Paying off student loans can be a difficult and lengthy process. With the average graduate having over $30,000 in student loan debt, finding effective ways to pay it off quickly is important. This article outlines the best strategies for paying off student loans so you can become debt-free faster.
Make a Budget and Stick to It
The first step is to make a detailed budget that accounts for your income and expenses. Be sure to include your student loan payment. With a budget, you can see where your money is going each month and where you may be able to cut back on spending to put more towards your loans. Setting a budget also helps you stick to a plan and not spend more than you earn.
Some tips for budgeting:
- Track your spending to understand where your money goes
- Categorize expenses as essential or non-essential
- Look for areas where you can reduce spending, like dining out or entertainment
- Use budgeting tools and apps to automate the process
Sticking to your budget takes discipline, but is key to freeing up money to pay off student loans faster.
Pay More Than Your Minimum Payment
One of the most effective ways to pay off loans faster is to pay more than the minimum payment due each month. Even paying $20 or $50 more per month can make a big difference over the life of your loan.
For example, on a $30,000 loan with a 6% interest rate and 10-year repayment term, just paying an extra $100 a month reduces the total payments by $8,200 and shortens the loan length by over 3 years.
The key is to pay as much extra as you reasonably can afford each month to save substantially on interest charges. Automating a higher payment amount can help ensure you consistently pay extra.
Refinance or Consolidate Your Loans
Refinancing and consolidating student loans to a lower interest rate saves money on interest over time. With refinancing, you take out a new private loan to pay off your existing federal and private student loans. This can secure you a lower interest rate, especially if you had loans with a high rate.
Consolidating combines multiple federal loans into one new loan with a fixed rate based on the average of the interest rates on the loans being consolidated. While this may not reduce your rate, it simplifies managing just one loan with one monthly payment.
To get the best rate when refinancing or consolidating, you’ll need a good credit score, stable income, and potentially a co-signer. Refinancing also causes you to lose federal loan benefits like income-based repayment, so be sure to weigh the trade-offs.
Make Extra Payments Toward Principal
When you make loan payments, your payment applies first to outstanding interest before the remaining amount goes to the principal balance. Making an extra principal payment reduces your overall interest costs and helps pay your loan off faster.
Any extra amount you pay typically goes entirely to the principal if you submit it as a separate payment designated as a principal-only payment. Or you can instruct the lender to apply an extra amount of a regular payment to the principal.
Even small extra principal payments add up over time. If you pay just $10 extra per month in principal on a loan with a 5% rate, you would pay the loan off a full year early and save $430 in interest.
Target High Interest Rate Loans
If you have multiple student loans with different interest rates, focusing on paying off the highest interest rate loans first (while making minimum payments on the others) saves the most money overall.
For example, if you have three loans with interest rates of 6%, 7%, and 8%, target the 8% loan. Once that’s paid off, put the extra money toward the 7% loan, and finally the 6% loan.
This “debt avalanche” method means you pay less interest over time compared to dividing payments equally across all loans. Apps and calculators can help you determine which loan to pay off first.
Use Windfalls Wisely
Using unexpected money, like tax refunds, inheritance, bonus pay or gifts, to make extra payments on your high interest loans speeds up payoff. Even an extra $500 or $1,000 payment made when you receive a windfall gives your loan reduction a boost without cutting into your regular budget.
Consider redirecting your tax refund directly to your student loan servicer so the extra payment is automatic every year. It could help pay off your loan years faster.
Best strategies for paying off student loans while balancing other goals
Paying off student debt faster needs to be balanced with other financial goals like retirement savings and maintaining an emergency fund. It’s important to find an approach that allows you to chip away at your loans while still investing in your future.
Here are some tips:
- Contribute enough to your 401(k) to get any employer match
- Start with a small emergency fund, then focus extra on loans
- Split any extra money between loans and retirement savings
- Refinance your loans only if the rate reduction is significant enough to justify losing federal perks
- Consider downsizing your living expenses to maximize student loan payments
The key is allocating your money in a way that keeps your finances healthy while still making steady progress on debt reduction. Don’t deprive your future self just to pay off loans a little quicker now.
