Student loans are an albatross around the necks of millions of Americans. More than 70 percent of today’s graduates walk away from school with debt, averaging about $35,000. We are not immune at any age. Many borrowers struggle with the payments for decades, far beyond the school years. Nearly one million retirees carry a record $18.2 billion in student loan debt.
The best (but not only) way to pay off a loan ahead of time is to send the lender more money. Today’s repayment options make payments affordable, but why drag the debt around for any longer than necessary? While you can, and especially if you’re single and don’t yet have kids, take the opportunity to knock the balance down.
Before you funnel all of your extra cash into accelerated loan payments, build up an emergency fund that will cover your expenses for six months. Once you have your emergency fund covered, you can then focus on paying off your student loans early with these nine tips.
1. Understand Your Loans, Interest Rates and Payments
First, make a list of all of your loans. For each, you’ll need to know what type of loan it is, the balance and the interest rate.
While conventional wisdom says to pay off the highest interest loan first, private variable loans may be an exception to that rule. That’s because even though the present interest rate may be lower than that of a federally backed fixed-rate loan, the variable nature means that interest rate hikes are inevitable. As the economy improves and the prime rate goes up, the interest rate on these loans could exceed the rate on the other loans within a few years.
On a traditional fixed-rate amortized loan, the bulk of the early payments goes to interest. The amount of principal you pay off each month goes up very slowly while the amount of interest you pay off goes down. Here’s an example:
Loan balance: $35,000
Interest rate: 6 percent
Repayment period: 10 years
Payment 1: $388.57 ($213.57 principal; $175.00 interest)
Payment 2: $388.57 ($214.64 principal; $173.93 interest)
Payment 3: $388.57 ($215.71 principal; $172.86 interest)
Payment 119: $388.57 ($384.71 principal; $3.86 interest)
Payment 120: $386.64 ($384.71 principal; $1.93 interest)
2. Make Extra Payments
As you can see, a greater percentage of each payment goes toward interest in the early part of the loan. So, the prime opportunity to save money is when a loan is new. Accelerating payments early in the life of the loan, before the bulk of the interest has already been paid, leads to the greatest interest savings overall.
You can make extra payments that will be applied entirely toward the principal, lowering the overall amount of interest you pay over the remaining life of the loan. Many loan servicers require that with every extra payment, you stipulate that the money should be applied toward the principal. If you don’t, a portion of the extra payment might be applied to interest charges.
Although it’s nice if you can double each payment, you don’t have to. Even an additional $20 or $50 each month will result in measurable savings over the life of the loan. Use a loan amortization calculator (free in Microsoft Excel and online) to see how much you can shorten your loan and how much interest you’ll save by making extra payments in various amounts. For maximum financial benefit, send extra payments to the loan that carries the highest interest rate.
3. Choose Your Repayment Plan Carefully
Federally backed student loans now come with a variety of repayment optionsdesigned to help borrowers manage their payments. Be warned, however, that opting for the smallest monthly payment that you qualify for can not only extend the life of the loan by many years, it will also usually result in greater overall interest charges by the time the loan is repaid.
4. Make Interest Payments While Still in School
Many loans accrue interest even when they are not in repayment. Once the loan enters repayment, the interest is capitalized – that means it is added to the principal balance, and subsequent interest charges are calculated on the new, higher balance. You’ll pay interest on interest, in other words. (The same thing happens, by the way, during most loan deferments and forbearances.) If you make payments while in school, at least to cover the interest charges, you can avoid facing that higher balance on graduation.
5. Skip the Grace Period
Student loans come with a six-month period following graduation when no payments are due. If you get a job right out of school, start paying. On unsubsidized loans, interest accrues during the grace period, so you’ll hurt yourself financially if you allow interest charges to build unnecessarily. Interest doesn’t accrue during the grade period on subsidized loans, but establishing an aggressive payment stance right from the beginning sets a precedent and the right tone.
6. Sign up for Auto-Payments
Automatic payments come with several benefits. Notably, all government and many private lenders charge a lower interest rate if you agree to automatic debits from your bank account each month. The discount is usually about one quarter of a percent. If you do nothing else, this discount alone could take a year or more off the life of your loan. Of course, automatic payments also help you stay on-time, avoid late fees and protect your credit score. (You can check your free credit score, with free monthly updates and free credit monitoring alerts, right here at Credit Sesame.com.)
