Many people conscientiously make their student loan payments each month, feeling like they are making slow – or no progress – toward debt relief.
This could be because when you pay off student loans, a lot of your hard-earned money goes towards paying interest. To really reduce your balance, you’ll want to pay more than your required payment each month, but also do it strategically, and perhaps in combination with other methods, like refinancing.
Here are 7 ways to pay off your student loans quickly:
1. Understand how interest works
2. Discuss your payments with your loan officer
3. Consider refinancing your student loans
4. Focus on earning more
5. Look for a Federal Direct Consolidation Loan
6. Set up automatic student loan payments
7. Make lump sum payments whenever you have extra funds
How to quickly reduce your student loan balance
The first step to quickly paying off student debt is to understand how student loan interest works.
Lenders charge interest from you in exchange for borrowing money. It’s calculated as a percentage of the amount borrowed, and on federal student loans, for example, interest accumulates daily.
To better understand how interest works, here is an example. Let’s say you have a federal student loan of $ 50,000 with an APR of 7%.
To find out the amount of accrued interest per day, use this formula:
(Interest rate) x (current principal balance) ÷ (number of days in the year) = daily interest
Here’s what the example looks like using the above formula:
(0.07) x ($ 50,000) ÷ (365) = $ 9.59
This shows that you are being charged almost $ 10 a day just in interest. In a 30-day month, with this example, you’ll pay $ 287.70 in interest. This means that if you make a monthly payment of $ 500, only $ 212.30 will go to principal.
Private loans can calculate interest differently. Your private loans may also have variable interest rates, which can change over time, rather than a fixed rate.
Ultimately, it’s important to look at your repayment history to see exactly how much the lender is charging on interest and how much is applying on the principal balance.
Also, make sure you understand how your loan manager allocates your payments. For example, if you make an additional payment and multiple loans are managed by the same company, how that payment is applied depends on your loan manager. The business can apply the supplement to the loan at the highest interest rate or apply it to a future monthly payment.
But if you want to get out of debt quickly, pay off high-interest loans first is the best route.
For example, let’s say you have a federal undergraduate loan with an interest rate of 4.53% and graduate loans with interest rates of 6.08% and 7.08%.
Focus on paying off the 7.08% graduate loan first. This is because it currently costs the most interest per month.
If it’s not clear how to allocate your loan payment to a specific loan on your manager’s online portal, discuss your options with the company. Provide written instructions if necessary.
Student loan refinancing could help you reduce interest and pay off your loans faster, especially if you have private student loans. Here’s why:
- Private student lenders often charge higher interest rates than what you would get with federal student loans.
- Your interest rate may be variable, which means it may increase over time. Refinancing gives you the option of moving to a fixed rate.
- Federal loan refinancing turns them into a private loan and you will no longer be able to enjoy some of the benefits of the federal loan. But your private lender may have limited deferral, forbearance, payment reduction, or forgiveness programs, which means you have less to lose by refinancing.
If you have federal and private student loan balances, be sure to first assess whether you should refinance your federal student loans. Consider the following:
- Are you eligible for one of the many federal student loan exemption programs? If you refinance, you will lose your eligibility.
- Do you plan to use special federal repayment plans like income-based repayment? Few private lenders offer these options.
- Are you going to save money? Depending on the type of federal loan, you may already have a low fixed interest rate.
To start refinancing, explore multiple lenders and find the best rate for you. Many companies offer potential borrowers the option of getting an interest rate quote without submitting a full application, which can help you compare offers.
Use a refinancing calculator to calculate how much you could possibly save, which can help you decide if refinancing is the right choice for your situation.
It can be difficult to make additional payments on your loans if the majority of your discretionary income is already spent on them. But one way to pay off loans faster is to focus on making more money.
To consider start a secondary activity, find a part-time job, or sell items you no longer use. Make a commitment to spend any extra money you earn on debt.
Working more might seem difficult now, but consider it a temporary fix so you can get on with your loans. Celebrate when you hit key milestones, like paying off individual loans or lowering your balance to a certain threshold, to stay motivated. Use a prepayment calculator to see how much time and money you can save by adding a little more to your payments each month.
If you have multiple federal student loans, consider combining them into one direct consolidation loan. Consolidation can make it easier to manage, organize and repay your loans by providing you with a monthly payment from a single manager.
Note, however, that consolidating can leave you with a longer repayment term, which could mean a lower monthly payment, but more interest charges overall. If you want to use it as a strategy to pay off loans quickly, consolidate federal loans to streamline bills, then put extra money on your payment each month to get rid of the balance.
To qualify for a Direct Consolidation Loan, you must have at least one Direct Loan or Federal Family Education Loan (FFEL) either in repayment, postponement or default, or in its grace period. School loans are not eligible.
Establishment automatic repayment of student loans has many advantages that will help you pay off your balance faster. First, many lenders offer an interest rate reduction of 0.25% in exchange for setting up automatic payment. While a fraction of a percentage point may not seem like much, you will save money over time and more of your monthly payments will go towards paying off your principal.
Automatic payments will also help you make sure you pay your bill on time, every month. This is important for keeping your credit strong; payment history is the biggest contributor to your credit rating, which helps determine if you might qualify for loans or credit cards in the future.
There may be times when you have more money in your pocket than usual, such as when you receive a tax refund or a year-end bonus. Consider applying at least some of this money to your student loan balance.
As is the case when you make additional payments through other methods, this ensures that more money than usual will go towards your principal. Use a lump sum additional payment calculator to get an idea of the importance of a larger than normal payment.
Having a student loan balance isn’t fun, especially when it feels like a lot of your money is spent on interest. But with a plan of action, you can begin to tackle your student loans and move forward.
Tara Mastroeni contributed to this article.
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