Dealing with student loan debt and looking for ways to pay it off quicker? The good news is, there are effective strategies to manage it without stretching your budget too thin. Here are some simple steps to help you start reducing that debt right away.
1. Enroll in Automatic Payments
Many private student loan lenders offer an interest rate discount to borrowers who enroll in automatic payments. This discount is typically 0.25% though some lenders offer a 0.50% discount. Enrolling in automatic payments can also help you avoid late fees by accidentally missing a payment.
2. Make Bi-Weekly Payments
By implementing this strategy, you make half of your monthly payment every two weeks. This method results in an extra payment each year, as you'll make 26 half payments instead of 12 full payments. Not only does this reduce your loan balance faster, but it also saves you money on interest.
Ensuring your lender applies any additional payments to the loan principal, rather than the next month's payment, is crucial. Keep in mind that some lenders may not allow bi-weekly automatic payments, requiring you to make payments manually.
Please remember to pay attention to your loan due date when making bi-weekly payments, ensuring both payments are received on time. It's essential to pay your monthly payment amount in full every month.
Now, let's explore strategies that may require more financial sacrifice to accelerate the repayment of your student loans.
3. Make Extra Payments
If you want to pay off your student loans faster, the best way to do that is to make extra payments. You can make additional payments toward your loan each month on top of the payment you are required to make, or you can make extra payments sometimes, for example if you’ve received some money as a gift or a bonus at work. Be sure to request that your lender apply any extra or over payments to the principal balance on your loan.
4. Make More than the Minimum Payment
If you make all of your minimum payments on time, you will pay off your student loan in the original agreed upon timeframe between you and your lender. However, if you make more than the minimum payment, even if that amount is small, such as ten dollars, you will pay your loans off sooner. For example, if your monthly payment is $50 per month and you pay $60 per month, by the end of the year you have applied an additional $120 toward your debt. That’s nearly two and a half months’ worth of payments you have eliminated, simply by adding an additional ten dollars to your payment amount! Be sure to request that any over payment be applied to the principal balance of your loan.
5. Make Payments While in College
If your student loans don’t require you to pay while in college, that doesn’t mean you shouldn’t. Other than Direct Subsidized Loans, you are responsible for the interest that accrues on your loans while in college. You can make interest only payments which will be applied to the interest accruing on your loan.
Here's Why You Might Want to Do This
Once your loans enter repayment, the interest is capitalized (i.e., added to your loan principal balance and then you pay interest on that new increased balance). If you have paid all of the interest while in college, there is no interest to capitalize and your loan principal will reflect the amount you originally borrowed when your grace period ends.
You’re not limited to interest-only payments while in school. If you are working it is wise to make whatever payments you can toward your student loans to reduce the overall interest you will pay and your balance when your grace period ends.
6. Paying Off Outstanding Interest to Avoid Capitalization
All federal student loans come with a grace period. This is the period of time after you’ve left school (or drop below half-time enrollment) and before you must start making payments on your student loans. At this point, the interest you have been accruing on your loans has not been added to your loan balance. If possible, pay off the accrued interest during your grace period to avoid that amount being capitalized (added to your loan principal) at the end of your grace period.
Now let’s take a look at some general strategies you can employ to help you pay your student loans off faster.
7. Create a Budget
There are few things more effective at getting your finances under control than a budget. Knowing how much money you have coming in and where it is going will help you identify areas where you can cut back and apply that money to your student loans. A budget doesn’t have to be difficult to create. There are several budgeting apps available to simplify the process.
8. Use a Savings App
There are several banks out there that let you round up the amount of your purchase to the next nearest dollar and place the difference into your savings account. This is a great way to save more money that you can then apply to your student loan balance. If your bank does not offer this feature, check out an app like ChangEd. The ChangEd app allows you to round-up your daily purchases or schedule savings based off your habits.
9. The Debt Snowball Method
The debt snowball method is a strategy to help you make physical and mental progress toward your goal of being free of student loan debt. Here’s how it works.
First, list all of your student loans from smallest balance to largest balance. Once you have your debt written down, you’ll know where to start. Begin by putting all of your extra money toward your smallest debt first. Once this debt is paid, you will take the money you were applying to that debt (and any additional funds), add it to your minimum payment amount, and tackle the next highest balance student loan.
Why the Debt Snowball Works
The idea behind the debt snowball is two-fold. It gives you an outlined method for tackling your debt, and as you knock out those smaller student loans you will feel a psychological boost from having fewer and fewer debts to pay. Sticking with the debt snowball can build momentum that keeps you motivated.
10. The Debt Avalanche Method
The debt avalanche approach offers a strategic method for tackling your student loans. Begin by compiling a complete list of your loans, noting the interest rates for each. Next, pinpoint the loan carrying the highest interest rate; this becomes your primary target for repayment. Allocate the maximum payment possible towards this high-interest loan while continuing to make the minimum payments on your other loans. This technique prioritizes loans that cost you the most over time, streamlining the path to becoming debt-free.
Why the Debt Avalanche Works
Tackling your loans based on interest rate can help you save money overall by knocking out your highest interest rate loans first. As you eliminate loans, you will increase the payment on each subsequent loan until all of your debt is paid in full.
11. Refinance Your High-Interest Student Loans
One of the best ways to save on student loans is to reduce your interest rate. You can do this by refinancing your high-interest student loans. When it comes to private student loans and PLUS loans, you may be able to find a more competitive interest rate in the refi market. This also allows you to roll many student loans into one, reducing the number of bills you need to pay each month. Here’s what you need to know about student loan refinancing once you have located all of your student loans.
Consider Which Loans You Want to Refinance
Refinancing student loans has the potential to save you thousands. Especially if you are using the refinance to consolidate several high-interest private student loans. You can also include federal student loans in a private student loan refinance, however, there are a few things you’ll want to consider.
Should you choose to refinance your federal student loans privately, you will forfeit your eligibility for the benefits of the federal student loan program. These may include Public Service Loan Forgiveness, Income Based Repayment, and generous periods of deferment and forbearance.
You may also look into consolidating your federal student loans through the Direct Loan Consolidation Program. This will not reduce the interest rate you pay on your federal student loans, but can help you maintain some of the federal student loan benefits while reducing the number of federal student loan payments you make each month.
Compare Student Loan Refinance Lenders
Once you have all of your student loan debt gathered up, the first thing you will want to do when looking to refinance is to compare lenders. You can compare interest rates, repayment terms, and other benefits such as interest rate deductions for enrollment in automatic payments, cosigner release, and customer service.
Compare Top Refinance Lenders
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Apply with a Creditworthy Cosigner
If you’re a recent graduate, or do not have a strong credit or employment history, you may need to apply for a student loan refinance with a creditworthy cosigner. This is someone who will share equal responsibility for the loan with you. If you fail to make the payments, your cosigner will be responsible.
If you require a cosigner to get approved for a student loan refinance, look for a lender that offers cosigner release as an option. This allows you to release the cosigner from the loan at your request after making a series of on-time payments (typically 24 to 48 months).