Explore Federal Repayment and Forgiveness Programs
The U.S. government offers several repayment plans that may make paying off federal student loans easier:
- Income-based repayment (IBR): Payment is 10% of discretionary income. Forgiveness after 20 years of payments.
- Pay As You Earn (PAYE): Payment is 10% of discretionary income. Forgiveness after 20 years of payments.
- Revised Pay As You Earn (REPAYE): Payment is 10% of discretionary income. Forgiveness after 20 or 25 years of payments.
- Income-contingent repayment (ICR): Payment is 20% of discretionary income or amount over 12 years. Forgiveness after 25 years of payments.
These can reduce your monthly payments to an affordable amount based on your income. You may pay more interest over time but have a lower payment. Be mindful of any tax implications on the forgiven amount.
Public Service Loan Forgiveness is also an option if you work for the government or a nonprofit. It provides forgiveness after 10 years of payments in an income-driven plan.
Consider Paying Loans with Retirement Savings
In some cases, it may make sense to use retirement account savings to pay off student loans:
- If your employer offers a match, at least contribute enough to get the full match before using any savings to pay down debt.
- Analyze whether the guaranteed return from eliminating high interest debt exceeds expected investment returns from the retirement account, considering your time horizon.
- Generally focus any withdrawals on Roth retirement accounts first so you avoid taxes. Withdrawals from traditional 401(k)s or IRAs count as taxable income.
- Be aware of withdrawal penalties if under age 59.5 for Roth IRAs and under age 55 for 401(k)s in limited circumstances.
This strategy requires careful analysis of the interest rate savings, tax implications, and your retirement investing time horizon. Consult a financial planner or advisor before using retirement funds to avoid penalties.
Other Tips for Paying Off Loans Faster
- Automate payments to avoid late fees – set up automatic monthly transfers to loan servicer.
- Sign up for auto-debit to receive interest rate discounts, making your payment go further.
- Pay loans twice per month instead of monthly to reduce interest charged.
- Pay off highest-rate loan first while paying minimums on others if you have multiple loans.
- Don’t lengthen your loan term – stick with standard 10 year repayment.
- Make biweekly instead of monthly payments to make an extra yearly principal payment.
- Look for student loan repayment assistance programs offered by some employers and states.
Using a combination of these strategies can help you pay off student loans aggressively and reach a zero balance and financial freedom much faster.
Summary of the Best Strategies for Paying Off Student Loans
Here’s a quick recap of the most effective ways to pay off student loans fast:
- Make a budget so you can allocate as much money as possible to your loans each month
- Pay extra beyond just your minimum payment
- Refinance or consolidate loans to lower your interest rate
- Make additional principal payments to save on interest
- Target your highest interest rate loans first
- Use windfalls like tax refunds to make one-time extra payments
- Explore income-driven repayment and forgiveness programs
- Consider very carefully using retirement accounts if interest rate savings exceed investment returns
- Automate payments and use other tricks to optimize your payments
Using these smart strategies requires discipline and focusing your finances, but doing so will allow you to pay off student loans in a fraction of their original term length. The faster you eliminate this debt, the sooner you can use your money for other goals and build real financial freedom.
Student Loan Hero. “7 Ways to Pay Off Student Loans Faster.” https://studentloanhero.com/featured/pay-off-student-loans-faster-tips/
Forbes. “Student Loans: 6 Best Ways To Pay Off Student Loans Faster.” https://www.forbes.com/sites/zackfriedman/2019/02/25/6-ways-pay-off-student-loans-faster/?sh=30e3749f7640
Federal Student Aid. “Income-Driven Repayment Plans.” https://studentaid.gov/manage-loans/repayment/plans/income-driven
NerdWallet. “5 smart ways to use your tax refund to pay down debt.” https://www.nerdwallet.com/article/taxes/use-tax-refund-to-pay-debt
Investopedia. “When to Use Retirement Funds to Pay Off Student Loans.” https://www.investopedia.com/articles/personal-finance/081216/when-use-retirement-funds-pay-student-loans.asp