How To Pay Off Student Loans

Student loans are part and parcel of the modern student experience. Collectively, the student loan debt in the U.S. reached a staggering $1.56 trillion by early 2020. The average payment was $222 and three million students reported that they were drowning in over $100,000 of school loans.

With so much debt consuming such a large number of individuals, collections agencies chomping at the bit, and the difficulty discharging student loans through bankruptcy,  it’s essential that those who have school loans take their debt seriously. For one thing, understanding the laws governing debt collection can help borrowers protect themselves against harassment. Additionally, there are plenty of ways to go about properly repaying your school loans before you default on your payments or need to seek legal counsel

Below are five specific steps that can be taken in order to minimize the effects of your student loans while simultaneously paying them off as quickly as possible.

Stay on a Budget

The first thing any savvy graduate needs to consider is their own personal financial situation outside of loans. After all, if you pay off your loans, but end up charging basic expenses, such as your groceries or rent, on your credit cards you’ll only be exacerbating the issue of debt and interest payments.

If you don’t have a budget yet, now is a good time to start one. Even if you do have a budget, it may be worth taking some time to give it a once over to identify any income or expenses that should be updated. 

In the case of starting a budget from scratch, you can do so by:

  • Choosing a budgeting system, such as a pen and paper, a spreadsheet, or a free budgeting program.
  • Setting short- and long-term financial goals such as building up an emergency fund, or paying off your student loans.
  • Calculating your income and expenses so that you thoroughly understand what money you have to work with and what expenses you can count on regularly.
  • Separating your wants from your needs to better understand what expenses must be addressed (such as a car loan payment) and which ones can be compromised (such as an entertainment or discretionary fund).
  • Analyze your spending habits by reviewing your credit card statements, tracking your cash spending, and balancing your checkbook or checking account in order to see how you’re spending your money.
  • Review your budget regularly so that you can make adjustments, nip bad spending habits in the bud, and generally keep your finances on track.

Creating and maintaining a budget is a powerful first step towards paying off your student loans.

Enroll in Autopay

While a well-kept budget can help you maintain a healthy overview of your finances, it doesn’t directly equate to paying off your loans. Therefore, once you have your budget in place, it’s important to make further efforts to actually pay off the loans.

While the steps outlined below can help you get spending and finances under control, the first thing you should do is ensure that, at the minimum, you’re paying your loans on time. You can do this by setting up autopay.

While autopay enrollment varies with each financial institution, it’s typically both free and easy to set up. Once done, all you need to do is make sure that there’s enough money in your account before each payment rolls around (consider keeping a buffer of two or three payments in the account at all times to avoid over-drafting).

In addition to providing a sense of accountability to your monthly payments, autopay often provides a small-yet-significant reduction in your loan’s interest rate as well. This is usually around .25%. While this may only save you a few hundred dollars, it does make a difference over time.

Pay More Than the Minimum Payment

Your normal loan payment consists of both principal and interest. In other words, a good portion of each payment isn’t even helping to reduce your loan.

If you want to aggressively pay down your student loans, you should try to pay more than your minimum payment. Any money paid beyond the minimum payment can go directly towards your loan principal — as long as you make your extra payments the right way.

The important thing to watch out for is whether or not your financial institution is applying your extra payment towards future payments or the principal of the loan. If the money is simply “paying future payments in advance” then it will include future interest as well. 

Always contact your financial institution first and confirm that extra payments will, indeed, be applied directly to the principal of your loan. This won’t just reduce the length of the loan, it will also lower the overall amount of interest that you pay over time.

Refinance If You Have Good Credit and a Steady Job

If you’ve graduated and you have both a good credit score — that is, over 670 — and a degree and a steady job to count on, you may want to consider refinancing your student loans. 

Refinancing consists of shopping for a new loan with a lower interest rate or a shorter term. Either of these (or both of them) can lower your interest and shorten the time it takes to pay off your loan.

Once you agree to refinance terms with a new lender, the new loan can be used to pay off your existing loan and you will simply shift to paying the new lender each month. Just remember to reset up autopay once the transition is complete.

Apply Raises and Tax Refunds To Paying Off Student Loans

Finally, over time you may have financial windfalls of one sort or another. This could consist of a raise at work, an inheritance, a tax refund, or even a stimulus check, such as the Economic Impact Payments sent out in early 2020 in response to the COVID-19 pandemic.

When you receive large influxes of cash, it can be tempting to spend them quickly. Even if you spend the money on valuable things, such as a downpayment on a house, it’s important to first consider allocating some of the funds towards your student loans. This can dramatically reduce your loan over time and can both shorten the length of the loan and save you untold quantities of interest in the process. 

From strict budgeting and autopay to refinancing and extra payments, there are many ways that you can aggressively pay off your student loans. While you are unlikely to go to prison for student loan debt, it can still become a major burden and impede your financial and lifestyle goals for years. This can prevent the need for deferment and help you completely avoid future collection calls or even bankruptcy.

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