How to Pay Off your Student Loans Faster
The secret is...
Looking for the big secret to paying off your student loans faster? Well, you’ll probably have to keep looking! There aren’t very many ways to get out of debt overnight unless you inherit money or win the lottery. But the are a few things you can do to speed up the process, aside from getting a big pay raise or another sudden windfall of cash.
The secret is creating a plan and sticking to it. The best way to get out of debt is to acknowledge it is there and then find a way to tackle the problem. The longer you put it off, the harder it becomes to manage and eventually overcome.
1. Pay more than you need to
When you set up your loans, you agreed to pay back a certain amount each month. Sometimes this may be as low as the interest you were charged for the month, and other times it covers interest as well as a portion of the principal balance. In recent years, this amount has often dropped from what it might have been in the past. And with extended loans (up to 25+ years in some cases) your monthly minimum payment might not even be truly covering the interest.
Whatever that amount is, pay more. If you add even $5-10 a month to your minimum payment, it makes the payoff date that much closer and lowers the total amount of interest you are paying on the account. And if you can increase that to $50 or $100 a month, just imagine how much sooner you would be out of debt! The small amounts do add up, and it is often easier to look at it as avoiding going out one extra night a month as a trade-off for paying down your debt. That $40 you spent at a restaurant could have bought two nice meals at home and still left you with $20 to put towards the student loan.
2. Sign up for auto-pay
This one often has two benefits - one, you don’t miss a payment and collect late fees, and two, your lender may lower your interest rate if you sign up. Why is a lower interest rate, even if only by %0.25, important? It’s that much less you will be charged over the lifetime of the loan. On $40,000, that can be almost $100 a year that you don’t have to pay. Add that to your extra monthly payment amount and you start to see real savings.
Auto-pay also ensures that the bill is paid each month. If you have to write a check or set up the payment yourself, it is tempting to skip a month or delay the payment to the last minute. With auto-pay there is no choice and the money goes exactly where you have planned to put it. Keep your budget on track with auto-pay!
3. Don’t delay paying
This may seem obvious, but some people may not see the harm in declaring themselves “permastudents” in order to avoid paying back loans. The longer you wait to start paying, the more you pay in interest and the longer it will take you to pay it all back. The best advice is to start paying back as soon as you get the loan. This may even include a bonus payment of excess loan money once you reassess your budget. At minimum, you should begin paying enough to cover interest each month, since many lenders add that amount into your total principal balance when you graduate.