I spend a lot of time thinking about my student loans. In school, I kept a running tally in my head. On my birthdays, I calculate how many years I have left on my payment plan. When I daydream about winning the lottery, the first thing I imagine is paying them all off.her
And yet, the realistic option to pay off student loans early never once popped into my head. It simply didn’t occur to me as a possibility.
Until I started working in personal finance, that is. Suddenly a whole new world of tips and tricks opened up to me. Here’s what I’ve learned about paying off student loans early — and how to do so painlessly.
How to pay off student loans early: 5 basic tips
Sometimes advice about student loans hovers on the unsustainable. People do drastic things — they sell their homes, forego all other financial goals, and essentially stop at nothing to achieve student loan debt freedom.
There’s certainly nothing wrong with that. Laser-like focus on a goal can yield incredible results. That’s why there’s a bonus section on extreme loan repayment ideas below. But first, let’s talk about more practical tips to work into your daily life.
1. Refinance at a lower interest rate
One of the biggest problems with student loans — and any debt, really — is interest. Interest is the reason your debt will cost you much, much more than it did the day you received your loan. It’s the reason you can feel like you’re not making any headway on your balance, regardless of how many payments you make.
That’s why lowering your interest rate as much as possible can help you pay your student loans off faster. The lower your rate, the more of your money you can apply to that principal balance.
In order to refinance, all you have to do is collect offers from refinancing lenders. Then you’ll select the best one for you. Each lender will show you a variety of interest rates (variable and fixed) and a variety of repayment terms.
Want to see it in action? Let’s say you have $60,000 in student loans with a 7.00% interest rate and 10 years left. Then you’re approved for a refinance with the same 10-year plan, but a 4.90% interest rate. Take a look:
Using our refinancing calculator, you can see the new loan saves you more than $7,000 overall. It also lowers your monthly payments by $61. Not bad!
Just remember: If you choose a longer repayment term, you can lower your payments even more. However, it’ll keep you in debt longer. If your main goal is to pay off the debt faster, choose a shorter repayment term if you can afford the monthly payments.
2. Make biweekly payments
Making biweekly payments is a tactic that not a lot of people know about, but can be super powerful. Here’s how it works:
- Split your monthly payment in half.
- Pay that amount every other week.
- Make sure your first two payments occur before your next due date. That way, you avoid accidentally paying less than the amount due.
When you do this, you’ll end up making one full extra payment per year. And that extra payment can save you a lot more than you might think.
As an example, let’s say the following numbers represent your current student loan debt:
- Current balance = $60,000
- Interest rate = 5.00%
- Time left on repayment = 120 months
Calc XML has a biweekly payments calculator that’s built for mortgages, but it can also give you an idea of what kind of savings you’d get on your student loans. Using the calculator for these numbers, here are your results:
- By paying half of your monthly amount every two weeks, you’ll pay an extra $636 per year.
- That extra payment will save you $1,773 in interest.
- Those savings will enable you to pay your loans off approximately 11 months early.
There is one caveat: Some student loan servicers don’t apply extra payments to the balance but pay the account forward instead. It’s important to make sure the extra payment is going to the balance.
You can make sure your payments are applied correctly by logging into your account and setting your preferences for extra payments. You can also call your servicer directly and ask them how to do this.
3. Utilize student loan repayment assistance programs (if possible)
Depending on where you live, what you do for a living, and for whom you do it, you might be eligible for a student loan repayment assistance program (LRAP).
LRAPs help you repay your loans, almost like a grant. They can provide you relief on your payments if you qualify — but if you utilize those plans and keep paying down your loans anyway, then you can make significant progress on retiring your debt.
And if for some reason making those payments interfere with your LRAP, you can always put your own money towards monthly payments in a separate bank account. Then, when the LRAP is finished, you can use the money in the account to make one giant bulk payment on your loans.
4. Employ the debt avalanche method if you have more than one loan
If you have a variety of loans and interest rates, you can pay them off faster by employing specific debt payoff methods. There are two popular methods — debt avalanche and debt snowball — but the debt avalanche method is the best for speedier debt repayment.
