If you’re like many who graduated college in the past decade or so, you’re suffocating under a mountain of student loan debt. The average is at an all-time high: $37,000.
Approximately 43 million borrowers, or seven in ten U.S. graduates, are carrying over $1.25 trillion in student loans. Whew!
The average monthly payment for student loan borrowers between the ages of 20 and 30 is $351. No matter if you can easily afford it or are struggling to make payments, it’s important to know your options.
In this article, I cover the cheapest ways to pay off your student loans. In the podcast episode, you’ll also hear my interview with Amber and Danny Masters, a couple who are drowning in $600,000 of student loans after graduating from law and dental school.
They kept their mountain of student loan debt a secret until they began redtwogreen.com, where they blog about their experiences, missteps, and details of their personal finances.
Here are some of the topics we discuss:
- tips to get a great education with less debt
- a rule of thumb for how much to borrow for school
- the value of having a repayment plan
- how to be proactive about your repayment options
- if they regret going into so much debt for their professional degrees
[Listen to the interview using the audio player in the upper right sidebar of this page or on iTunes, SoundCloud, Stitcher, and Spotify]
Free Resource: Online Loan Comparison Chart—a handy chart to compare lenders for student loans and refinancing to a lower interest rate.
What's the Future of Student Loan Debt?
If you have student loans that are crushing your finances and perhaps holding you back from reaching goals like saving for retirement or buying a home, there may be a bright spot in the future. President-Elect Trump has proposed ideas to help borrowers who can’t afford their payments.
Today, if you’re struggling to keep up with student loan payments, you may qualify for an income-based repayment plan. There are several different types, but the Pay As You Earn program caps payments at 10% of your income and wipes out your debt after you’ve made payments for 20 to 25 years, depending on the type of loan you have.
Trump has proposed a repayment plan that would cap student loan payments at 12.5% of income and forgive the balance after you make payments for 15 years. That would raise the cap, but forgive your balance 5 to 10 years sooner than the current option, giving financially stressed borrowers more relief.
Trump has proposed a repayment plan that would cap student loan payments at 12.5% of income and forgive the balance after you make payments for 15 years.
But if you need help paying your loans right now, don’t wait for Trump’s potential plan to be enacted. Go ahead and investigate your options at studentloans.gov. Just remember that the downside of reducing your monthly payment or extending the repayment period is that you end up paying more interest over time.
The Cheapest Ways to Pay Off Your Student Loans
In this article, I’m just going to focus on the cheapest ways to pay off your student loans. You can use these ideas alone or in combination with each other to shrink what you owe.
Here are 8 ways to take charge of your debt so it costs less and allows you to get rid of it faster:
1. Understand the big picture of your debt.
Many graduates have multiple loans from a variety of lenders. The first step to paying off your loans efficiently is to assess what you owe.
Create a simple spreadsheet that lists your loans and their payment terms. And don’t limit this exercise to just your student loans. Take the time to document all your debts—like mortgages, credit cards, car loans, and personal loans—in one place.
If you’re not sure what debt you owe, visit your lenders’ websites or pull a free copy of your credit report at annualcreditreport.com or CreditKarma.
For each debt list the:
- monthly due date
- minimum payment
- current balance
- interest rate, and whether it’s fixed or variable
- lender or servicing company and their website or phone number
Now you can see the big picture of your finances and know what to prioritize.
See also: Should You Refinance Your Student Loans?
2. Refinance your student loans.
Once you create a “big picture” spreadsheet, you may see that your interest rates are high compared to current rates. Depending on the type of student loans you have and when you got them, the interest rate you’re paying could be well over 6%.
Doing a refinance means that you pay off one or more of your high-interest loans with a new loan that has a lower interest rate. There are private lenders that may refinance student loans for as little as 2% or 3% with repayment terms ranging from 5 to 20 years.
Paying less interest means you can pay more toward your principal balance each month, which pays down your loan faster and allows you to easily save money.
Every lender’s underwriting requirements for refinancing will be different, so you need to shop and compare offers from several companies to make sure you get the best deal. If you’re not sure where to start, check out my Online Loan Comparison Chart for some of the best places to refinance your student loans.
