How to Pay Off Student Loans Faster
Point of Interest
Paying off your student loan faster than your repayment schedule stipulates will allow you to lower your financing costs and start working toward your financial goals.
Student loan debt has become the second-highest consumer debt category, topped only by mortgage debt. With $1.6 trillion owed by a collective 44.7 million borrowers, student loan debt is larger than credit card and auto loan debt in the United States, according to educationdata.org. Still, many people don’t know how to pay off student loans faster.
If you got into debt to finance your higher education, paying off student loans is probably one of your top financial priorities. If you ever wondered how to pay off student loans quickly, there are tips and tricks that can help you lessen the financial burden and reach your other financial goals.
How to pay off student loan faster
According to educationdata.org, the average amount of student loan debt in the U.S. is $32,731. That’s equivalent to a monthly loan repayment amount of $383. Paying off your student loan faster will not only ease the financial pressure on your monthly budget but will also help you reach other financial goals, such as saving or investing.
Pay more than a minimum amount
There’s no penalty for prepayment of student loans, so you should take advantage of this opportunity to slash the balance as much as you can. If you make larger payments each month, you’ll be able to reduce the debt balance and save on interest payments.
For example, if you have a student loan with a balance of $20,000 at an interest rate of 7.0% and a repayment term of 10 years and you make an additional payment of $20 every month, you could pay back your loan in approximately 8.9 years. That will save an estimated $939.63 in interest over the life of the loan. It’s convenient to track how your monthly payments impact your budget through a budgeting app. Make sure you check the 7 Best Budget Apps of 2020 to see what are your options.
Tip: Make sure that the lender uses all your extra payments to cut down your principal.
Look into loan forgiveness programs
If you feel that student loan payments are hard to manage, student loan forgiveness can be an excellent option to ease the pressure of debt.
Loan forgiveness is usually given to those who work at a qualified job and includes programs such as Teacher Loan Forgiveness and Public Service Loan Forgiveness. There are also loan forgiveness programs for lawyers who enter the public service or non-profit sector, along with various law school loan forgiveness programs.
Medical professionals working in high-need areas may be eligible for student loan forgiveness from National Health Service Corps. If you are an army member, you may qualify for several forgiveness programs available from the U.S. Armed Forces.
Tip: Note that some forms of student loan forgiveness are taxable as forgiven debt may be considered as “income” on the tax return. This applies to the forgiveness of federal student loans on the income-driven repayment plan.
Consider refinancing your loan with a lower rate
With interest rates at a record low level, now is the perfect time to refinance student loans.
Refinancing means that you take out a new loan to replace an old one, so it makes sense to refinance when market rates drop and you want to lock them in. When you refinance, your old loan is paid off in full, and you start with a new one with new terms and/or a lower interest rate.
You can refinance with the old lender, but you can also do it with a new one if you get a better deal. Be sure to use resources like the best student loan refinance rates to research and help you decide.
Tip: Keep in mind that federal loans carry many benefits, such as income-driven repayment plans, forgiveness programs, and options for deferment and forbearance that you may lose if you refinance with a private lender.
Make biweekly payments rather than monthly
If you chose to make student loan payments every two weeks instead of once a month, you could end up paying one more payment in a year. There are 52 weeks in a year, so you’ll make 26 payments, which is equivalent to 13 monthly payments. You can considerably accelerate your student loan repayment with one extra loan payment each year. This strategy makes sense for those on the bi-weekly salary schedule, who will have a perfect match between their budgets’ inflows and outflows.
Get a side hustle
You can take a side hustle or another job in addition to your primary job to help supplement your income. This is a compelling approach to repaying student loans quickly since you can only save so much, but your income potential is unlimited. Leverage your skills and take on any opportunity to work part-time or overtime.
The gig economy is flourishing and a growing number of businesses are recognizing the benefits it offers, so interesting and increasingly lucrative freelancing projects abound.
Tip: Start generating new income streams so that you can pay off your student loans quickly without compromising your lifestyle.
Use raises, tax returns and other financial windfalls to pay down loans
A one-off financial windfall, such as a raise, a bonus, an inheritance or a tax refund can make a significant difference to your student debt burden.
For example, the IRS statistics show that the average tax return in the U.S. was $3,125 in 2020. That money put to good use, such as paying debt early, can have a considerable impact on your budget.
Assuming you have a student loan with a balance of $20,000 at an interest rate of 7.0% and a repayment term of 10 years, you can lower the debt balance to $16,875 by making an extra payment equal to that average tax refund ($3,125) toward your loan balance. That will also shorten your repayment term to 7.9 years while potentially saving $2,691.77 in interest over the life of the loan.
Take advantage of federal tax deductions and interest rates deductions
The student loan interest deduction is a federal income tax deduction that reduces your taxable income by allowing you to deduct up to $2,500 of the interest paid on a student loan if your modified adjusted gross income is less than $70,000 in the past tax year. If it’s between $70,000 and $85,000, you can deduct a reduced amount of interest paid.
Most federal loan servicers and many private lenders offer a 0.25% interest rate discount if you sign up to have your payments automatically pulled from your bank account through an autopay option.
Consider consolidating your loans
If you have multiple student loans, you can combine them all into one loan with a fixed interest rate. This is called consolidation and the main benefit is that it allows you to repay your various loans through a single monthly payment.
The downside is that it will also reset the term of the loan, allowing you to choose a shorter term and pay off the debt faster. If you hold federal loans, you can consolidate them through the Direct Consolidation Loan program at no cost.
Tip: If you hold federal loans, you can consolidate them through the Direct Consolidation Loan program at no cost. But you can only do it once, so make sure you do it when the interest rate is low as you’ll be stuck with it for the remainder of the loan term.