Federal student loans start with a 10-year term, which can be extended even longer with consolidation. Interest adds up when repaying student loans for this long, never mind the hassle of dealing with bills and sacrificing other financial goals in the meantime.
While student loan debt is much like dealing with other types of loans, there are some key differences for paying them quickly. Use the following tips for paying off student loans faster than you would by sending in the minimum each month.
1. Borrow with caution
Paying back your student loans faster begins with planning before the first payment is even due and hopefully before the money is borrowed.
Start with the obvious: limit your loans. The lower your student loan debt, the faster you’ll be able to pay it off.
To get an idea of how much you should borrow, try a calculator that suggests a total you’ll be able to repay. This calculator from FinAid will estimate an acceptable debt load based on the starting salary in your field.
Make sure to choose student loans wisely, too. They’re not all the same, and there’s often big differences in cost and repayment options between federal and private loans. Federal loans typically have more options for consolidation and payment plans after you graduate. For private loans, options and rates really depend on the lender, so be sure to check the fine print.
2. Start paying in college
You can start making payments on student loans before you graduate. Although payments are deferred, interest accrues on unsubsidized loans while you’re still in school. Paying while you’re still taking classes keeps interest costs down for the future and will give you a jump on paying off student loans later.
Maybe you have a summer job or internship that allows you to pay down some of your balance. While coming up with the cash in college isn’t easy, it’s worth much more than spending any money earned on spring break trips.
3. Enroll in auto payments
Paying your loans automatically offers several benefits. You won’t risk late payments, you can have the payment withdrawn from your bank before you can spend the money, and you can even save on interest.
Some servicers offer a 0.25% discount on your interest rate for setting up automatic payments. It’s a small reward but can save hundreds if you’re paying back large balances over a long period.
4. Pay anything extra you can afford
The savings from making even small extra payments over the minimum on your student loans can leave surprising results.
Can you manage just $100 more a month towards your loans? The general recommendation is to keep student loan payments between 10% to 15% of your income. If you’re paying less than that, you may be able to afford more. If you pay more, you’ll save.
By paying just $100 extra a month on $20,000 in student loans at 6.8% interest, you’ll have student loans paid off 3.8 years earlier. That’s just over six years instead of 10 to finish paying off student loans.
You don’t have to stop there, either. With an extra $165 payment over the minimum, you can cut your 10-year term in half.
Want to pay even more? Investigate your savings further with this prepayment calculator.
When you’re paying extra, target the loans with highest interest rates first to save the most on interest charges.
5. Earn more to pay down loans
Getting a part-time job that doesn’t pay as well as you hope might actually be worth more than you think.
Don’t look at just your hourly wage. Consider the interest savings from the above example.
Don’t rule out a second job, freelancing, or other ways to earn more money. Remember that it can just be temporary while you’re paying off student loans, which will come sooner when you make more than the minimum payments.
6. Avoid consolidating loans
If you’re looking to pay down loans faster, consolidation probably won’t help and can even hurt.
Several student loan repayment options are available, and you’ll automatically be eligible for some if you have federal loans. In many cases, consolidation ends up costing more money and lengthening the term of your loans. Some extend the original 10-year term to 25 years.
If you consolidate federal loans with different interest rates, you’ll lose the ability to target the highest interest rates first. Federal loans should almost never be consolidated with private loans for this reason.
Consolidation does make sense when you’re having trouble making payments. But if your top priority is paying off student loans, look elsewhere.
7. Use tax savings to pay
While paying student loans is a drain on your wallet, you can get some money back on your taxes. If you earn less than $60,000 (or are married, file a joint return, and earn less than $120,000), you can deduct up to $2,500 in student loan interest payments on your taxes. This will help itemizers save a few bucks, and you can turn around and put the tax savings towards paying down your loans.