7. Refinance and Consolidate
Some loans are good candidates for refinancing and consolidating. Most importantly, if you can lower your interest rates, restructure the loans (if they are eligible). Even when you don’t get a measurable financial benefit from consolidating, it can be helpful from a financial management standpoint to reduce several bills to one.
8. Live Modestly
If your new job pays you more than you’ve ever earned before, don’t raise your standard of living. Just put all of the extra funds toward the loans. Resist the temptation to buy a new car or travel. Avoid credit card debt. If freedom from debt is your goal, put your resources toward getting rid of it.
9. Will Someone Else Pay the Loan Down?
Depending on your individual situation, you may even be able to get help paying off your student loans from outside sources. If you work in public service or as a teacher, you might be eligible for loan forgiveness. Nurses, firefighters and paramedics might qualify, too.
The U.S. government offers up to $10,000 per year in student loan repayment assistance to employees.
All branches of the U.S. military offer repayment assistance for qualifying loans.
Some employers are willing to make a single lump-sum payment toward student loan debt as a signing bonus or in lieu of a raise.
The popular volunteer organizations Peace Corp and AmeriCorp both offer loan repayment or cancellation benefits to people who serve
Seven out of 10 seniors who graduated from public and nonprofit colleges in 2014 had an average student loan debt of $28,950, according to the most recent numbers crunched by the Institute for college Access & Success.
In her second edition release of CliffsNotes Graduation Debt, author Reyna Gobel explains that student loan minimum payments are typically figured for a 25 to 30-year term so you could be paying it for most of your adult life. The debt could even hamper your ability to move out of your parent’s house, buy a car, buy a house or even start a family.
Quick Tip: Check your free credit score on Credit Sesame.
So, how do you know if your student loan debt is realistically payable before 20 or 30 years pass, given your starting salary? The simple formula cited by Mark Kantrowitz, student loan expert and publisher of edvisors.com is, “If your total student loan debt is less than your starting annual income, you will be able to repay it in 10 years or less.”
Kantrowitz says that paying 10 percent of your monthly income toward student loan debt is manageable, and paying 15 percent is stretching that limit.
Many young adults graduating with student loan debt just want it gone, above all else, and they are willing to stretch. They are proof positive that it can be done, by using extreme student debt payoff strategies.
Want to see how they did it?
Student loan payoff strategy #1: Extreme budget-cutting
Name: Zina Kumok
Current profession: Personal finance writer/blogger in Denver, Colorado
Starting salary after graduation: $28,000 in an entry level newspaper reporting job
Time to payoff: 3 years
Why she did it: “As soon as I made that first payment and saw how half went to interest, I realized I wanted to be debt-free as soon as possible. It was so hard to learn how little my $28,000 income really was.”
How she did it: “My strategy was extreme budget-cutting to make as many additional payments toward principal as possible. Once I moved in with roommates and cut my rent payment, it was even easier.”
Extreme student debt payoff secrets: “I signed up for auto-debit and on that day every month I would also put in my extra payment for whatever I could so it would automatically go to principal. That included birthday money, a bonus or holiday gift money. I also used the ‘snowball method‘ of debt payment where you pay off the smallest loans first to free up money from that payment as well as use the momentum for seeing it paid off to put toward paying off the next smallest loan and I just kept going.”
Professional opinion: Edvisors urges you to take advantage of auto-debit programs for 2 reasons.
1. Auto-debit, which automatically transfers loan payments your bank account to the lender, helps you avoid late payments
2. Signing up often makes the borrower eligible for a discount on the loan’s interest rate (0.25% to 0.50%).
Student loan payoff strategy #2: Keep college costs low
Name: Micah Fraim
Current profession: Certified Public Accountant, owner of Micah Fraim CPA in Roanoke, Virginia
Starting salary after graduation: $40,000 in an entry level accounting job
Time to payoff: 6 months
Why he did it: “While mortgage debt and other types of debt can be a financial tool, I naturally hate consumer debt and student loan debt which is just a drain on income.”
How he did it: “My goal was to pay it off in one year at $1,000 per month, with a one-month grace period. Because I lived at home and paid only $400 rent to my parents, every other dime went to the student loans in a bi-weekly plan and I paid it off even faster than my goal.”
