There are a lot of different ways to go about repaying your student loans. And for good reason: personal finance is personal, and what works for one person may not be effective for you.
That’s why the best way to pay back student loans is a repayment plan that works best for you.
Most of the time, money is about more than numbers. It’s about how it makes you feel and what motivates you to take action. Good habits and small actions over time lead to financial success.
When you take motivation and financial habits into consideration, the best student loan repayment plan could be one that combines the debt avalanche method and making extra payments.
Don’t believe this is true? Read on to find out how this could be the best way to pay back student loans.
The best way to pay back student loans
If you’re in good standing with your student loans and it’s the numbers that motivate you, you need a strategy that allows you to repay your loans as cheaply as possible.
That’s why the best way to pay back student loans combines two methods: the debt avalanche and extra payments. Here’s how you can organize around the best way to pay back student loans.
Step 1: Implement the debt avalanche
To take advantage of this strategy, you need to list out every single student loan you have. Once all the information is in one place, you’ll then be able to see the order in which you should pay off your loans.
With the debt avalanche, you focus on paying down one loan at a time. Once the first loan is paid back in full, you can move to the next balance. The interest rate of the loan determines the order in which you work down your list, starting with the highest interest rate first.
Here’s an example:
|Student Loan #1||$7,000||5%|
|Student Loan #2||$15,000||6%|
|Student Loan #3||$2,000||4%|
Using the debt avalanche on this example, you would focus on paying off Student Loan #2 first because it has the highest interest rate.
You would make at least the minimum payment on the other two loans as you worked to repay Student Loan #2 in full. Once that balance is paid off, you would turn your attention to Student Loan #1.
Step 2: Where the avalanche really starts to come down
Let’s say you pay $150 per month on Student Loan #2. Meanwhile, you’re paying $50 each on Student Loans #1 and #3.
Once Student Loan #2 is paid in full, you would take your $150 per month payment and apply it to Student Loan #1. This is on top of the $50 per month payment you were already making. You’re now paying $200 per month on Student Loan #1 until that balance is paid off.
Now you’re left with Student Loan #3. You take the $200 per month you were using to repay Student Loan #1, combine it with your existing $50 per month payment, and then pay $250 per month on Student Loan #1 until that balance is also paid off. Congratulations, you’re now student loan debt free!
Essentially, this method works because your payments “avalanche” as you pay off your loan balances. The speed at which you repay your loans gets faster and faster as you increase your payment amounts.
And this is where step 2 can make this the best way to pay back student loans.
Step 3: Increase your payments
The debt avalanche gives you a framework for repaying your student loans in the right order. Now, boost that power by increasing your payments.
You know you need to make at least the minimum payment on all your student loans. And with the debt avalanche, you need to throw as much as you’ve got toward the loan you’re actively working to repay.
Again, using our examples above, let’s say you have three student loans with balances. You make a payment of $50 on both Student Loans #1 and #3, and $150 on Student Loan #2. You now have a grand total of $250 going towards student loans per month.
To see how much you can increase your payments by, first look at your current cash flow. Then determine how much discretionary income you make. That’s the money that’s left over after necessary expenses and living costs like rent, groceries, transportation, and so on.
If you feel like you currently have an extra $100 per month in your budget to put toward student loans, add that to the $150 you use to pay down Student Loan #2.
Step 4: Explore ways to increase your income
Look at ways for you to earn more money to fund your student loan repayment goals. There are plenty of options for making a little extra money on the side while you pay down your debt.
You can take your talents to the freelancing marketplace and pick up some paying gigs on the side of your current job. Or, explore ways to sell items or use idling assets like renting out a spare bedroom. You can also find ways to develop passive income streams in your life.
Take the extra money you make and put that on top of your payment amount for Student Loan #2 as well. This will dramatically accelerate your repayment timeline. Ultimately, the faster you can pay off that first loan, the faster you can take that payment and apply it to the next loan.
Why is this the best student loan repayment plan?
This one-two punch to your debt is the best strategy because it’s the fastest, cheapest way to repay your debt.
By using the debt avalanche, you knock out loans in order of interest rate. This is the cheapest way to pay back your student loans because the interest rate is what costs you money. It’s the fee for borrowing the sum in the first place.
And by working to increase your payments across the board, you’re exponentially accelerating the rate at which you pay down your debt. This saves you more money because you’re shortening the time you’re charged that interest fee.
Play around with the numbers using your own student loans by checking out the Student Loan Hero prepayment calculator. You’ll discover the strategy listed above is the best way to repay student loans, save you money, and put you in a position of debt freedom as fast as possible.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.53% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|