Student Loans: 15 Ways to Pay Back Student Loans Faster 1. – Paying back your student loans can be intimidating. I know — when I was graduating from college and trying to find work and a place to live in an entirely new city, the thought of also having loans to pay back made me terrified.
But I’m here to tell you — don’t freak out. You can pay back your student loans. It might take time, yes, and probably determination. You will definitely need a plan. But making that plan is just one of the things this article will help you do — and it will also give you the tools to move from having thousands of dollars of student debt to being debt-free. You might even be able to do it faster than you expected.
But first, let’s talk about why you should try to pay your student loans off earlier than required.
The biggest benefit? You’ll save money. Let’s say you have a $30,000 loan with a 4.5% interest rate that you pay off over 20 years — you’ll pay $15,550 in interest. But if you pay it off in only 10 years, you’ll save $8,240. If you pay it off in five years, you’ll save $11,993. That’s enough money to buy a new car. Or, depending on where you live, a full year or two of rent.
Getting rid of your student loan debt also gives you a lot of freedom — the freedom to take a lower-paying job that you care about more, the freedom to travel, even the freedom to take on other “good” debts — like a mortgage for your first house.
It’s also important to note that defaulting on your student loan can have very serious consequences; in fact, not repaying student loan debt can be worse than not repaying other types of debt. Defaulting on your loans can ruin your credit score, making it difficult to do everything from signing up for basic utilities to renting an apartment. Your debt could increase thanks to accruing interest. And if you have federal loans, the government can add fees or even garnish your wages, forcing your employer to withhold money from your paycheck and send it directly to the government.
There are times when it is smarter to pay off other loans before student loans — if you have other debt with a higher interest rate, pay that down first, and it’s a very good idea to build an emergency fund of at least $1,000 as you start paying down student loan debt. But other than that, it can be really helpful to pay off your student loans as soon as possible. It’s not always easy, but it is doable. Follow the suggestions below to help speed up your student loan repayment.
1. Have a Positive Mental Attitude
Achieving any goal requires determination and a feeling that you can do this — and, really, you can. Psyching yourself up about it sounds silly, but it can really help. Remind yourself what you’re paying for — a college education. That’s huge! It helps open career doors, and it helps you grow as a person. And don’t forget — college graduates have greater job opportunities and still earn more money on average.
Many people who have paid off their loans also mention the great psychological benefit of feeling like a huge weight has been lifted off their shoulders. I know that personally, if I fantasize about getting a windfall of cash, the first thing I think about doing is paying off my student loans. (I know; boring fantasy. But right after paying off the loans, I’d travel!)
2. Understand Your Loans, and Make a Plan
In order to create an accurate repayment schedule, you need to understand your loans.
Use a Repayment Calculator
Plug the information about your loan into a repayment calculator like the one from FinAid.org, or use your loan servicer’s online account tools. Learn how much you need to pay per month in order to pay off your loan within a specific amount of time.
Pay Attention During Exit Counseling
If you borrowed a federal student loan, you are required to receive exit counseling, which teaches you important information about your rights and how to repay your loan. Depending on your school, you might do this online or in-person. Either way, make sure to pay close attention. You can see a “tour” version of federal student loan exit counseling that is full of helpful information.
Pay Attention to Details and Paperwork
Make sure you read everything you receive about your loans and understand your loan terms. For example, are your interest rates fixed (meaning that they will stay the same for the duration of the loan) or variable (meaning that they can change, possibly making it harder for you to budget your monthly payments)? Understanding the terms of your loans will help you avoid potential complications.
See If You Qualify for Income-Based Repayment
If you have a federal loan (other than a Perkins or Parent PLUS loan), and you are on limited income, the Income-Based Repayment (IBR) plan allows you to pay based on what you earn, not on what your loan payments are supposed to be. According to the Federal Student Aid office, “Under IBR, your monthly payment amount will be 15 percent of your discretionary income, will never be more than the amount you would be required to pay under the Standard Repayment Plan, and may be less than under other repayment plans.” And, if “you repay under IBR for 25 years and meet certain other requirements, any remaining balance will be canceled.”
This program is only for people who hold federal — not private — loans. Even if your loan is serviced by a private company, it might still be a federal loan. If you’re not sure, login to the National Student Loan Data System to see if you currently have a federal loan.
IBR does have some downsides — like possibly paying more interest since you’re stretching out your loan term. To learn more about whether the program is for you and how to apply, visit the Federal Student Aid office’s Income-Based Plan page.
Make a Budget
A budget isn’t just an important part of loan repayment — it’s an important part of overall financial independence. Your budget helps you allocate the funds for paying back your student loans (and, well, everything else you need to pay for in life). Check out our guide to creating your first budget.
Create an Emergency Fund
While creating an emergency fund should be part of your budget, it’s important enough that it deserves its own mention. This is a special section of your savings set aside for, well, emergencies. The idea is that if something terrible and unexpected happens – your car breaks down, you need to go to the doctor, etc. – you’ll have the funds set aside to pay for it without needing to pull from other areas of your budget. Shoot for having $1,000 in your emergency fund; that amount will cover most things that could happen.
3. Make Payments While Still in School
Paying your loans down before you graduate will certainly help you pay them off faster. For most loans (except for need-based federal subsidized loans), the interest meter is running the whole time you’re in school. When your required payments begin, the unpaid interest is “capitalized” – that is, added to your loan balance; interest then is calculated on the new larger, balance. Any payments you can make while in school help lessen interest capitalization and can save you money. Check with your loan servicer to be sure, but in most cases there are no prepayment penalties.
