Whether you’ve been dealing with student loans for years, or you’ve only recently graduated from college, you probably are ready to cleanse yourself of this financial burden. Unfortunately, it takes time to do this. Some people will tell you to get a second job or wait around for Student Loan Forgiveness in order to get rid of your debt faster, but those options aren’t for everyone. Luckily for you, I’ve put together 3 easy strategies that you can do TODAY to pay off student loans faster. The secret is in the interest. Let’s get into it.
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What To Consider Before Attacking Your Loans
There are a few things to consider before going all-in on paying off your student loans. Are you making the best use of your money by going all-in on your loans?
You should always at least make the minimum payments on any form of debt. That’s a given. But beyond that, how should you allocate your extra money?
- Pay off any debt with a higher interest rate first. Credit card debt, car loans, etc.
- Contribute to your retirement funds, particularly if your employer offers a match. Retirement accounts are tax-advantaged and will often earn better returns for you than what you’re losing from student loan interest.
- Build a baseline emergency fund of 1-3 month’s expenses in a high-yield savings account.
For a full break down of how to allocate your income, please read my Spending Roadmap guide.
For me, I focused on getting my credit card debt down to $0 and bringing my emergency fund up to 3 month’s expenses. Then I started contributing 6% to my 401k to meet my employer match amount.
Now I’m fully focused on paying off my student loan debt as quickly as possible. I’m getting debt-free before investing in real estate or buying a car. I want to be free of student loan debt before I start taking on other forms of debt.
Determine what order to prioritize your spending, then execute according to the plan you set.
When you’re ready to go all-in on your student loan debt, there are a few strategies you can use to help you pay off student loans faster.
These strategies are NOT to help manage payments if you’re struggling to meet the minimums. These are strategies that can help you avoid paying unnecessary interest over the life of your loan.
We want to lower our interest rates overall and attack the highest-interest loan first.
Strategy 1: Set Up Automatic Payments
Setting up automatic payments is one of the easiest ways to lower your interest rates immediately.
Doing so often leads to a 0.25% interest decrease for many loan providers. While this may not seem like a huge difference, it’s very easy to do and will result in more money back in your pocket.
This is also a surefire way that you won’t fall behind on payments, you’ll just have to make sure you have the money in your account when the autopay hits.
Luckily with most loan providers, you have the ability to choose which day of the month the payment goes through. Set this up to follow a payday and you’ll be golden.
This strategy gives you a free 0.25% discount, so definitely utilize this.
Another bonus is that some loan providers offer incentives for making consistent on-time payments, and since your automatic payments are set, you’re probably going to be able to do this.
For example, MPOWER Finance offers a 0.50% rate discount for making just 6 straight on-time payments.
So now your interest rate is a total of 0.75% less than what it was before, just by turning on automatic payments. Easy peasy.
Strategy 2: Attack The Highest Interest Loan
Before I get on with this strategy, it’s important to understand the two repayment methods:
- Debt Snowball: Eliminate the debt with the lowest balance first. Finishing your lowest loan first will keep you motivated, and get your momentum going into your other loans.
- Debt Avalanche: Eliminate the debt with the highest interest first, regardless of balances. This method will save you the most money in the long-run.
Evaluate the merits of each, and determine which one will work best for your personal situation.
For me, all of my loan balances are pretty close together, and I want to save the most amount of money possible. Therefore, it makes the most sense for me to choose the Debt Avalanche method.
Now that you have a repayment method selected, it’s time to talk about repayment plans. If you have private student loans, you probably won’t have much flexibility here.
Your repayment plan will determine how much your minimum payments are every month, and subsequently how long it will take for you to pay off your student loans in total.
The more you pay every month, the less interest you pay over time, and the sooner your loans will be paid off.
However, if you have multiple loans, each one will have its own minimum monthly payment requirement. For example, my Standard Repayment Plan (meaning I pay off my loans over the course of 10 years) dictated a minimum payment of about $305 every month.
This $305 was divided up between 4 loans of varying interest rates, so really it was minimum payments of around $80, $70, $75, and $80. Those four minimums equated to the $305 I owed monthly.
This didn’t leave much room for me to attack the loan with the highest interest. So here’s what I did:
- First, I switched my repayment plan from a Standard Repayment Plan to a Graduated Repayment Plan which cut my monthly minimums in half. Choose a repayment plan that will lower your monthly minimums, and suits your financial situation. Read about repayment plans here.
