Student loans aren’t inherently bad — you borrowed money to put yourself through higher education, and that can lead to better job opportunities that give you more earning power. However, it’s possible to run into problems when you pay student loans back.
Not only do you need to repay the sum of money you borrowed, but your lender charges you a fee for allowing you to borrow the money and pay it back over time. That, of course, is the interest on your student loans, and it’s the interest that costs you money.
Managing your interest payments is the best way to pay back student loans as cheaply as possible. You have a few options when it comes to paying student loans in such a way that you also save money in the long run, so read on to see which routes work best for you.
Pay student loans faster
The simplest way to pay student loans while also saving money? Pay faster. Get ahead of schedule and send in larger payments, or send in a payment every two weeks instead of every month.
This way is simple, but not necessarily easy if you don’t have the discretionary income to devote to extra student loan payments. Even if you don’t have the extra money now, you do have the power to make more money on the side to boost your income. Here’s how you can get started with earning more money.
If you need some motivation, take a look at how increasing your payments can pay student loan debt off faster — and save you money in interest while you’re at it. This prepayment calculator can show you the kind of impact just an extra couple hundred dollars per month can make.
Once you start making extra student loan payments and accelerating the rate at which you’re knocking out your debt, make sure those additional payments are applied correctly to get the most bang for your buck.
Get strategic with the debt avalanche
If you have multiple loans, the order in which you repay them can save you money. Pay student loan debt in order, starting with the loan with the highest interest rate first, then the second-highest interest rate next, and so on until the last debt you tackle is the one with the lowest interest rate. This is known as the debt avalanche.
It saves you money because you eliminate the factor that’s costing you the most: higher interest rates. If you can combine this strategy with making extra payments on your student loans, you’ll repay your debt well ahead of schedule and save the most money possible while doing it.
Make payments during the grace period
You can take a few small actions to trim down what you owe in interest, and therefore save money while you repay your loans. If you have subsidized Stafford loans, interest begins to accrue after your grace period ends (if your loan was disbursed before July 1, 2012). With unsubsidized Stafford loans, interest starts accruing immediately after graduation, regardless of your grace period. (If you have a private loan, interest will likely begin to accrue as soon as the loan is disbursed.)
If you don’t make any payments because you want to enjoy the grace period, be aware that you’ll have to pay interest on that interest later! Go ahead and at least make interest payments during this period, but it’s even better if you can make payments on the principle balance, too.
Set up autopay
Talk to your loan servicer about earning interest rate reductions. One possible way to do this is to set up autopay on your student loans. This means payments are automatically deducted from your checking account. In exchange for setting up autopay, lenders usually reward you with a .25% interest rate reduction for taking this action, which helps you save money. You also benefit because you no longer have to worry about remembering to make your payment each month. It’s automatic!
Claim deductions on your taxes
Did you know you can actually get a kickback for making interest payments on your student loans? It’s true, so long as you claim the credits and deductions you’re entitled to as someone paying student loans when you file your taxes.
You can deduct student loan interest that you paid from your taxes, regardless of what repayment plan you’re on. Doing so can help you reduce the amount of income tax you owe by up to $2,500.
Qualified loans include loans you took to pay approved education expenses only, that were for you, a spouse, or a dependent. Qualified education expenses include tuition and fees, room and board, and textbooks, supplies, and other necessary expenses like transportation. Any loans from relatives or qualified employer plans that you used for school won’t count towards this deduction.
You should also be aware of the income requirements needed to claim this deduction. Your adjusted gross income can’t be more than $80,000 (or $160,000 when you file jointly). You can use this interest deduction calculator to determine if you’re eligible to file for a deduction, and what your benefit could be.
You can use the Student Loan Interest Deduction Worksheet from IRS Form 1040, Form 1040A, or Form 1040NR when you file your taxes. To learn more and to get copies of the forms you need, check out this comprehensive guide on student loan interest deductions from the IRS.
What doesn’t save you money when you repay your loans
The strategies above will help you repay your loans while saving money, but not all repayment methods will do this for you. Strategies designed to help you manage your debt, like income-based repayment plans or repayment plans that lower your monthly payment, can help ensure you make your payments in full and on time. But they do this by lowering your monthly payment and extending the period of time which you need to pay back student loans. While it can help you today, this approach will cost you money over the life of your loan because you end up paying more in interest.
Other repayment methods that can cost you more than sticking to the original payment plan include consolidation and the debt snowball. With consolidation, you could end up paying more if your loan term is dramatically extended. If you use the debt snowball payment method, you prioritize paying off your debts based on their balance instead of interest rate.
Ultimately, any strategy that will get you out of debt and that you can consistently stick to is a solid one worth pursuing. But if you want to optimize to pay student loans while also saving money, choose a way to repay your debt that doesn’t leave you paying more interest over time.
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