4. Consolidate Your Loans
Loan consolidation is not the right choice for everyone. But for some people, it can help. Consolidating your loans — grouping multiple smaller loans into one big one – could make paying your loans more convenient, because you only have one servicer.
Consolidation makes it harder to use the “debt snowball” technique with your loans — a method of debt repayment that has you pay off your smallest debt first, then “snowballing” the money you were putting towards that debt to the next biggest debt, and so on. This method works for all types of debt, not just student loan debt — check out our guide to the debt snowball method.
Consolidation can also extend your payback period. While this might help by giving you lower payments in the short-term, also note that you’ll be paying more interest in the long-term. You might also run into another problem if you’re interested in consolidating your private loans – since the credit crunch, fewer companies are offering private loan consolidation.
Finally, be wary of consolidating federal and private loans together. There are certain benefits that come with your federal loans — such as being eligible for income-based repayment (see above) — that you may lose if you consolidate private and federal loans.
5. Consider Enrolling in Auto-Debit
When you enroll in auto-debit, your student loan servicer automatically deducts your payment from your bank account each month. There are several benefits to this payment method, and some lenders may give you a discount just for enrolling.
You’ll Never Miss a Payment
If you have auto-debit, your loan servicer will automatically deduct the amount from your bank account. You do need to make sure, of course, that you have enough money in your account each month for the payment to clear — otherwise, you could be looking at overdraft fees.
While not exactly the same, this is also in the spirit of “paying yourself first” — a savings or debt-reduction technique where money is set aside before you ever receive it. For example, if you designate 10% of your paycheck to be direct deposited into your savings account instead of your checking, that’s paying yourself first.
You Might Get a Discount
Some lenders offer a discount for enrolling in automatic debit. According to FinAid.org, “The most common loan discounts include a 0.25% interest rate reduction for having your monthly loan payments direct debited from your bank account.” It might not seem like much, but that can really add up over time.
You Can Still Make One-Time Payments
If you have unexpected extra cash, you can still make a one-time payment to pay down your loan faster.
6. Get Help From Your Employer
Some employers offer assistance with your student loans as part of a benefits package.
There are several programs already in place that help you pay back student loans. Some are through employers, while others are more public-service oriented:
- Government employees may receive up to $10,000 a year in assistance paying back federal student loans through the U.S. Office of Personnel Management’s Student Loan Repayment Program.
- The Nursing Education Loan Repayment Program, which “helps alleviate the critical shortage of nurses by offering loan repayment assistance,” offers loan assistance for nurses. If you go this route, you will be required to work at either a “health care facility with a critical shortage of nurses or at an eligible school of nursing in the case of nurse faculty.”
- Branches of the U.S. Military offer their own loan repayment programs for qualifying education loans. Check out options from the Army, Navy, Air Force, and National Guard.
- Teachers may have multiple loan-forgiveness options. Teach for America, part of AmeriCorps, offers an AmeriCorps education award and “loan forbearance and paid interest for two years.” There is also a separate Teacher Loan Forgiveness Program that provides “forgiveness up to a combined total of $17,500 on your Direct Subsidized and Unsubsidized Loans and your Subsidized and Unsubsidized Federal Stafford Loans.” That program requires a teaching commitment of at least five years.
- People who work full-time in public service can have their eligible remaining federal student loans discharged after 10 years thanks to the Public Service Loan Forgiveness program.
- Some private employers have their own already existing programs. Ask your HR representative.
It’s important to study the criteria for any program you’re considering. Also in some cases you may be required to report forgiven loans as taxable income, so be sure to factor in any potential tax consequences in your decision.
Ask Your Employer
Some employers might be willing to include student loan repayment as part of your benefits package even if they don’t have an official program. Similar to signing bonuses and health benefits, student loan repayment is another way for employers to attract top talent. Bring up the idea to your boss and remember — this has to be a good deal for the company as well. In exchange for the student loan payment, you might offer incentives such as a promise to stay at the job for a specific period of time or agree to relocate to a branch office.
Get Help Avoiding Future Debt
While it doesn’t help you pay your current loans, if you’re planning to go to grad school, you might be able to get your employer to pay for it. The most likely employers to offer this benefit? Colleges. But several other employers have pay-for-school programs as well. Even if your employer doesn’t have one of these programs, you might still be able to convince your them to pay for it. Check out this guide from U.S. News and World Report on how to persuade your boss.
Donating your time can help you pay off your loans while doing good. The two most well-known programs, AmeriCorps and Peace Corps, both offer some manner of education award or partial loan cancellation in addition to paying your living expenses during your time of service.
Peace Corps members volunteer internationally and receive two student-loan related benefits. Volunteers can have up to 70% of a Perkins Loan canceled, depending on how many years they serve. And all Peace Corps volunteers receive an award of $7,425 after 27 months of service. This money can be used toward paying back student loans.
Domestic AmeriCorps volunteers, meanwhile, are eligible to receive a Segal AmeriCorps Education Award at the end of their service that can be used towards paying loans. The amount varies, but according to the AmeriCorps website, in 2011, it was $5,550. And, if you decide to pursue the Public Service Loan Forgiveness program mentioned above, your time in the AmeriCorps counts towards your 10 years of public service.