How to Pay Down Your Student Loans Strategically

Tom Gilmour is a senior director of Planning Experience Integration for Northwestern Mutual. 

If you’ve ever borrowed money, you’ve probably heard that there is good debt and bad debt. Because it provides some value back to you, student loan debt falls into the “good debt” category. But it can hold you back from tackling the many other financial goals you’d like to accomplish. Monthly student loan payments can make it tough to pay for essentials, pay off credit card balances or save adequately for retirement. In some cases, too much student debt can even make it impossible to qualify for a home mortgage.

If this sounds familiar to you, you’re not alone. According to the 2024 Northwestern Mutual Planning & Progress study, two-thirds (66 percent) of Americans currently hold at least some personal debt, with the average amount of debt (excluding non-mortgage-related debt) increasing by 4 percent in the past year. On average, those who have student loan debt expect that it will take them until they're nearly 45 years old to pay it off.

The study also found that 64 percent of people with debt are prioritizing paying down debt over building their savings.​ If you need a plan to tackle your own student loan debt, consider these tips to pay them down strategically.  

Confirm your loan type(s)

If you have several different student loans, you may have lost track of whether they’re federal or private loans. Different loan types may have features, including some potential benefits, that can play a role in how you can best manage them. Look up your federal student loans on the Department of Education’s website; your private student loans are listed on your credit report, which you can access from each of the three credit-reporting agencies for free once a year.

Identify your goals

Aside from wanting to ditch student loan debt for good, it’s a good idea to identify specific goals you want to accomplish. Do you want to:

• reduce your required monthly student loan payment because you’re struggling to pay it each month?
• find a lower interest rate on one or several student loan balances?
• pay off loans by a certain date so you can feel more in control of your financial life?

All these goals will help you manage student loans—but they also require different types of action. Here are some possible solutions to explore, based on your personal goals:

1. You need to reduce your required monthly student loan payment

If you have federal student loans, you may qualify for an income-driven repayment plan, a deferment, or an extended repayment plan. Any one of these options requires that you apply and receive approval from your loan servicer before you veer from your current required payment and may require that you submit tax returns or proof of income.

These plans won’t reduce your total loan balance any sooner; in fact, they could increase the amount of time it could take to pay off your loan as well as the total balance you ultimately pay. But they can reduce your monthly student loan payments so it’s easier for you to pay them and keep your accounts in good standing.

And if you’re eligible for public student loan forgiveness based on your profession, income-driven plans can be a good option because you know you’ll have the balance of your loan forgiven after you meet a minimum number of payments.

2. You want to lower the interest rate on your student loans

If you have good credit and a steady income, refinancing may lower the interest rate on several of your loans because you’d be rolling them all into one new private loan (this assumes you qualify for a lower interest rate). In turn, you may pay less money in interest, and more toward the principal.

Whether you refinance with a traditional financial institution or online lender, make sure you understand the details of any new loan before you commit. These could include

• whether there are application or processing fees;
• the length of the new loan term (you probably don’t want it to be longer than your current one); penalties for missed payments or if you pay down your student loans early;
• and whether the interest rate is fixed (which means it will remain constant) or variable (which means it could increase). 

If you plan to refinance any federal student loans, make sure you’re not eligible for loan forgiveness. Once you refinance a federal student loan, it becomes a private loan, which takes those benefits off the table. Keep in mind that private loans don’t offer the same protections of a federal loan including deferment, forbearance and income-driven repayment options. Be sure to understand these tradeoffs when opting for a lower interest rate.

One note: Don’t confuse refinancing with a federal direct consolidation loan, which means you combine your federal loans into a new one that has a fixed interest rate based on a weighted average of your previous loans. That means you won’t necessarily lower your overall interest rate—plus, consolidating takes away the ability to strategically pay off individual loans that had higher interest rates than others. If you’re looking to consolidate, it’ll likely be for the convenience of making one loan payment a month.

3. You want to get student loan payments out of your life—yesterday

If your goal is to shed student loan debt once and for all, periodically make an additional payment to your higher interest rate student loans to pay down the balance more quickly.

Make sure you make it clear to the loan servicer that the payment should apply to the principal (and not be considered an early payment for the following month). You might even send a paper check with a letter that clearly states you want the money to apply to the principal. Include the same instructions in the check memo. Send your payment to the lender’s physical address to increase the chances that it’s applied correctly.

Get help from a financial advisor

If you need some help finding the best strategy for paying off your student loans, your Northwestern Mutual financial advisor can help you balance paying down debt while still prioritizing other important financial needs. Your advisor can also help to educate you about tricks to pay down your debt faster so you can free up more money for other goals, like saving.