The thrill of graduating college comes crashing down when you face over $30,000 in student loan debt. The amount lurks behind every purchase and every thought of buying a car or a home. If you’ve calculated your total and want to know how to pay off student loans fast, then this guide is for you.
Start Paying Your Loans While You’re in School
Many students ignore their loans until after graduation, but it’s wise to start paying them off while you’re in school. Get a part-time job while you’re in college and dedicate most or all of the earnings to your student loans. If you can pay off $800 a month while you’re in school, then you’ll have paid off $30,000 or more by the time you graduated. For some people, that’s their entire amount owed!
You can pay off the principal early by making pre-payments while studying. Call your loan servicer to make sure your payments are applied to the principal and not the interest. You can make payments on federal loans while in school, but some private loans will charge you a fee for doing so. Be sure to find out which loans you can pay off without fees.
Do you have subsidized loans, which don’t accrue interest until after you’ve graduated? Or do you have unsubsidized loans, which start accruing interest right away? Pay down the unsubsidized loans first to avoid large increases in interest.
Know Where Your Money is Going
Creating a budget is one of the most important steps to managing your finances. This is especially crucial if you want to know how to pay off student loans fast. Tracking your expenses and income will give you a snapshot of how much is coming in and going out each month so you can assess areas where you’re overspending or underspending.
Allocating expenses like your cable bill, dining out or drinks with friends to your loan payments can dramatically reduce the length of time you’re in repayment. Having some discipline now will pay off in the long term.
Ignore the Minimum and Pay More
The minimum payments work in favor of the loan servicer because they force you to pay more interest over time. Assess your budget carefully and see how much additional you can apply to the principal each month. This helps to avoid additional interest from accruing because the principal keeps decreasing.
What’s the best way to make additional payments to pay off student loans fast? Make your regular payment on time via auto-pay and then schedule another extra payment for the next day. Under federal regulation, lenders apply your payment to late charges or collection costs for your loan, then to any outstanding interest accrued since your last payment, and then to your principal. Private lenders typically follow suit.
Paying the extra amount immediately after your due date leaves a minimal amount of time for interest to accrue and more of your payments will go toward the principal. Schedule your recurring bill-pay for both amounts so you won’t forget.
Treat Cash Windfalls as Massive Loan Payments
Did you receive a bonus, inheritance or other financial gifts? Put some or all of it toward your student loan debt instead of making a big purchase. You’ll be happy you did once you see the how quickly a big payment reduces your student loan balance.
Pay off High-Interest Loans First
Log in to all of your lender websites and note which loans have the highest interest. It’s smart to pay off loans with the highest interest first because the balance capitalizes the fastest for loans with high-interest rates. Any additional payments should go toward loans with the highest interest rates.
Refinance Your Student Loans
The reason many people refinance their student loans is to get a lower interest rate and to bundle them into one monthly payment. If you want to know how to pay off student loans fast, refinancing is usually a good option. You can consolidate federal and private loans through a private lender.
If you have good credit, you can usually get a better interest rate. You can also choose a shorter repayment term so you can pay off your loans faster. The downside is that you give up protections like deferment of income-based repayment plans on federal loans, which puts you at risk if you lose your job and can’t afford student loan payments for a while.
Understand Capitalized Interest
Capitalized interest on student loans happens when your loan servicer adds unpaid interest to your total loan balance. This makes your balance increase and then accrue even more interest. To put it simply, you pay interest on your interest and it can cause you to owe more than the amount you originally borrowed. This happens when you defer or forbear your student loans.
If you’re thinking about signing up for an income-based repayment plan, this may not be the best choice if you want to pay off students loans fast. Income-based Repayment or Pay As You Earn plans may not cover all of the interest that’s accruing, which can lead to capitalized interest. In the short term, you may feel better covering your payments, but you may end up owing more in the long term.
Take Advantage of Interest Rate Reductions with Auto-Pay
Many loan servicers offer a 0.25% interest-rate reduction when you sign up for automatic payments or auto-pay. This is a simple way to pay off your loans faster while guaranteeing that you pay them on time.
Find an Employer That Offers Student Loan Repayment Assistance
Student loan repayment assistance is a perk that more companies are providing given that most students carry debt into their careers. Although only 4% of companies offer this benefit now, it is the hottest benefit of the past year with 76% of people saying that student loan repayment benefits would be a deciding or contributing factor to accepting a job, according to the 2015 American Student Assistance survey. Employers usually pay $100 to $300 a month with many employers matching contributions up to $2,000 per year.
Deduct up to $2,500 in Taxable Income
Graduates of eligible colleges and universities can qualify to have $2,500 deducted from their Adjusted Gross Income, which reduces total taxable income. People earning over $80,000 are not eligible, however, and those earning between $65,000 and $80,000 can only deduct a portion of $2,500.
Research Student Loan Forgiveness Programs
There are several ways to have your student loans forgiven, such as the Public Service Loan Forgiveness Program, which applies to qualifying loans after 10 years of payments. You can work for a government agency, non-profit organization or other qualifying organizations. Your state may also offer some repayment assistance in which they repay part of your loan, but you need to work in an area in which the state needs assistance.
You can also work for the Peace Corps to get a deferment of Stafford, Perkins, or Consolidation loans. If you work for Americorps for a year, you’ll receive $4,725 for your loans. Volunteering with Volunteers in Service to America for 1,700 hours will give you $4,725 for your loans, too. Thinking of joining the military? You can see the student loan benefit eligibility here.
Paying off your student loans fast is a smart financial decision that will help you to get out of debt quickly. Not only will you enjoy sticking to your plan as you see your principal decrease, but you’ll be even closer to other financial goals like saving for a car or a house, retirement or for your children’s education.