When I graduated from college and landed my first job, I felt overwhelmed by my student loans. My balance was higher than my nonprofit salary and I had no idea how I was ever going to get out of debt.
I started reading personal finance blogs that talked about making extra payments on student loans to pay them off faster — and I rolled my eyes. I was on a tight budget; I sometimes couldn’t find the cash to put gas in my car, let alone extra money for my loans.
But I knew I had to do something to tackle my debt and get it under control. Here’s why making extra payments on student loans is so important, and what you can do to find the money.
Why you should be making extra payments on student loans
When you work full-time, you may feel exhausted. The last thing you want to do is work another job or side hustle. But if you can find the motivation, working a little more can pay off in a big way.
Here are four reasons why you should put an extra $100 towards your student loans each month.
1. You’ll save thousands of dollars (seriously)
When I left school, I had about $35,000 in student loans at a 6.80% interest rate and minimum monthly payment of $400. If I paid only the minimum, it would have taken me 10 years to pay off the loans. In addition, I’d pay $13,334 in interest on top of my original loan balance.
If you were in the same situation and boosted your payments to $500 a month, you’d reduce the overall interest charges by $3,693. That’s $3,693 you could save for retirement, put towards a down payment on your first house, or use to book a vacation.
How much could you save by paying an extra $100 a month on your student loans? Use the calculator below to find out.
2. You’ll be debt-free faster
For federal student loans, borrowers are automatically enrolled in a Standard Repayment Plan of 10 years. A decade is a long time; I didn’t like the idea of being in my 30s and still carrying student loan debt, so I was determined to pay it off faster.
Putting an extra $100 a month towards your debt does more than save you money in interest. In my case, bumping up my monthly payments to $500 meant I would be debt-free years ahead of schedule.
Student loans are a huge burden hanging over your head — getting rid of them faster frees up your mind (and money) to focus on more important things.
3. You can build up savings more efficiently
If you’re debt-free, that means you can boost your savings more quickly. Once you pay off your student loans, you can dedicate more money to your savings account.
If you put that $500 into the bank each month when your loans are gone, you’d have $12,000 saved in two years.
Invest that same amount of money in a 401(k) or IRA with an annual return of 6 percent, and you’ll earn $3,040 on your investment over two years.
4. You may be able to buy a home more easily
Interested in owning your own home? When mortgage lenders review your application for a loan, they look at your debt-to-income (DTI) ratio.
This is a number that shows how much debt you have relative to your salary. The lower the ratio, the better. Your lender wants to know you can easily afford your mortgage payments along with your other monthly obligations.
Your student loans can hurt your DTI ratio. If you have a large student loan balance, your monthly bill can eat up a significant part of your salary, making it more difficult to get a mortgage. Putting more cash towards your student loans now will help reduce your DTI ratio later on, improving your chances to get a mortgage for the home you love.
Finding more money to pay off your debt faster
You might understand why extra payments are so important, but scraping together the extra cash can be difficult. While plenty of people will tell you to track your spending to “find” more money, that advice doesn’t always work. If you’re already strapped for cash, you likely aren’t blowing money on Starbucks, fancy dinners out, avocado toast, or shopping sprees.
That was the case for me. I was on a bare-bones budget with nothing left to cut out. My home was a tiny studio apartment; I didn’t have television; I brought my lunch to work; I lived off a lot of peanut butter and jelly sandwiches. I wasn’t living extravagantly — I was barely squeaking by.
Making extra payments on my student loans was essential, but my salary just couldn’t cut it. That’s when I realized something: Instead of cutting my expenses, I had to boost my income.
I took whatever little side jobs I could. I cleaned houses, ran other people’s errands, and watched pets. While my side gig income varied wildly early on, I was able to make an extra $100 student loan payment every month.
That didn’t seem like a lot at the time, but it added up quickly. I saved thousands by paying off my loans years ahead of schedule, just by working a few extra hours a week. If you’re struggling to find extra money, consider launching a side hustle. Working a little bit each month can give you the money you need to pay off debt more quickly.
Check out 10 side hustles you can start this week for ideas on how to earn cash for your student loans.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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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 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% 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.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
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|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|