The average amount of debt people have after college is approximately $40,000. Assuming you have a 6.0% interest rate and a 10-year repayment period, you’ll pay $444.08 a month. In the end, you will have paid $13,290 in interest after making 120 payments.
That’s a long time for such a large financial commitment. So how can you pay it off sooner? The answer is actually more complicated than making more and paying more (though that always helps, too). Here are five tips to help get your student loans truly behind you.
1. Make a Payment Every Two Weeks
Though you are only required to make one payment a month, if you have the average amount of debt, that’s still around $400 your putting towards covering your student loans. That might be hard to swing with a single paycheck. Why not, instead, split that $400 payment into two payments of $200 every two weeks?
Doing this makes student loan payments a little more bearable each month. For one, you’re not going to be stocking up on groceries the first of the month only to tighten your belt at the end. Instead, your separating the amount you owe each month into something that is more manageable for you and your family. Technically, you’re not paying more, and yet, using this method, you could shorten your loan term by an entire year. Here’s why:
If you’re like most people, you get paid every two weeks. How many weeks are there in a year?
Divide 52 by 4, and what do you get?
13, or in this case 13 months.
Pay every two weeks and you will essentially have made an extra payment per year. This, in turn, would shorten your repayment period by an entire year, and saves a good amount of money in interest by the time all is said and done.
2. Devote Your Tax Refund to Student Debt
It sounds easy to use your tax refund for student loans. But when the time comes, you might think you need that refund for something else, like a new work wardrobe, car repairs, credit card or medical debt. Adulting comes fast after you’ve graduated. If you can’t devote all of your refund to your student loan debt, then at least set aside enough for an extra payment per year. That alone will cut your payment term by a year if you consistently do this each year.
How much can you save with this method?
Consider This: The average refund in 2018 was about $2,800. Assuming that amount stays relatively the same in the upcoming years, an extra $2,800 a year would amount to $28,000 in ten years.
You still make your regularly monthly payments with this method, but you also make an extra large payment, as well. Keep in mind that if you use your tax refund as your payment, part of it will go towards interest. You want all of the check to go towards the loan principal (the amount you borrowed).
A $444.08 monthly payment would have $200 of that amount go solely towards interest. You don’t want that. You want all of it to go towards the amount you owe (the principal), and not the cost of taking out the loan (the interest).
To make sure all of your tax refund goes towards your student loan principal, you can either:
- Send your check with a written letter requesting that the amount go solely towards the principal. Be sure to check with your lender to ensure there’s not a special form you need to fill out.
- Write on the check that you want the full amount to go towards the principal.
- Call your lender and speak with a customer service agent about your extra payment. You may even be able to make the payment entirely over the phone while you’re at it.
3. Get a 0% Interest Introductory Credit Card and Do a Debt Transfer
Transferring all or some of your debt only makes sense if you are able to pay off the balance amount within the introductory period. Credit cards that offer 0% interest usually offer this perk for 6 to 21 months. Get smart with this strategy and combine it with your tax refund to make sure you have the funds to pay off the credit card.
Say you get the average $2,800 tax refund and you open a 0% intro APR credit card. You transfer $2,800 of your student loan debt to the credit card, and you immediately pay it off the same month with your refund money. In doing so, you could also potentially earn yourself cash back (depending on the card), which could then be put towards your student loan payment as well.
Obviously, you have to have good credit to do this, so it might not be a strategy that you’re able to implement right out the gate; however, it could at least be one further down the road. Monitor your credit score and make your payments on time so you can start doing it as soon as possible.
Balance transfers, when done right, can save you a lot of money in interest. If you qualify, you could open up a 0% intro APR card once a year to take full advantage of the credit card perks that are out there.
A word of warning: If you have a government student loan, and you transfer the loan to a credit card, you lose all of the benefits and safety nets that go along with those loans— such as loan deferment, loan forgiveness, and wage payment adjustment.
Also, note that not all lenders accept credit card payments so you need to check with your specific lender before taking any action.
4. Refinance Your Student Loan to a Lower Rate
You need to have a good credit score in order to refinance and the rates offered need to be better than the current interest rate on your student loans.
Refinancing student loans typically doesn’t come with any application or loan origination fees. It doesn’t cost you anything to do, and it could save you a lot of money in interest. There are lots of reasons you could want to refinance, but the best one in this case is to lower your interest rate.
Alternatively, you can also switch from an adjustable rate to a fixed rate, especially if your credit score has increased over the years and rates are lower than when you first took out your loans.
When you do qualify for a lower rate, your monthly payment will likely decrease. However, a smart way to pay off your debt faster is to keep paying your previous payment amount and diverting the extra money to your principal.
Note: To get out of debt sooner, don’t refinance if you would be adding additional time to your payment period. If you are on track to finish with your student loan payments by 2029, don’t refinance after three years with another 10-year loan term. You want to get out of debt as soon as you can! Also, remember that refinancing federal student loans waives your access to those extra perks we talked about earlier.
5. Enroll in Auto-Pay
If you have a non-government student loan, you can probably save a bit in interest if you enroll in automatic payments, depending on your lender. The industry standard for enrolling in auto-pay is 0.25%. Over time, that adds up to a decent amount of money.
Say you start out at 6% on a $40,000 loan. The amount of interest you’ll have paid after 10 years will be $13,290. With a 5.75% interest rate, however, the total amount of interest goes down to $12,689.
This is a savings of $601.
Maybe that doesn’t sound like a lot to you, but why would you not choose to have $601 stay in your pocket? Also, your monthly payment would go down to $439.08, saving you $5 a month.
If the savings you receive in interest doesn’t excite you, keep in mind the benefits that will accumulate from auto-pay. Besides from never having to remember to make payments, your credit score could go up as you develop a positive payment history. This results in a higher credit score, which could lead you to better credit card offers and better refinance options.
Additionally, should you ever decide to buy a house, lenders will be more likely to lend to you. Lenders like to see a positive history of repayment on large loans, such as student loans. If they see are responsible with your debts, they’ll be more likely to pre-approve you.
Take the Initiative: Use a Variety of These Tactics
If you haven’t noticed yet, you can use any or all of the strategies mentioned above in conjunction with one another. Do this, and you’ll be free of your student debt much faster than your peers. And even better, you’ll be better positioned to tackle other financial goals in life.