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.
Student Loan Prepayment Calculator
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Time to Repayment
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