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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 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 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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 ourstudent 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
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.
3 Important Disclosures for SoFi.
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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|