Paying off your student loan debt may seem like a small step on your financial journey, but for some people it’s a long journey in itself. A 2013 survey found that it took the average borrower over 20 years to repay their loans.
If you want to get out of debt in your 20s, you’ll need a plan that takes into account your personal circumstances and all available repayment options. We will help you come up with the best strategy in the article below.
Pros and cons of paying off student loans early
pros
- Save on total interest
- Relieve the psychological burden of student loans
- Simplification of obtaining other loans
Minuses
- Can make more money by investing extra funds
- May delay other financial and personal achievements
- May miss out on future loan forgiveness opportunities
How to pay off a student loan early
Paying off student loans early is no different than paying off any other debt. You will need to gather information together so you know what you are dealing with. You will then choose a loan to focus on and start paying it off one at a time, paying as much as you can.
Two things that can speed up repayments are lowering the interest rate on private loans and increasing your income. Lower interest rates mean more money flows into your balance, and more income means you can make larger payments.
Organize your loans
If you’re a recent graduate and don’t know how to find your student loan information, go to the Federal Student Assistance (FSA) website to find your federal loans. You will need your FSA ID and password. If you don’t remember your username or are having trouble logging in, contact the FSA at 1-800-433-3243.
The FSA website will only list your federal loans. To find your private student loan, check your official credit report from all three credit bureaus at www.AnnualCreditReport.com. Your credit report must list any private student loans you have taken.
Before you start spending extra money on student loans, you need to figure out how much you owe. Open the spreadsheet and write down the following information for each loan:
- Creditor’s name
- Monthly payment
- Interest rate
- Total loan amount
- Federal or private loan
Having all the information in one place will help you determine the most effective debt repayment strategy.
Explore loan forgiveness options
If you have federal student loans, you may be eligible for several loan repayment and forgiveness programs. By taking advantage of these programs, you will be able to pay less monthly, as well as save on the total amount of interest.
The Public Service Loan Forgiveness Program (PSLF) cancels any balance after 120 monthly payments while employed by an eligible non-profit or government organization. Borrowers must have an income-focused repayment plan during this time to qualify for PSLF, so their monthly payments will be lower than normal.
There are also many loan repayment programs targeted at healthcare and legal professionals. You can be forgiven for tens of thousands of loans in exchange for a few years of work in a low-income society.
Choose a loan repayment strategy
If you want to pay off your loan early, you can choose the debt snowball or debt avalanche method.
The debt snowball method assumes an additional payment on the loan with the smallest loan balance. Once this loan is repaid, you will add additional money to the loan with the next smallest balance. The debt snowball method has been proven to be more motivating for borrowers.
The debt avalanche method means adding more funds to the loan with the highest interest rate. Once you repay this loan, you will focus on the loan with the next highest interest rate. The avalanche strategy will save you the most money on total interest, although it may take you longer to pay off individual loan balances.
Refinance private student loans
Borrowers with private student loans can refinance these loans at a lower interest rate, saving more interest in the long run. Start by comparing your current interest rates to general market rates. If your rates are higher than other lenders offer, it might be time to refinance. Use our student loan refinance calculator to see how much you can save.
If you have multiple private loans with high interest rates, you can refinance all of these loans into one loan with the same lender. It will also make repayment easier.
Borrowers with federal student loans should think twice before refinancing as these loans will then be converted to private loans. Once you refinance federal loans, you will lose all perks and benefits, such as income-based repayment plans, loan forgiveness programs, and long-term deferral and forbearance options. Better to leave the federal loans as they are.
If you need to refinance your private student loans, here is our list of the best companies to refinance student loans.
When making additional student loan payments, it is important to ensure that these funds are channeled correctly. Some lenders take additional funds and apply them to the next monthly payment instead of adding them to the principal amount.
Contact your lender and ask them how to make sure your extra payment goes towards paying off the principal. Then double check every month to make sure your payment was applied correctly.
Find ways to make more money
If you can’t afford to pay extra on your loans and want to, it’s time to evaluate your budget. But as inflation continues to plague ordinary Americans, spending cuts may not be enough. A part-time job or an increase in salary may be the only way to channel more money into loans.
Here are some ideas on how to earn extra money.
What about Biden’s student loan write-off program?
As of early this year, a new plan is being discussed for those using income-based payment plans. Under this new plan, payments for undergraduate students will be set at 5% of your discretionary income (that’s what the government is talking about “fee minus a small amount for basic living expenses”). balance is forgiven.
Graduate loan payments will be 10% of discretionary income, and those who borrowed less than $12,000 will only have to make payments for 10 years before forgiveness occurs.
Summary
Paying off student loans early may seem like the best financial decision you can make, but don’t do it at the expense of your other life goals. For example, if you want to buy a house, you will have to save up for a down payment. If you want to quit your job and become self-employed, you may need start-up funds.
Also, don’t forget to invest for retirement when you pay off your loans. The power of compound interest means you can make huge profits if you start investing early. You must also have a significant reserve fund before you pay extra on your loans. This will save you from having to go into debt if something unexpected happens.
