ave you recently graduated with student loans of which you know close to nothing about? Lucky for you, you’ve come to the right place.
For most people, paying your way through college is the first experience in life at having a debt to repay. The introduction of all new terms, conditions, operations, and rules, can make it challenging to know what you're getting yourself into and what you should expect moving forward.
Throughout college, you probably found your inbox flooded with emails about various student loans options and lenders. And now that you’ve graduated, you may be receiving periodic update emails from your lender. With graduation approaching or in the recent past, it may feel as though you have an immense weight on your shoulders as you desperately attempt to dig your way out of your student loan debt as quickly as humanly possible – all the meanwhile being a newbie to the grownup world of loans and loan repayments.
As it turns out, you don’t have to be a math genius or finance major to make sense of the student loan process. We’re here to make it easier and help you through it. Throughout this article, we’ll briefly introduce you to the basics of student loans - student loans 101 - but for the large majority of this article we will go over methods of paying off your student loans fast.
Student Loans 101
Often the documents and emails we receive about student loans are meant to explain and clarify key points. Yet, you may find yourself consistently with the same thought: What does that mean? If this sounds like you, stay with us. You may have been able to breeze through college in ignorance with the help of friends and family but as you become more independent and start paying off your loans, it’s important to backtrack and get to know the ins and outs of student loans. It can be difficult, but it doesn’t have to be.
By now, you know what a loan is and that there are two types: federal and private. But, for most of the loans available to you, you will have to do an exit counseling session. So, if you're not yet convinced on the importance of understanding your loans, allow us to elaborate.
What is an Exit Counseling Session?
During an exit counseling session, you will have to read about your loan and answer questions about it – usually around things like the terms of the repayment. This is to ensure you know what you’re getting yourself into.
What Determines Your Interest Rate?
With private loans, your interest rate can be variable or fixed, meaning that they can be dependent on yours, your parents, or any other cosigner's credit score. They are also typically unsubsidized which means that you are responsible for all of the interest that accrues on your loan, including the interest that builds up during school. Typically, private loans are taken out with a repayment period in mind – usually anywhere from 5 to 20 years - and are not eligible for student loan forgiveness programs or government-backed repayment programs (more on this later).
All federal student loans have a fixed interest rate. The current fixed rate is 3.73% for undergraduates and 5.28% for graduate and professional degrees. Because the interest is fixed, there is no credit check. So, no matter how low or high your credit score is, with federal loans, there is a standard rate. There are three types of federal student loans for undergraduates:
- Direct subsidized loans
- The government will pay the interest that accumulates while you are in school or in deferment
- Direct unsubsidized loans
- You are expected to eventually pay all of the interest that accumulates, even when you are in school
- Direct PLUS loans for parents
- These are taken out by your parents and repaid by your parents, even though the funding goes to you
So, now that you have a basic understanding of the types of student loans and the implications for each of them, you can begin to apply this knowledge to what loans you may have taken out to fund your own education. Generally, people pull from multiple sources to fund their education and loans are only one piece of a larger pie. It might be the case that you have both federal loans and private loans, or just one or the other.
Whatever your personal situation is, you’ll want to consider how you can repay your loans as fast as possible. There are a number of ways to shorten your repayment period and shrink the interest on your loans. Not every method will be applicable to your personal situation, but you should be able to find at least one strategy that makes a difference.
How To Pay Off Student Loans Pronto
Pay Right Away
This may seem like common sense, but it’s best to start paying your loans lickety-split if you can. Think about starting your payments during your grace period, or even better, while you’re still in school. By doing so, less interest will accrue and get added to your total balance when you start your repayment period. Again, this is only if you find this to be in the cards for you. If this isn’t a possibility, worry not because there are alternatives.
Make Extra Payments
Obviously, many of us are given a regular payment plan with our various loans where we’re meant to meet a certain amount by a certain time. But, no one is going to stop you from making payments early or paying more than the minimum amount. If you can afford to do more than the minimum required of your loan, it is in your best interest to do so.
However, if you plan on paying extra there is one stipulation worth mentioning: student loan servicers may automatically apply your extra payment to the next month’s bill. This won’t help you pay your loans faster. Instead, it will just mean you get in your next payment early and must wait for the next one. In other words, your contributions, while greater in size, would still remain on the original timeline. Rather, you should call or email your servicer and let them know that you would like to apply your extra payment to your current balance and keep the next payment as planned. Making this clarification would hopefully allow you to chip away at the principal.
Before you enlarge your payments, you should know that in addition to the pros of paying extra, there are also cons.
- The sooner you pay off your student loans, the sooner you can work towards other big grownup goals like homeownership, savings, retirement, etc.
- The faster you get out of debt, the faster you can improve your debt-to-income ratio. A lower debt-to-income ratio allows you to qualify for loans that you may need for a car, house, credit card, etc.
- The less time you spend paying a loan, the less interest you end up paying on them – which could save you hundreds of dollars.
