Imagine after several years of dutifully making student loan payments every month, your student loan balance still looks the same. Maybe it’s even higher.
So of course you wonder, where has all your money gone? And why does it feel like your balance hasn’t budged one bit?
Well, if most of your hard-earned money is going toward interest, then your student loan balance will ultimately decrease at a snail’s pace, no matter how high or low your balance is.
But before you start to panic, there is light at the end of the tunnel. Here’s how you can slay your student loan balance like a pro in four easy steps.
How to cut down your student loan balance fast
1. Understand how interest works
The first step to paying down your student debt quickly is to understand how student loan interest works.
Essentially, interest is additional money paid to your lender in exchange for letting you borrow their money. It’s calculated as a percentage of the amount you borrowed and accrues daily.
To better understand how interest works, let’s say you have a $50,000 loan with a 7.00% APR.
First, you need to calculate your daily interest. To find out your daily interest, use this formula:
(interest rate) x (current principal balance) ÷ (number of days in the year) = daily interest
Here’s how the example looks using the formula above:
(.07) x ($50,000) ÷ (365) = $9.58
This shows you are being charged close to $10 per day just in interest. So in a 30-day month, you’ll pay $287.40 in interest. That means if you make a monthly payment of $500, only $212.60 is going toward the principal.
Ultimately, it’s important to look at your repayment history to see exactly how much is going toward interest and how much is going toward the principal balance.
2. Talk to your loan servicer about your payments
Your loan servicer should be able to clearly illustrate where your money is going. They should also spell out how much is going toward interest and how much is going toward the principal balance.
Make sure you also understand how your loan servicer distributes your payments. For example, if you send in a check or make automatic payments, your loan servicer may distribute your payments evenly among your loans.
But what if you want to get out of debt faster? Well, then you’ll want to pay off the high-interest debt first.
For example, I currently have undergraduate loans with a 2.30% APR, as well as graduate loans with 6.80% and 7.90% APRs.
I pay the minimum on my undergraduate loans and am focusing on paying off my 7.90% APR graduate loan first. Why? Because this graduate loan costs me hundreds of dollars in interest each month.
Luckily, through Nelnet, it’s pretty easy to select where I want my money to go. But if it’s not clear how to designate your loan payment to a specific loan, discuss your options with your loan servicer. Make sure you are clear on how you want the money to be distributed.
3. Consider refinancing your student loans
Student loan refinancing can be a great option if you have private student loans. Specifically because:
- Private student lenders often charge higher interest rates than what you’d get with federal student loans.
- Your interest rate may be variable, meaning it can increase over time, sometimes substantially.
- Your lender may charge a penalty if you pay off your loans early.
- Your lender may have poor deferment or forbearance policies.
If you have both federal and private student loan balances, be sure to assess whether you should refinance your federal student loans first. Consider the following:
- Do you qualify for one of the several federal student loan forgiveness programs? If you refinance, you’ll lose your eligibility.
- Do you plan to use special federal repayment plans like income-based repayment? Few private lenders offer these options.
- Will you save money? Depending on the type of federal loan, you may already have a low, fixed interest rate.
To get started, check out various companies and find the best rate for you. Remember, each lender has different terms and conditions, so read the fine print. Student loan refinancing companies like SoFi, CommonBond, and LendKey all offer affordable variable and fixed rates.
At the end of the day, make sure you do the math and understand how much you could be saving. You can even use the Student Loan Hero refinancing calculator to find out how you could potentially shave off thousands of dollars in interest each year.
4. Focus on earning more
If you want to make more of a dent in your principal balance, you’ll need to make more than the minimum payments. But if the majority of your discretionary income is already going toward your student loan balance, that can be tough.
The solution is to focus on earning more money. Saving money can help your bottom line, but there is a finite amount of savings you can earn by slashing your budget. On the other hand, your earning potential is theoretically limitless.
Consider starting a side hustle, getting a part-time job, and selling goods. Commit to putting any extra money you make toward debt and watch your balance start to rapidly decrease.
Working extra on top of your job(s) might not sound like your cup of tea, but it’s only temporary. Plus, it’s a surefire way to make progress on your student loans. Use a prepayment calculator to see just how much time and money you can save by adding a little more to your payments each month.
Having a student loan balance is no fun, especially when it feels like so much of your money is going toward interest. But with a plan of action, you can start to tackle your student loans and make progress.
Ben Luthi contributed to this article.
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