5 tips for paying off student loans
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According to Forbes, student loan debt is now the second-highest category of consumer debt, with only mortgage debt higher. Nearly 45 million borrowers owe over $1.5 trillion in federal student loans in the U.S., which doesn't even include private loans. Based on a Pew Research Center analysis of data from the Federal Reserve Board’s 2018 Survey of Household Economics and Decision making, the median debt for those with a bachelor’s degree is $25,000 and the median debt for postgraduate degree holders is $45,000.
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As you develop a strategy for paying off your debt, you could consider the following:
- Type of loan
- Interest rates
- Current balance
- Length (term) of the loan
Now let's take a look at five tips to help you pay off your debt:
1. Refinance your loan(s)
Much like the refinancing of a mortgage, it's sometimes possible to refinance and consolidate student loans, especially if you have a decent credit score and income. With refinancing, you'll be able to consolidate multiple loans into one and choose a new, shorter loan term with a lower interest rate. Your monthly payment may increase, but you'll be able to pay off your debt faster and save money in the long term by paying less interest.
2. Pay more than the minimum monthly payment
This is a particularly quick way to pay off student debt. One method is to make your loan payments every two weeks instead of monthly. By making a payment every two weeks (usually half of your monthly payment amount), you'll effectively make an extra payment each year. In turn, you'll shorten the time it takes to pay off your loan and potentially save hundreds or thousands of dollars on your total interest payments.
To help boost those monthly payments, look for ways to increase your income, like starting a side hustle or using a cash-back credit card for your everyday expenses. The Blue Cash Preferred® Card from American Express, for example, is TPG's best cash-back card for gas and supermarket purchases in the U.S. Any "extra" money you earn can help you save money in the long run.
If you do decide to make extra payments on top of the minimum monthly amount, just be sure that your loan servicer is applying the extra amount to your loan's principal. If not, you could end up paying interest instead, which won't pay off your loan faster.
Using the extra income I make with a vacation rental, I plan to have the student loans I acquired during graduate school paid off within the next five years -- nearly 15 years before the loans actually amortize.
Further Reading: How to get out of debt in 2020
3. Set up automatic payments (and potentially lower your interest rate)
Lenders will often offer a small discount on your interest rate if you set up automatic payments. For example, Navient, a company that services federal student loans, will reduce your interest by 0.25% when you sign up for autopay. In addition to saving on interest, autopay will help you avoid missing payments and incurring late fees, which is key to sustaining a healthy credit score.
It even may be possible to set up biweekly automatic payments. Some loan servicers allow it, others don't. If your servicer doesn't allow biweekly autopay, you'll have to do it manually if you want to use that strategy to pay off your debt faster.
Further Reading: How to consolidate debt: 9 steps to regain control
4. Adhere to the standard payment plan
The standard repayment timeline for federal student loans is 10 years, unless you chose otherwise. Although it's possible to choose alternative payment plans, like income-driven or graduated payment plans, if you can afford to stick to the 10-year repayment timeline, that could be a fast and cheap way to pay off your loans.
5. Focus on eliminating one loan at a time
This is a psychological strategy, but it's a valuable one, nonetheless.
When you have multiple loans to pay off, it's easy to get overwhelmed. If consolidating all of your loans into one doesn't make sense, try focusing on paying off one loan at a time. Of course, you'll have to continue making the minimum payments on all of your loans, but applying any extra payments to a single loan will help you pay off that loan faster. And once one loan is paid off, you'll likely be more motivated to get the others paid off too.
Decide what strategy works best for your own personal finance goals. Whichever tactic motivates you and keeps you on track is the best one.
Further Reading: Melt Away Debt with the Debt Snowball Method