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When you’re worried about money and feel your options are limited, debt can feel like a pair of handcuffs. And if it feels like you can’t do what you want to do — which is to pay it all off and get yourself free — there’s the temptation to do nothing. The right debt reduction plan, however, can help you start paying down your balances, stay on track with your budget, and work towards your future financial goals. Here are some options to get you started.

Tips to Build a Debt Reduction Plan

Prioritizing Expenses

A good first step is to look at everything you have coming into your bank account each month (income) and everything that is going out (spending). You can do this with pen and paper, or by leveraging an all-in-one budgeting app, such as SoFi..

Once you have a list of all of your monthly expenses, you can divide them into essential and nonessential expenses. Looking over your nonessential expenses, you may find easy places to cut back (such as streaming services you rarely watch or a membership to a gym you hardly ever use) to free up more funds for debt repayment. You may also need to cut back in other areas, such as meals out, clothing. and other discretionary purchases, at least temporarily.

A budgeting framework you might try is the 50-30-20 rule, which recommends putting 50% of your money toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and paying more than the minimum on debt payments.

Next, you can come up with a debt repayment strategy. Here are four popular approaches to knocking down debt. The debt avalanche method is probably best suited to those who are analytical, disciplined, and want to pay off their debt in the most efficient manner based solely on the math.

The debt snowball method takes human behavior into consideration and focuses on maintaining motivation as a person pays off their debt.

The debt fireball method is a hybrid approach that combines aspects of the snowball and avalanche methods. Here’s a closer look at each strategy.

Debt Avalanche

The avalanche method puts the focus on interest rates rather than the balance that’s owed on each bill.

1.    The first step is collecting all debt statements and determining the interest rate being charged on each debt.

2.    Next, you’ll want to list all of those debts in order of interest rate, so the debt with highest interest is on top and the debt with the lowest interest rate is at the bottom of the list.

3.    Now, you’ll want to focus on paying more than the minimum monthly payment on the debt that is first on the list, while continuing to make the minimum payments on all the others.

4.    When the first debt is paid off, you can move on to paying more than the minimum on the second debt on your list. By eliminating debts based on interest rate, you can save money on interest.

Debt Snowball

The debt snowball method can be effective in getting a handle on debt by getting rid of debts on your list more quickly than the avalanche method. However, it can cost a bit more.

1.    You’ll start by collecting debt statements and making a list of those debts, but instead of listing them in order of interest rate, organize them in order of size, with the smallest balance on top and the largest balance at the bottom of the list.

2.    Next, you’ll want to put extra money towards the debt at the top of the list, while continuing to pay the minimum on all of the other debts.

3.    Once you wipe away the first debt, you can start putting extra money towards the second debt on the list and, when that is one wiped out, move on to the third, and so on. This method provides early success and, as a result, can motivate you to keep going until you’ve wiped out all of your debts.

Debt Fireball

This strategy is a hybrid approach of the snowball and avalanche methods. It separates debt into two categories and can be helpful when blazing through costly “bad debt” quickly.

1.    You’ll want to start by categorizing all debt either “good” or “bad” debt. “Good” debt is debt that has the potential to increase your net worth, such as student loans, business loans, or mortgages. “Bad” debt, on the other hand, is normally considered to be debt incurred for a depreciating asset, like car loans and credit card debt. These debts also tend to have the highest interest rates.

2.    Next, you can list bad debts from smallest to largest based on their outstanding balances.

3.    Now, you’ll want to make the minimum monthly payment on all outstanding debts — on time, every month — then funnel any excess funds to the smallest of the bad debts. When that balance is paid in full, you can go on to the next-smallest on the bad-debt. This helps to keep the fireball momentum until all the bad debt is repaid.

4.    Once the bad debt is paid off, you can simply keep paying off good debt on the normal schedule. In addition, you may want to apply everything that was being paid toward the bad debt towards a financial goal, such as saving for a house, paying off a mortgage, starting a business, or saving for retirement.

Using Personal Loans for Debt Reduction

Another debt payoff strategy you may want to consider is refinancing your debt. This involves taking out a personal loan, ideally with a lower rate than you are currently paying on your “bad” debts, and using it to pay off your balances.

Personal loans used for debt consolidation can help pull everything together for those who find it easier to keep up with just one monthly payment. A bonus is that because the interest rates for personal loans are typically lower than credit card interest rates, you can end up saving money.

Here’s a look at the process.

1.    You’ll first want to gather all of your high-interest debt statements and total up the debts to be paid.

2.    A good next step is to research your personal loan options, comparing rates, terms, and qualification requirements from different lenders, including traditional banks, online lenders, and credit unions. You may be able to “prequalify” for a personal loan for debt consolidation to get an idea of what rate you are likely to qualify for. This only requires a soft credit check and won’t impact your score.

3.    Once you’ve found a lender you want to work with, you can apply for the debt consolidation loan. Once approved, you can use the loan to pay off your high-interest debts. Moving forward, you only make payments on the new loan.

The Takeaway

Having a debt reduction plan in place is key to getting rid of those financial handcuffs and being able to look forward to a successful financial future. To get started, you’ll want to assess where you currently stand, find ways to free up funds to put towards debt repayment, and choose a debt payoff method, such as the avalanche or snowball approach.

Another option is to get a debt consolidation loan. This can help simplify repayment and also help you save money on interest. If you’re curious about your options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi debt consolidation loan could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

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Undergraduate and graduate students in school at least half-time can put off making federal student loan payments, and possibly private student loan payments, with in-school deferment. The catch? Interest usually accrues.

Loans are a fact of life for many students. In fact, a majority of them graduate with student loan debt.