Here’s how it works:
- Rank your loans from highest interest rate to lowest.
- If you have extra to apply to your loans each month, apply it to the loan with the highest interest rate.
- Once you pay off one loan, add what you were paying on it to the minimum payment on your next highest loan.
- Keep rolling these payments onto your next loan, never decreasing how much you pay each month on your loans until they’re all gone.
Here’s an example. The details below assume you have 10 years left on three student loans:
- Loan One has a $20,000 balance, 4.50% interest rate, and $207 monthly minimum.
- Loan Two has a $10,000 balance, 6.00% interest rate, and $111 monthly minimum.
- Loan Three has a $30,000 balance, 5.50% interest rate, and $326 monthly minimum.
- That makes a total of $644 due per month, which you decide to increase to $700.
Here’s how the debt avalanche would work:
- Loan One and Three get their minimum payments.
- Loan Two gets the minimum plus $56, which is the additional money you added when you upped your total monthly payments from $644 to $700.
- Once Loan Two is paid off, you’d roll over its payments ($111 + $56) to Loan Three’s minimum payment, equaling $494.
- And once Loan Three is paid off, Loan One gets the entire $700 monthly payment until it’s paid off and you’re free of student loan debt.
So how much can this save? Using Unbury.us, making just the minimum payments would free you from debt in July 2027. But adding the $56 and using the debt avalanche method would result in you knocking out Loan Two in June 2023. And you’d be completely out of debt by June 2026 — 13 months early.
As for debt snowball, it focuses on paying your smallest balances first. This is certainly good for motivation, but it won’t always be as useful in paying your debt off faster.
5. Apply bonuses, birthday money, and tax refunds to your loans
Another way to win the fight against high interest rates is to make large extra payments that go straight to your principal balance. And what better way to do that than with money that you weren’t planning on having in the first place?
And if you really don’t like the idea of giving up hard-earned bonus money, birthday cash, or tax refunds to your student loans, then you can always split it up. Assign some percentage of extra money to your student loans, and then do whatever you please with the rest.
Bonus: Extreme student loan debt repayment methods
Now, let’s dig into some more extreme student loan repayment methods. In short bursts, they might help you make a huge amount of progress.
Decrease your expenses as much as possible
The first thing is to evaluate your lifestyle. What are you willing to get rid of?
For example, you could downgrade your home, apartment, or car. You could cook more and eat out less. Even a short-term shopping ban can help.
Once you’ve decided how to decrease your expenses, apply all the extra money to your student loans.
Add all pay increases or extra money in your budget to your loans
Recently get a pay raise? Congratulations! Instead of using it to upgrade your lifestyle, why not put all the extra cash straight towards your student loan debt?
Bonus: Once your student loans are paid off, you’ll feel like you got a raise twice. That’s because you’ll then get to use your pay raise for other things and get another bump from not having those monthly payments anymore.
Sell physical assets you don’t need
Look around. Do you own assets you could live without, such as a house with a mortgage when you could rent, or a car when you could bike?
If you sell them and apply the money to your student loans, you can knock a ton of time off your repayment.
But first, evaluate the long-term consequences to be sure this won’t cost you more money later. Examples of this could include paying more to re-enter a suddenly hot real estate market or spending more on taxis than you did on car payments.
Why you should pay off student loans early
Federal student loan interest rates are currently hovering between 4.45 to 7.00%, according to the Office of Federal Student Aid. Private student loan interest rates can vary quite a bit, but FinAid is showing them to be as high as 12.88%.
That’s why paying off your student loans early can be so beneficial. Those interest rates can drastically increase your overall debt load by the time you’re finished with your original repayment plan.
As you can see from the examples above, there are many ways to release yourself from the chains of student loan debt before your repayment plan would have you do. But choosing the right strategy is all about you.
Choose the variety of methods that match up with your lifestyle. Following a financial principle because it sounds like a good idea won’t be helpful if you find that you can’t or don’t want to maintain it.
Remember, personal finance needs to be personal to be effective. Create a strategy you can feel good about, and you’ll be sure to reach success in the end.
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