7 ways to pay off student loans faster
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If you want to get out of student loan debt but don’t have the money to pay your student loans in full, these 7 ways can help you pay off your loans faster. (iStock)
Worried about graduating with student loan debt? You’re not alone. Students graduating with a bachelor’s degree from a public college or university borrowed $26,100 in student loans on average, according to the National Center for Education Statistics. That figure is even higher for students at private nonprofit and for-profit institutions.
The good news is that it’s possible to pay off your student loans and save money.
Student loan refinancing could be one option to help you pay off your loans faster. You can learn more about student loan refinancing by visiting Credible, where you can compare rates from multiple private student loan lenders.
- Understand all your debts, then make a plan
- Consider consolidating or refinancing
- Stick to a budget
- Decide between the debt snowball and debt avalanche methods
- Pay more than the minimum payment
- Set up autopay for an interest rate reduction
- Stay on the Standard Repayment Plan
1. Understand all your debts, then make a plan
Many people leave college with multiple student loans, including federal and private student loans. Your first step should be to find out how much you owe so you can make a plan.
To find out how much you owe in federal student debt, log into your StudentAid.gov account. There, you can find each loan’s current balance, interest rate, loan servicer, and payment schedule.
To gather information on your private loans, you might need to call your loan servicer to get details on your loan balance, interest rate, and payment schedule. If you don’t know who your servicer is, check your original loan documents, ask your university’s financial aid office, or check your credit report.
Once you gather information on each loan, create a spreadsheet with all your loan details.
2. Consider consolidating or refinancing
Consolidating or refinancing your student loans combines multiple loans into one monthly payment with one servicer. So what’s the difference?
Consolidation combines all or some of your federal loans into one Direct Consolidation Loan. Consolidation doesn’t lower your interest rate — your new rate will be a weighted average of all your consolidated loans, rounded up to the nearest one-eighth of a percent. Fortunately, the new loan will have a fixed interest rate, so your loan payment won’t go up if interest rates rise.
Refinancing combines all or some of your federal and private student loans into a new loan from a private lender. Refinancing may allow you to lower your interest rate or lower your monthly payment by extending your repayment term. Your new interest rate may be fixed or variable.
Remember that refinancing federal student loans into a private loan means losing out on many federal student loan benefits, including income-driven repayment plans, deferment, forbearance, and student loan forgiveness.
You can easily compare prequalified rates from multiple lenders using Credible.
3. Stick to a budget
Making (and sticking to) a budget is one of the most important things you can do to build good money habits and pay off your student loans quickly.
While many effective budgeting methods are available, a common one is the 50/30/20 rule. This budgeting approach suggests you allocate your monthly take-home pay as follows:
- 50% toward needs (housing, groceries, utilities, transportation, and minimum debt payments)
- 30% toward wants (dining out, streaming subscriptions, entertainment)
- 20% to savings (retirement account contributions, emergency savings, and investing)
When using the 50/30/20 rule to pay off student loan debt, your minimum payments fall into the needs category so you won’t default on your loans and negatively affect your credit score.
Any extra student loan payments fall into the savings category because once your debt is gone, you can allocate that money to savings.
Keep in mind that the 50/30/20 rule is just a guideline, and you may have to tweak those categories to fit your unique circumstances.
4. Decide between the debt snowball and debt avalanche methods
The debt snowball and debt avalanche are strategies for paying down your debt, assuming you decided not to consolidate or refinance your loans.
Under the debt snowball method, you pay off your debts in order of size, from smallest to largest. You make the minimum payment on all debts and allocate any extra principal payments to the loan with the smallest balance. Once you pay off that loan, you focus on the next-smallest balance, repeating this process until you’re debt-free.
Under the debt avalanche method, you pay off your debts according to their interest rates — highest to lowest. You make the minimum payments on all loans but direct any extra money to the loan with the highest interest rate.
The avalanche method is the most efficient way to pay off your student loans because it minimizes the cost of debt. However, many people find the frequent milestones of the debt snowball method more motivating.
5. Pay more than the minimum payment
Federal student loan borrowers are automatically enrolled in a Standard Repayment Plan with a repayment term of 10 years. If you want to pay off your student loan in under a decade, you’ll need to make extra payments toward the loan principal.
You can do that by paying extra with your monthly payment or sending a lump sum whenever you have funds available.
You can also make an extra payment every year by switching to bi-weekly payments. When you make bi-weekly payments, you make 26 half payments per year rather than the 12 monthly payments you’d normally make. To make this strategy work, you must make both halves of your payment by the due date.
Whichever method you choose, make sure your extra payments go toward the loan principal rather than prepaying interest. Your loan servicer should be able to tell you how to make principal-only payments.
6. Set up autopay for an interest rate reduction
Federal student loan lenders and some private lenders offer a slight interest rate reduction if you sign up for automatic payments — typically 0.25%.
While this discount won’t make a huge dent in your debt, every dollar counts when you’re trying to pay off your student loans faster. Plus, it’s a good way to ensure you’re never late with your payments.
7. Stay on the Standard Repayment Plan
Federal student loans offer income-driven repayment plans, which limit your monthly payment to 10% to 20% of your discretionary income. These plans are helpful if your monthly payments are too high compared to your income, but they’re not the best choice if you want to get out of debt quickly.
Income-driven repayment plans often extend your repayment period and increase the amount you’ll pay in interest over the life of the loan.
If you want to pay off your student loans faster, consider staying on the Standard Repayment Plan, which ensures that your loan balance will be paid off in 10 years.
To get started on refinancing your student loans, visit Credible and compare prequalified rates from multiple lenders.