- Switching plans gave me a lower monthly minimum for each individual loan and much more flexibility. Now, instead of having to pay around $75 for all of the loans, I’m now only paying $30 or $40 minimums per month. This lets me direct the majority of my payments to the loan with the highest interest as an overpayment.
- By being able to put more money towards the loan with the highest interest rate, I will be paying less in interest over time. This only works if you actually direct overpayments towards your loans. If you lower your monthly minimums and continue to only pay the minimums, then you will end up losing money to interest, and it will take much longer to pay everything off.
- This also works for those going with the Debt Snowball repayment method. Instead of directing your overpayments towards the loan with the highest interest, simply direct it towards the loan with the lowest balance!
So now, I’m paying a total of approximately $100 between 3 of my loans, and I’m able to put the remaining $205 towards my loan with the highest interest. I’m still paying $305 per month, but I will save much more money in the long-run.
Another perk of this is if you happen to lose your job or run into a financial crisis, your student loan minimums will be lower so it would be much easier to manage your payments.
Strategy 3: Student Loan Refinancing
If you have a private student loan, you may not have availability to Strategy 2. Often times, when you take out a private loan, your repayment plan is locked-in.
So, in that event, it will be in your best interest to explore refinancing your student loans.
What exactly is refinancing?
Essentially, you are taking out another loan from a private lender to pay off your existing loan. The new lender will offer you a lower interest rate on different terms for the new loan, meaning you will pay less money over the life of it. Pretty neat!
In order to qualify for this, you generally need 3 things:
- Bachelor’s degree or Graduate degree.
- Be employed and meet the minimum income requirements
- Have a strong credit history.
Other requirements may exist depending on which lender you go through.
If you meet these requirements, I think it would definitely be worth your time to explore refinancing options.
It is also to be noted that if you have Federal Loans, you should do your due diligence before refinancing. There are certain benefits that come with federal student loans that would NOT carry over to a private loan.
Some of these benefits include:
- Income-Driven Repayment Plan options
- Student Loan Forgiveness
- More flexibility when it comes to pausing payments
- Less-strict rules on defaulting: Federal loans give you more time to get back on track if you miss a payment.
Read about more benefits that come with federal loans here.
If you fully understand the implications of refinancing from a federal to a private loan, then go for it. Otherwise, it’s often not advised to give up those benefits.
So if you know that refinancing is the right move for you, where do you start?
How To Refinance Your Student Loans:
Refinancing is done through a variety of private lenders, such as SoFi and College Ave.
There are many different lenders out there with different benefits and perks, and you want to choose the one that will work best for your individual situation… If only there was some way to compare the lenders side-by-side…. hmmm..
Oh wait! There is!
Believe it or not, you can easily compare various refinancing options with Credible.
The best part? Credible is completely free to use. You simply put in your loan information and other personal information, and they’ll determine some great options that would be available for you based on your credit score, loan details, and more!
On top of that, checking refinanced rates on Credible does not hurt your credit score.
When it presents you with a list of lenders that would accept your refinancing, simply follow the process to get your loan refinanced. Here are some things to consider when selecting a lender:
- Variable vs Fixed rates: Variable rates are subject to fluctuate over the life of your loan. They typically start low and increase over time. Fixed rates will not fluctuate.
- The loan term: Whether it’s a 10, 15, or 20 year loan term will determine your monthly minimum payments, and ultimately the amount of money you pay overall due to interest.
- Most refinancing will be available to those with both undergrad and graduate degrees, however, some lenders may only be available for individuals with graduate degrees.
- Will you need a co-signer to refinance? This may be the case if your credit history isn’t up to standard for your particular lender of choice.
- Does the lender have any special repayment options that can help you become debt-free sooner? Does the lender have any fees you need to know about?
Luckily, you can compare all of these factors side-by-side on Credible. Making the right decision can be the difference between saving $200 on interest, or $2,000 on interest.
Pay Off Student Loans Faster
Now that you are equipped with these three strategies, you should be able to cut down your interest rates and have the freedom to attack your high-interest loans with full force.
The fastest way to pay off your loans is by minimizing the impact of interest and paying more than the minimums every month.
If you follow these strategies, you will be debt-free in no time.
Let me know in the comments below which of these you’re going to try first. Let’s pay off student loans as quickly as possible and move on with our lives!