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 your federal or private 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.
Here’s the method I’ve found to be the best way to pay back student loans — read on and see if you agree.
The best way to pay back student loans
If you’re in good standing on your student loans and it’s the numbers that motivate you, then you need a strategy that allows you to repay your loans — whether you have federal student loans or private student loans, or both — as cheaply as possible.
That’s why my preferred way to pay back student loans combines two methods: the debt avalanche method and making extra payments. Here’s how you can put this tactic into action to repay student loans.
Step 1: Implement the debt avalanche strategy
To take advantage of this debt payoff strategy, you need to list out every single student loan you have, along with interest rates and minimum balances, and figure out how much extra money you can pay in addition to the total of all the monthly minimums. Once you’ve compiled all this information, you can then determine the order in which you should pay off your loans.
With the debt avalanche method, you focus on paying down one loan at a time, devoting all your extra money toward it while continuing to make minimum payments on all your other loans. Once the first loan is paid back in full, you can move to the next one. The interest rates of the loans determine the order in which you work down your list, starting with the loan 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, you would focus on first paying off Student Loan #2 because it has the highest interest rate, putting all your extra money toward it. You also would make at least the minimum payment on the other two loans as you work to repay Loan #2 in full. Once you paid it off, you would turn your attention to Loan #1, the debt with the second-highest interest rate, and finally pay off Loan #3.
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 Loan #2 is paid in full, you would take your $150 per-month payment and apply it to Loan #1. This is on top of the $50 monthly payment you were already making. You’re now paying $200 per month on Loan #1 until that balance is paid off.
Now you’re left with Loan #3. You take the $200 per month you were using to repay Loan #1, combine it with your existing $50 payment, and then pay $250 per month on Loan #1 until that balance is paid off. At this point, you’re free of student loan debt.
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, making this a great 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 of 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.
Using the example 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, first look at your current cash flow. Then determine how much discretionary income you make. That’s the money left over after necessary expenses and living costs like rent, groceries, transportation, etc.
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. And if you get a bonus at work, a tax refund or another big chunk of cash that you can spare, use that to make an occasional lump sum payment, which can make a big dent in your student loan debt.
Step 4: Explore ways to increase your income
Look at ways 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 side gigs in addition to your current job. Explore ways to sell items you don’t need or use idle 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 for Student Loan #2. 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, and ultimately become debt-free faster.
Bonus tip: Consider refinancing your student loans
Another option for some borrowers is to refinance their student loans. Here’s how it works: You take out a new (private) loan to pay back your existing student loan debt. Depending on your financial situation, you may qualify for a new loan with a lower interest rate (which could save you money) or a longer term and lower monthly payment amounts (which could work better for your budget). Note that if you increase the term of your loan, you will pay more over the life of the loan in interest.
Another downside of refinancing federal student loans into private loans is that you lose some of the financial protections and benefits offered by federal student loans, including income-driven repayment and Public Service Loan Forgiveness. If you think you might need these programs in the future, refinancing may not be the best option for you.
Why is this a good way to repay student loans?
Debt avalanche and extra payments, the one-two punch to your student loans, is my preferred payoff strategy because it’s the fastest and 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 interest rate charges are what cost you money. 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 for which 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 a great way to repay student loans, save you money and put you on track to be debt-free as fast as possible.
The information in this article is accurate as of the date of publishing.
This report was originally published July 21, 2016.
Emily Long contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.88% – 6.15%1||Undergrad & Graduate|
|1.88% – 5.64%2||Undergrad & Graduate|
|2.50% – 6.85%3||Undergrad & Graduate|
|1.89% – 5.90%4||Undergrad & Graduate|
|1.99% – 6.59%5||Undergrad & Graduate|
|1.88% – 5.64%6||Undergrad & Graduate|
|1.90% – 5.25%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.13% – 5.25%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Interest Rate Disclosure
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.48% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance 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 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.
Auto Pay Discount Disclosure
You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Student Loan Refinancing Loan Cost Examples
These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.
One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.
© 2021 Earnest LLC. All rights reserved.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for SoFi.
Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 1.99% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
6 Important Disclosures for Navient.
7 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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.
8 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.