest

The typical reaction of someone facing the reality of sizable student loans is one of three things: denial that it exists or is as big as it is, a false belief that it need not be paid back, even though it does exist, or deep depression or anxiety that they’ll never be able to pay it back.

While these reactions are understandable, they’re clearly not the knight in shining armor that’s going to come galloping to your rescue if you’re taking a deep gulp at the sight of big student loans.

But there are three big powerful and accessible forces that do have the potential to whack down your debt by big, hulking chunks in time. I like to call them the three musketeers. And I strongly believe that if you’re someone who’s groaning under the weight of student debt, you must get intimately familiar with these three musketeers. And more importantly, you must enlist as many of these chivalrous entities to work in your favor, and do it pronto!

Let’s get up close and personal and introduce ourselves to these chevaliers, shall we

The first musketeer: loan forgiveness

The most powerful, seductive and remote of these brave soldiers is loan forgiveness. I know there are many out there (thankfully, none among our readers, I hope), who think they’re not under any obligation to pay back their loans. That’s not what I am talking about here.

What I am talking about are clearly-defined, well-established programs that provide that some or all of your outstanding student loans will be forgiven, once you meet certain requirements or conditions. To understand how awesome forgiveness can be, imagine that the sizable payments every month on your student loans for a good many years into the future suddenly got wiped out if not tomorrow, at least not too far into the future.

All of a sudden, you can now actually buy that car or make the down payment on that dream nest you’ve been planning for years – a huge big airy space just opened up in your budget to allow you to make that happen. And this can be made possible by loan forgiveness.

There are three things to understand very clearly about loan forgiveness:

Photo by Dan Gold

First, who’s offering them?

There are hundreds of forgiveness programs of every stripe and variation. But looking at it high level, forgiveness programs are offered by the federal government as part of the federal student loan program, by other governmental agencies or bodies at the federal or state level, by the armed forces, or by other philanthropic or other institutions looking to promote certain careers or services in certain areas.

Second, what are the requirements to be eligible for forgiveness?

Given that free and sizable dollars are at stake, you can bet that most programs have fairly tight requirements to make sure that only those for whom the benefit is meant make it through all the hoops. The requirements come in two flavors: one is about what you have to substantively do or be to qualify, such as being a nurse or being deployed in the armed forces. The second is typically a bunch of paperwork and formalities that take on very important proportions in most cases. It pays to attend to these very carefully, or you could end up losing your chance “for want of a shoe” and end up losing the war.

Third, what is the tax status of the forgiven amount?

This is one of the biggest blind spots that hits people who are rejoicing on receiving a big forgiveness benefit. With very, very few exceptions, you can count on the fact that Uncle Sam will consider this “gift” as a source of income to you, and tax you accordingly. If you’ve been forgiven thousands, or even tens of thousands of dollars, expect the tax hit to be proportionate to that benefit, and scrape together cash quickly because the bill will come due pretty soon -April 15 of the following year, in fact!

With these three factors in control, you’ll be well on your way to enlisting this big force to work in your favor.

The second musketeer: refinance

These days you can barely google any question relating to student loans without seeing dozens of links to student loan refinance offers. Should you take these up?

There is no clear answer, but you should give the gifts of this musketeer a very hard look to understand what they can or cannot do for you.

Here’s the high-level: if you have federal loans, chances are that the interest rate on these is typically higher than what you get in the market if you have a good credit score – so you’ll be tempted to swoop down on that refinance offer like a hawk that’s just spotted a hapless rabbit.

But hold on a second.

The trick with federal loans is that even though interest rates are high, the loans themselves come packaged with many benefits – most importantly, the option to have your loans forgiven under certain circumstances. So weigh your pros and cons carefully.

With private loans, however, the equation is much simpler. You won’t have the golden parachute attached to the private loans you took out in school in most cases, so if your refinance saves you money, chances are it makes sense to do it.

Photo by Alexander Mils

The third musketeer: Benefits and accelerated payments

The third musketeer’s power lies in speeding up the pace of repayment on your loans. There are two primary sources, and for obvious reasons, I like one a lot more than I like the other.

First, the usual suspect: pay more, faster. Obviously, if you keep paying more than you need to every month, you’ll end up paying off your loans much faster than you otherwise would. And if you’re in the habit of spending on things you’d rather not, then this practice has the added benefit of removing that temptation and socking that cash away towards something that will actually benefit you 100%.

Here’s the second, and more fun to accelerate pay-off: many employers are now offering a benefit of making student loan payments on your behalf. Their reasons are straight forward: as they look to become more attractive employers to millennials, they realize that providing student loan relief is probably one of the most rewarding perks they can offer. And if that perk keeps millennials in their jobs a few months or years longer, all the better!

This deal is great for you too, as a borrower and employee. The benefit as a borrower is obvious. However, what you may not know is that this benefit is also pretax, in that this amount is lopped off from the top of your paycheck and doesn’t figure in calculating your taxable income. That’s sweet, and I love it! Because employers are not likely to know which of their potential candidates need it and which don’t, chances are lower that they’ll cut your overall compensation package to make up for this benefit, although you should always make sure your pay is competitive.

So there you go!

Photo by Ivaylo Klissarov

As you craft a clever and prudent loan pay-off strategy, make sure you’re taking a good look at every one of these three musketeers – enlist every last ounce of firepower at their disposal to work in your cause.

And who knows, you might throw off the shackles of your student loans much faster than you thought and move a touch closer towards those dreams that spurred your journey to begin with!