- If you’re enrolled in a forgiveness program or income-driven repayment plan, making extra payments could cause you to have less of your loans forgiven
- Paying extra could lead you to miss out on stock market opportunities. If your incentive to pay extra is to save on interest, you may want to think again. The extra money you are using on loan payments could be used in investments that would come with a larger gain than the money saved on a lowered interest rate.
- Paying extra may draw your attention away from other, more important debts. For example, if you also have credit card debt with 13% interest rate and your loans have a 5% interest rate, it may be more important to focus on paying off your credit card first and foremost.
If you’re eligible, you can refinance your loans and pay them quicker without making extra payments. Refinancing means replacing your current loan with a new one. More specifically, it's when a private lender pays off your existing loans and issues you a new private loan on new terms. Generally, you do this because the new terms are preferable to the terms of your former loan. In general, with a refinance you may get a lower interest rate, smaller monthly payments, or a reduction of the total number of payments.
Say, for instance, your credit has improved since you took out your original loan or if interest rates have dropped, you may be eligible for refinancing your loan at a lower interest. Or, if you find yourself struggling to meet your monthly payments, you may be able to refinance your loan under terms that extend the length of the payments and lower the monthly bill. For example, instead of $700/month for 30 months, you could refinance for $500/month for 42 months.
Side note: extending the length of repayment could increase the interest rate.
On the other hand, if you find yourself in a situation where you can afford more than your monthly payments, you could refinance your loan such that you pay more in a shorter duration. This means paying off your loans quicker, getting out of debt sooner, and potentially decreasing the amount of resulting interest.
A good candidate for loan refinancing is someone who has good credit – 600s and above. It is also an individual with a debt-to-income ratio below 50%. Having a reliable income and steady job is also a crucial factor. You shouldn’t pursue loan refinancing if you need income-driven repayment, public service loan forgiveness, or any other program of the sorts.
Enroll in Autopay
Many federal student loan servicers and private lenders offer an interest rate discount if you enroll in autopay. The auto payment feature drafts the money from your bank account monthly on or before the due date. The drop in interest will likely be minimal – usually 0.25 percent – but it is a drop nonetheless.
You should only enroll in autopayments if your bank account balance is stable and reliable. A potential downside to this feature would be if you were to overdraw from your bank account. Keep an eye on your finances so you don’t have any unpleasant surprises.
To find out if you’re entitled to an interest rate reduction for automizing your payments, contact your loan servicer.
Make Biweekly Payments
A biweekly payment schedule means making half payments every two weeks instead of one full payment once a month. This schedule results in paying a little extra every year without realizing it. In sum, this shaves time off of your repayment plan. To find out how much time and money you could save, use this biweekly student loan payment calculator.
Make the Most of Tax Deductions
Student loan interest deduction is a federal income tax deduction that allows you to deduct up to $2,500 of the interest paid on student loans from taxable income. The deduction can be used for both federal and private loans. However, there are two prerequisites to qualify for this tax deduction: 1) you are legally required to pay interest on a qualified student loan, and 2) your filing status is not married filing separately. If you qualify, you will generally save a few hundred dollars on income taxes which could later be used towards repaying your loans. In essence, the taxes you save can be easy extra money to help you pay off your debt.
Check to See If Your Employer Offers Repayment Assistance
Now more than ever, workplaces are offering student loan repayment as a perk to attract and keep employees. A select few even offer to pay for college for employees that sign up for degree programs within a chosen network of courses and schools – Walmart and Starbucks for example.
Until 2025, employers can donate up to $5,250 for college tuition or student loan repayment. A huge bonus for those of you that are working through school is that this employer payment assistance is not considered taxable income. Ask your HR department or consult the employee manual to explore options that may be available to you.
Seek Out Loan Forgiveness
There are countless situations that permit an individual to have their student loans forgiven. The catch is: you must actively seek them out. Ignoring help that is available to you may lead you to feel like you’re carrying an immense burden on your shoulders.
Depending on your circumstances, it may be in your best interest to apply for loan forgiveness. As the title alludes to, student loan forgiveness programs forgive, or eliminate part or all of your debts. Each program has strict and specific qualifications.
The most widely known program is Public Service Loan Forgiveness (PSLF). To be considered, you must work full time in a public service position by a government or non-profit organization and make 120 payments under an income-driven repayment plan. It is difficult to be granted approval for these programs, so you may want to do some thorough research on the different types of student loan forgiveness before you apply.
At the end of the day, repaying student loans can be a big stressor. But, as you’ve now learned, there are many options available to help relieve some of the pressure. Having many choices can be overwhelming, but work your way through them and do a process of elimination. Rule out what isn’t an option for you, and find out what it is. Start planning. No matter how much you’ve borrowed and how unfavorable the terms of your loan may be, you won’t be in debt forever. Take a deep breath, take it one step at a time, and take solace in the fact that you’re not alone in this.