How To Pay Off Your Student LoansOct 02, 2020
The average student graduate leaves college with $37,172 in student loans. This is a huge burden for new grads to carry. How are you supposed to buy a house, and do adult things with this large burden on your shoulders?
Like any loan, student loans have interest. The longer you leave the balance outstanding, the more it costs. But how do you pay off student loans while dealing with the other expenses that accompany adulthood?
While there’s no magic answer to pay off $37,000 fast, there are ways to speed up the process.
- Make payments while interest capitalizes
Most student loans accrue interest even while in the grace period or deferment. You aren’t required to pay the interest now, but if you don’t, the lender adds it to the back of your loan. This means you pay more interest overall because your balance increased.
Avoid this by paying interest even while you’re in college or when your loan is in deferment. The payments are typically small, but it makes a world of difference when you’re in repayment.
- Make extra payments
Student loans don’t have any type of prepayment penalty. As long as you make your minimum payments on time, you can pay any extra money at any time. If your budgeting allows you to make consistent extra payments, you can cut years off your loan.
It doesn’t have to be a huge amount either. For example, if you have $20,000 in student debt at a 5% interest rate and you made an extra $100 a month payment, you’d shave 4 years off your loan and save $2,446 in interest.
- Make bi-weekly payments instead of monthly payments
This doesn’t require any extra money or crazy budgeting tactics. Instead of paying the full monthly amount due once a month, break it in half and pay it twice a month. For example, if your payment is $300, you’d pay $150 every two weeks.
This seems strange since you’re not paying anything extra, but it works. Here’s why.
There are 52 weeks in a year. If you make bi-weekly payments, you make 26 ½ payments. That comes out to 13 annual payments or one extra payment per year. That extra payment lowers your total interest and cuts a little time off your loan’s timeline.
- Use your windfalls to pay down your debt
If you get extra money, such as from tax returns, an inheritance, or a bonus at work, don’t put it in your checking account. Instead, immediately use it to pay down your student debt.
If you can’t handle putting the entire amount of your newfound cashflow into your loan, break it up. Put at least 50% of the cash toward the loan. Split up the remaining 50% amongst debt payoff, savings, and fun.
- Set up autopay
Many lenders provide a discount if you sign up for autopay because it guarantees they’ll receive their payment on time. While the savings is only a quarter of an interest rate (not much), every little bit counts. If you combine auto pay with some extra payments, you’ll pay your loan off faster and for less interest than you thought.
- Exhaust your repayment options
Many federal student loans are eligible for an income-based repayment plan. If approved, you may be able to make lower monthly payments based on your income (the less you make the less you pay). After a certain period, usually 20 years, the federal reserve forgives the remainder of your loan.
- Refinance private student loans
If you have non-government student loans, consider refinancing them, but hold off on government loans, as refinancing should be your last resort. If you refinance government loans, you won’t be eligible for any payment assistance, such as the income-based repayment plan.
Private loans, however, don’t have repayment plans, so refinancing may help lower your interest costs and pay your loan off faster.
- Start a side hustle
If you can find extra money when budgeting to pay your student loans down faster, start a side hustle.
Today there are many options. You can start something online, offering digital services to people around the world, or start something in your own area that requires your physical labor, such as cutting lawns, driving for Uber, doing deliveries, or pet sitting.
Take the money you earn from your side hustle and apply it directly toward your student loans. Treat it like the windfall funds – put as much of it toward your student loans as you can, splitting the remainder up amongst the other priorities in your life.
- Use the standard repayment plan
All government student loans go on the standard repayment plan unless you ask for something else. If you can afford it, stay on this plan.
You’ll pay the debt off in 10 years and put it behind you. While the payments are higher, it’s a sacrifice worth making if you can work it into your budgeting. You’ll pay the least amount of interest and be out of student debt.
Stay Consistent and You’ll Pay Off Student Debt
It seems like an uphill battle, but it is possible to pay off student debt. The interest charges won’t get the best of you if you stay ahead of it. Don’t let the loan just sit in deferral or keep asking for income-based repayment and not do anything else. It takes a concerted effort to stay on track, but if you do, you’ll get out of student loan debt and be able to focus on other areas of your financial life.
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