How to Pay Your Student Loans If You’re Self-Employed

Whether you own a dental practice, are a freelance writer or designer, or own a brick-and-mortar business, being self-employed offers flexibility and autonomy. But it’s also highly unpredictable.

If you have student loans, you know that navigating your student loan repayment with a gross income that fluctuates month-to-month can be challenging. In fact, a Census report on the topic found that student debt might be discouraging young workers from pursuing self-employment.

Challenges with student loan repayment when self-employed

There are a handful of unique challenges that self-employed student loan borrowers face. Here are a few unique nuances that come with self-employment:

• Cash flow. Your paycheck schedule can be unpredictable and is at the mercy of your clients.
• Health insurance. If you don’t have access to health insurance through a spouse, you’re responsible for paying for your own coverage.
• Self-employment taxes. Since you’re your own employer and employee, your tax liability might be higher
• No loan forgiveness. Self-employed individuals don’t qualify for profession-based student loan forgiveness programs, like Public Service Loan Forgiveness (PSLF).

Overall, your expenses as a self-employed worker are likely higher, making it more difficult to put funds toward student debt. However, there are a few different approaches to consider as a self-employed borrower, based on your loan type and situation.

Related: What to Know About Kiddie Tax and Hiring Your Kids as Employees

Federal student loan repayment while self-employed

If you have federal student loans under the U.S. Department of Education, you have more flexibility and options.

If your business is a few years old and stable…

Let’s say you have a dental practice that’s a few years old, and you have a steady stream of people coming to you. Steady clients mean your self-employed income and cash flow are relatively stable.

If you want your federal student loans out of your life for good, your best bet is the Standard Repayment Plan. This has the shortest repayment period of 10 years, making it the quickest option. You can also throw extra money toward your loans to pay down the principal balance and pay less in interest.

Pros:

• Pay less interest over time.
• Ditch student debt faster.

Cons:

• Monthly payments might be higher.
• Takes away additional cash that could be used toward your business.

If you’d like to keep more cash on hand and don’t mind having debt over the long term, consider an income-driven repayment (IDR) plan. Payments plans under this option recalculate your minimum monthly payments, based on 10%-20% of your discretionary income.

For example, the new Saving on a Valuable Education (SAVE) can be a good fit, as all Direct Loan borrowers qualify for this IDR plan. It comes with generous borrower benefits, such as a higher poverty line deduction and lower monthly payments. However, other IDR plans, like Pay As You Earn (PAYE), might make sense if you want a shorter forgiveness timeline or have a high income.

Pros:

• Lower student loan payments.
• Have a longer repayment period.

Cons:

• Pay more in interest over time.
• May not qualify for all IDR programs.

If you just started your business or are experiencing tough times…

If you launched your business within the past two years and steady income is a concern, consider income-driven repayment.

An IDR plan can be helpful for self-employed student loan borrowers who aren’t earning enough to claim a salary or are experiencing cash flow issues. Under income-driven repayment, your monthly loan payment can be as low as $0.

If you end up making monthly payments, they won’t be more than 10%- 20% of your income. After 20 to 25 years of payments under an IDR plan, any remaining federal student loan balance is forgiven.

You must recertify your income each year, but if your income drastically changes, consider recertifying earlier to modify your payment. Typically, you’ll need to provide pay stubs or tax returns for verification, but as a self-employed borrower, alternative documentation (e.g. bank statements, invoices, etc.) might be required.

Pros:

• Might have a $0 monthly loan payment.
• Student loan forgiveness on remaining loan balance after 20 to 25 years.

Cons:

• Pay more interest charges over time.
• Might be difficult to prove self-employed income.
• Might pay taxes on forgiven amounts, if any.

If you’re dealing with short-term financial struggles…

Sometimes a tragedy, like a natural disaster, or major financial hurdles, like losing a key client, tips your finances off balance. Self-employed student loan borrowers are likely to face short-term financial struggles that can affect their ability to make student loan payments.

If you know this challenging time is indeed short-term, opting for loan deferment or forbearance can be smart. These are short-term options that put loan payments on hold.

For example, these options might come up as federal loan relief due to a global emergency or through traditional deferment and forbearance. Check with your federal loan servicer to see what you qualify for.

Pros:

• Puts payments on hold for a short time.
• Relieves financial stress.

Cons:

• Interest might accrue.
• Is for a limited amount of time, and typically, won’t count for forgiveness.

Private student loan repayment while self-employed

If you have private student loans and are self-employed, your student loan repayment options aren’t as generous or robust. Private loans are issued by private financial institutions that set their own repayment terms, so it’s a good idea to see what they offer.

If your business is solid…

If your business is solid and income is relatively stable (meaning you have consistent clients), your best bet is to pay off private student loans as fast as possible. Getting out of student debt faster lets you reinvest those funds toward your business or have additional money toward other goals.

Pros:

• Pay off student loans faster.
• Reinvest money or have additional income with freed-up payment.

Cons:

• Costs more in the short-term to aggressively pay down private loan debt.
• Limits cash you have on hand now.

If you’re facing financial difficulties…

There aren’t as many relief options or student loan repayment plans available for private student loans. If you anticipate not being able to make your next private loan payment, ask your current private lender if they offer deferment or forbearance options.

Pros:

• Possible relief from payment postponement in the short term.
• Can free up cash.

Cons:

• Not a long-term solution.
• Availability and eligibility of hardship options vary by lender.

Student loan refinancing while self-employed

If you’re unhappy with your loan terms, you don’t have to stick to the student loans you have. Student loan refinancing replaces your existing loan with a new loan at a better interest rate and possibly more advantageous terms.

This option could save you several thousands of dollars in interest over time. In fact, ELFI, a refinancing lender, noted that the average refinancing savings over the life of the loan was $13,940. 

Qualifying for a student loan refinance as a self-employment professional varies by lender.

Earnest

Earnest, a refinancing lender, doesn’t have specific self-employed borrower requirements. To understand their clients’ income situations, they request proof of consistent income and a copy of bank transactions from the past two years. Whether you’re a medical professional with your own practice or not doesn’t matter.

The lender is also open to considering self-employed borrowers who want to refinance their loans from an incomplete Bachelor's or Associate’s degree. Additionally, it looks at overall assets to determine the best rate for you, though it doesn’t have a set minimum.

Sofi®

Sofi®, one of the first student loan refinancing companies, requires 2 years of tax returns to qualify to refinance student loans if you are an independent contractor, sole proprietor, or owner of an S corp.

There is no difference for medical professionals versus other kinds of business owners.

That means once you have a strong tax return from a recent calendar year, you might qualify for better rates than if you had to use two years of older returns. You also might want to consider refinancing before purchasing a business if you have a modest amount of debt and a strong W-2 income.

The bottom line

Self-employment is a rollercoaster of a journey filled with highs and lows. Balancing the intricacies of self-employment alongside your student loan repayment can be difficult, but you have options.

If you need personalized help, book a consultation with one of our student loan experts who can create a custom plan for your unique situation.