While some students choose to start paying off their loans while they’re still in college, many take advantage of in-school deferment.

What Is In-School Deferment?

In-school deferment allows an undergraduate or graduate student, or parent borrower, to postpone making payments on:

•   Direct Loans, which include PLUS loans for graduate and professional students, or parents of dependent undergrads; subsidized and unsubsidized loans; and consolidation loans

•   Perkins Loans

•   Federal Family Education Loan (FFEL) Program loans

Parents with PLUS loans may qualify for deferment if their student is enrolled at least half-time at an eligible college or career school.

What about private student loans? Many lenders allow students to defer payments while they’re in school and for six months after graduation. Sallie Mae lets you defer payments for up to 48 months as long as you are enrolled at least half-time.

But each private lender has its own rules.

Recommended: How Does Student Loan Deferment in Grad School Work?

How In-School Deferment Works

Federal student loan borrowers in school at least half-time are to be automatically placed into in-school deferment. You should receive a notice from your loan servicer.

If your loans don’t go into automatic in-school deferment or you don’t receive a notice, get in touch with the financial aid office at your school. You may need to fill out an In-School Deferment Request, which is available at studentaid.gov.

If you have private student loans, it’s a good idea to reach out to your loan servicer to request in-school deferment. If you’re seeking a new private student loan, you can review the lender’s school deferment rules.

Most federal student loans also have a six-month grace period after a student graduates, drops below half-time enrollment, or leaves school before payments must begin. This applies to graduate students with PLUS loans as well.

Parent borrowers who took out a PLUS loan can request a six-month deferment after their student graduates, leaves school, or drops below half-time enrollment.

Requirements for In-School Deferment

Students with federal student loans must be enrolled at least half-time in an eligible school, defined by the Federal Student Aid office as one that has been approved by the Department of Education to participate in federal student aid programs, even if the school does not participate in those programs.

That includes most accredited American colleges and universities and some institutions outside the United States.

In-school deferment is primarily for students with existing loans or those who are returning to school after time away.

The definition of “half-time” can be tricky. Make sure you understand the definition your school uses for school deferment, as not all schools define half-time status the same way. It’s usually based on a certain number of hours and/or credits.

Do I Need to Pay Interest During In-School Deferment?

For most federal student loans and many private student loans, no.

However, if you have a federal Direct Unsubsidized Loan, interest will accrue during the deferment and be added to the principal loan balance.

If you have a Direct Subsidized Loan or a Perkins Loan, the government pays the interest while you’re in school and during grace periods. That’s also true of the subsidized portion of a Direct Consolidation Loan.

Interest will almost always accrue on deferred private student loans.

Although postponement of payments takes the pressure off, the interest that you’re responsible for that accrues on any loan is currently capitalized, or added to your balance, after deferments and grace periods. (This capitalization will no longer occur in certain situations as of July 2023, thanks to new regulations from the Department of Education that are set to take effect.) You’ll then be charged interest on the increased principal balance. Capitalization of the unpaid interest may also increase your monthly payment, depending on your repayment plan.

If you’re able to pay the interest before it capitalizes, that can help keep your total loan cost down.

Alternatives to In-School Deferment

There are different types of deferment aside from in-school deferment.

•   Economic Hardship Deferment. You may receive an economic hardship deferment for up to three years if you receive a means-tested benefit, such as welfare, you are serving in the Peace Corps, or you work full time but your earnings are below 150% of the poverty guideline for your state and family size.

•   Graduate Fellowship Deferment. If you are in an approved graduate fellowship program, you could be eligible for this deferment.

•   Military Service and Post-Active Duty Student Deferment. You could qualify for this deferment if you are on active duty military service in connection with a military operation, war, or a national emergency, or you have completed active duty service and any applicable grace period. The deferment will end once you are enrolled in school at least half-time, or 13 months after completion of active duty service and any grace period, whichever comes first.

•   Rehabilitation Training Deferment. This deferment is for students who are in an approved program that offers drug or alcohol, vocational, or mental health rehabilitation.

•   Unemployment Deferment. You can receive this deferment for up to three years if you receive unemployment benefits or you’re unable to find full-time employment.

For most deferments, you’ll need to provide your student loan servicer with documentation to show that you’re eligible.

Then there’s federal student loan forbearance, which temporarily suspends or reduces your principal monthly payments, but interest always continues to accrue.

Some private student loan lenders offer forbearance as well.

If your federal student loan type does not charge interest during deferment, that’s probably the way to go. If you’ve reached the maximum time for a deferment or your situation doesn’t fit the eligibility criteria, applying for forbearance is an option.

If your ability to afford your federal student loan payments is unlikely to change any time soon, you may want to consider an income-based repayment plan.

Another option to explore is student loan refinancing. The goal of refinancing with a private lender is to change your rate or term. If you qualify, all loans can be refinanced into one new private loan.

Playing with the numbers can be helpful when you’re considering refinancing. Using a student loan refinance calculator can help you figure out how much you might save.

Should you refinance your student loans? If it could save you money, refinancing may be worth it for you. Just know that if you refinance federal student loans, they will no longer be eligible for federal deferment or forbearance, loan forgiveness programs, or income-driven repayment. Make sure you won’t need access to these programs.

As you’re weighing the pros and cons, this student loan refinancing guide can be a valuable resource to help you decide if refinancing makes sense for you.

The Takeaway

What is in-school deferment? It allows undergraduates and graduate students to buy time before student loan payments begin, but interest usually accrues and is added to the balance.

If you’d like to lower your student loan rates, look into refinancing with SoFi. Students are eligible to refinance a parent’s PLUS loan along with their own student loans. And there are no fees.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.