Extreme student debt payoff secrets: “First keep your college costs low. Then, pay all your other bills immediately so you can’t spend that money on something else, so you can see immediately how much you have left over from each paycheck to pay biweekly toward your student debt.”
Professional opinion: Gobel encourages borrowers to make bi-weekly payments. If you do, you’ll pay the equivalent of 13 monthly payments per year instead of 12.
Student loan payoff strategy #3: Keep expenses low
Name: Nick Santora
Current profession: Cyber security specialist, owner of Curricula, a cyber security training program for corporations in Atlanta, Georgia.
Starting salary after graduation: $50,000 in an entry level cyber security job
Time to pay off: 5 years
Why he did it: “I wanted to challenge myself to get that loan paid off by the time I turned 30.”
How he did it: “I paid a ‘bill to myself’ every month of $1,000, the amount I would need to pay the loans off in 5 years.”
Extreme student debt payoff secrets: “I lived with roommates so my rent was only $500 per month. Along with a decent starting salary I received bonuses and raises every year and I used all of that to attack my student loans aggressively. It was me against the student loans. Without that aggressive focus, goals can fall apart.”
Professional opinion: Gobel advises borrowers to put any raises or bonuses towards student loans instead of lifestyle boosts. The only exceptions to that rule are if you have no emergency fund or you have much higher interest credit card debt to pay off as well.
Student loan payoff strategy #4: Earn extra income
Name: Michelle Schroeder-Gardner
Current profession: Personal finance blogger currently writing and traveling around in an RV
Starting salary after graduation: $50,000 as an entry level financial analyst
Time to pay off: 7 months
Why she did it: “I received my first student loan payment bill around 5 months after I graduated and I realized that I needed a plan to get out of student loan debt.”
How she did it: “I am queen of the ‘side hustle’ to drum up extra cash. My blog was one of my original and most successful side hustles, so much so that I quit my day job after my blog income surpassed it. I’ve also done mystery shopping, surveys, virtual assisting, and freelance writing for others all to pay off my student loan debt fast. I think everyone really does have time for a side hustle and they should use it.”
Extreme student debt payoff secrets: “Towards the end of my student loan debt payoff journey, I decided to dip into my emergency fund to make final payoff so much quicker. Also, I knew my new higher and growing income could support repaying the emergency fund very quickly.”
Professional opinion: Using an emergency fund to pay off student loan debt is only advised if you still have some emergency fund and your current income can replace it quickly. Gobel cautions that you could be at the mercy of an emergency that uses up your cash and delays another debt payment, putting you behind and adding fees and interest.
Student loan payoff strategy #5: Pay down the principal
Name: Jonna Reczek
Current profession: Public Relations account associate in New York, N.Y.
Starting salary after graduation: $38,000 as an entry level public relations account associate
Time to pay off: Recently graduated and still paying
Why she did it: “I had a discussion with my dad who explained how paying longer results in paying more interest. That’s when I knew I had to pay them off as quickly as possible.”
How she did it: “I used the 6-month grace period to find a good job as soon as possible and build up a savings base. Once the $2,000 loan became payable, I decided to just pay it with the savings I had amassed to avoid stretching it out with its higher interest rate. Now, I can devote all my extra money to the other, lower-rate, $10,000 loan.”
Extreme student debt payoff secrets: “I am currently living with a family friend so I only pay $500 monthly rent which includes everything. I also front-load all my payments so the extra amount goes towards principal. Since I’m newly out on my own, I just learned that opening my mail every day is actually very important. I recently found a letter with a November time-stamp containing a notification that my first loan installment would be due in February.”
Professional opinion: Gobel suggests always being aware of all your student loans (you may have many), their specific interest rates, loan terms and payment dates. She advises using the National Student Loan Data System as your first step in adopting an extreme student loan debt payoff plan.
Any extra amount you can put toward student loan debt is good.
Gobel explains (with a chart in her book) that even $5 reduces the amount you owe and the length of the loan and amount of interest you will ultimately pay. She also advises borrowers to check with each loan servicer to ensure that none of these extreme payment strategies voids any specific direct-debit or other borrower benefits attached to your current payment plan.
If you’re struggling with student loan debt, you’re not alone and fortunately, there are a number of student loan repayment options that can help.