3. Make accelerated loan payments.
A secret weapon you can use to whittle down your balance on student loans (or any type of loan) faster and pay less interest without paying a dime is to make accelerated or biweekly payments instead of monthly payments.
A secret weapon you can use to whittle down your balance on student loans (or any type of loan) faster and pay less interest without paying a dime is to make accelerated or biweekly payments instead of monthly payments.
This strategy works for all types of installment loans and mortgages, as long as there isn’t an expensive prepayment penalty (which typically isn’t the case for student loans). When you understand how much you can save making biweekly payments, you’ll want to jump for joy each time you send in a payment!
Biweekly payments aren’t magic; they simply take advantage of the fact that one month out of each quarter has five weeks in it instead of four. There are thirteen weeks in each quarter, not twelve; and there are fifty-two weeks in a year, not forty-eight. So it’s a sneaky way to get the equivalent of one extra monthly payment made each year.
That additional amount works wonders toward paying down a loan faster, which means you pay a lot less interest over time. This strategy works especially well if you get paid every other week, so you can budget the biweekly loan payment to occur close to each payday.
See also: How to Stay Disciplined and Do More With Your Money
4. Make more than the minimum payment.
If you have some discretionary money each month, you could pay more than the minimum payment. Let’s say you owe $50,000 at a 5% interest rate for 10 years. Your minimum payment would be $530 and cost about you about $14,000 in interest over the life of the loan. But if you pay an additional $100 each month, you’ll save about $3,000 in interest and pay off the loan 2 years earlier.
When you send more than the minimum payment or make biweekly payments (from tip number 3), make sure that you add a note to your payment indicating that you want the extra to go toward your principal balance. Otherwise the lender may think that you’re prepaying next month’s s payment and simply hold it, which won’t help you get rid of the debt any faster.
5. Use windfalls to pay down debt.
As tempting as it can be to treat yo’self using a bonus, gift, or tax refund on a luxury item, remember that using a windfall to pay down debt is the absolute easiest and most effective way to get rid of it faster.
When you get a raise or promotion at work, consider it a windfall as well, and make sure you use additional income to accomplish important goals like building an emergency fund, saving for retirement, or paying down debt.
Many people get stuck on the right order to pay down debts and never make progress. Choosing the wrong debt to pay down early is better than never acting on any of your debts.
Many people get stuck on the right order to pay down debts and never make progress. Choosing the wrong debt to pay down early is better than never acting on any of your debts.
However, when considering your student loans, I recommend attacking your highest-interest debt first because it’s costing you the most. Remember the spreadsheet I mentioned creating that lists your debt? Sort it by highest to lowest interest rate.
If you have debts with higher interest rates than your student loans, such as credit cards, personal loans, or payday loans, always pay off those first. Student loans and mortgages have relatively low rates and come with tax breaks, making their net cost even less.
See also: A Blueprint to Prioritize Your Personal Finances
6. Explore loan forgiveness programs.
If you work full-time in certain industries, such as teaching, medicine, or doing public service work, you may qualify to have some, or all, of your student loan forgiven. That’s the government’s way of thanking you for giving back to your community after you’ve made payments for a certain amount of time.
However, forgiven debt is considered income, so you’re still on the hook for taxes on any amount you don’t repay. For example, if you earn $40,000 and have $10,000 of student loan debt forgiven, you’d owe income tax on $50,000 instead of $40,000 that year.
7. Find out if your employer has student loan benefits
Helping workers pay down their student loans is an innovative benefit some large companies are offering. Check with your human resources department to find out what may be available.
If your company hasn’t created a student loan repayment benefit, propose it as a solution to stay competitive, retain the best talent, and help workers reduce financial stress.
See also: 3 Money Mindset Tips and Tools for Surefire Financial Success
8. Automate your loan payments.
Many lenders offer to automate your loan payments by drafting them from your bank account on a given day each month. They know you’re less likely to miss a payment this way. But in exchange, your lender may offer a slightly lower interest rate, which helps you pay off your student loans a little bit faster.
To get rid of your student loans the cheapest and fastest way possible, stay focused on living within your means, using windfalls wisely, and earning additional income. Revisit your entire debt repayment strategy at least once a year to make sure you’re tackling it the smartest way possible.
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