Income-based repayment (IBR)
All borrowers with a financial hardship and qualifying outstanding loan balances (Direct, Stafford, PLUS and Direct/FFEL consolidation loans made to students) are eligible to participate. The IBR plan sets your payment amount to 15 percent of discretionary income. That’s the difference between your adjusted gross income (AGI) and the poverty guideline for your family size in the state where you live.
Payments are based on income and family size and change each year. The minimum payment is never greater than the standard ten-year repayment amount. If the calculated payment does not cover the interest charges (on the subsidized portions of the loan), the government will pay the difference for up to three years so that the loan balance does not increase. This program also imposes limits on the capitalization of interest that accrues during deferment or forbearance.
The Pay-As-You-Earn plan is available to borrowers who took out their first qualifying loan (Direct subsidized and unsubsidized, Direct PLUS loans made to graduate or professional students, and Direct consolidation loans without underlying PLUS loans made to parents) on or after October 1, 2007 and who have received at least one disbursement on or after October 1, 2011. The borrower must also demonstrate financial hardship. Some ineligible loans are nonetheless considered when determining eligibility.
Monthly payments are based on income and family size, and change each year. The minimum payment is never greater than the standard 10-year repayment amount. Interest payment benefits are similar to those offered by the income-based repayment program, and capitalization is limited.
Any remaining balance after 25 years is forgiven.
Other repayment options
Graduated repayment allows the borrower to start with lower monthly payments that increase over time, usually every two years. Eligible loans include Direct subsidized and unsubsidized loans, subsidized and unsubsidized Federal Stafford loans and all PLUS loans.
Extended repayment allows the borrower up to 25 years to repay the loan. Eligible loans include Direct subsidized and unsubsidized loans, subsidized and unsubsidized Federal Stafford loans and all PLUS loans.
Borrowers who don’t qualify for the IBR repayment plan might consider income contingent repayment, which does not require a hardship. Payments are based on income and family size and the loan balance is forgiven after 25 years. Eligible loans include Direct subsidized and unsubsidized, Direct PLUS loans made to students and Direct consolidation loans.
Income sensitive repayment is a ten-year repayment plan based on income, with no hardship required. Eligible loans include subsidized and unsubsidized Federal Stafford loans, FFEL PLUS loans and FFEL consolidation loans.
An online payment calculator can show you the different payment amounts you’ll pay under the different plans and the time frame for repayment. For example, a single person in California whose AGI is $30,000 and whose outstanding loan balance is $25,000 at 4 percent interest will pay between $104 (200 months) and $253 per month (120 months) depending on the plan chosen. The highest monthly payment results in the lowest total amount paid. The lowest monthly payment adds 80 months to the loan.
Repayment options are different for Perkins loans; contact your school for information.
Loan forgiveness and cancellation
In some cases, student loans may be forgiven in whole or in part. For example, Direct, FFEL and Perkins loans will be discharged in their entirety if the borrower dies or becomes permanently disabled. But you needn’t take such drastic measures to have your loan reduced.
Become a teacher. New borrowers (as of October 1, 1998) who teach full-time in a low-income elementary or secondary school or qualified educational service agency for five consecutive years can have as much as $17,500 of their loan balances forgiven.
Borrowers employed in public service are eligible for Direct loan forgiveness after having made 120 payments (ten years), even in the PAYE or IBR repayment programs. Public service includes Peace Corps volunteers, U.S. armed forces serving in hostile areas, nurses, medical technicians, law enforcement and corrections officers, Head Start workers, child or family services workers, and early intervention services providers.
Perkins loans are similarly forgiven but in a slightly different manner.
Consolidation, deferment, forbearance
Loan consolidation is another repayment strategy that could help, creating a single monthly payment from two or more. Some consolidation loans also lower the minimum payment by extending the life of the loan to thirty years. The advantage is affordability on a monthly basis. The disadvantage is that the consolidation loan starts the clock over.
Deferments and forbearances allow you to stop making payments for a period of time. Interest continues to accrue, but for those who qualify, the government may pay the interest on a deferred loan. During a forbearance, if you don’t pay at least the interest each month, it will eventually be capitalized. That means the unpaid interest will be added to the loan balance, and then you’ll pay interest on the larger balance for the life of the loan.
Programs are not available to borrowers already in default. If you’re struggling, explore the StudentAid.ed.gov website and contact your loan servicer to discuss options before you stop making payments.