Did you know that because of the very expensive cost of attending university, more than 50% of students in the United States who choose higher education receive financial aid? And this is after attending high school where it’s encouraged by both parents and teachers to attend university. So students are encouraged to go to university and take out all these loans. But, how many of the students taking student loans understand the nitty and gritty part of them?
Every year in university I signed the paperwork for my student loans. And, in retrospect, I had very little idea of what I was signing. All I knew was that this money would help pay for me to go to school.
Now that I understand my student debt, I want to pay down these loans as quickly as possible. Doesn’t everyone? How can you do it?
First of all, ask yourself: do you have a healthy, stable income? Are you comfortable with your finances?
If not, start by checking out these tips on how to improve your credit and finances.
If you do feel comfortable with your finances, you can use this guide to start considering alternative ways to pay off your student debt as quickly as possible.
However, if you are trying to qualify for the Federal Public Service Loan Forgiveness Program, or are on an income-based repayment program, you may not benefit from this guide. This guide will benefit those who want to pay off their loans more quickly over time.
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Back to Basics: Student Loans and Credit
Let’s get the basics down first.
Student loans affect your credit. This means you should always pay at least the minimum on-time. But because the interest on your loans add up, you should find alternatives to paying the minimum on your student loans. Before we talk about the alternatives, make sure you understand student loans and how they affect your credit.
At any point in your life, getting student loans are an easy way to benefit your credit. Student loans add to your credit history and diversifies your credit portfolio. Student loans are considered installment loans. An installment loan means you pay off part of the principal with every payment (unlike other loans where your payments can just be interest and the principal is paid off at maturity).
Because your credit score is partially determined by the diversity of your credit portfolio, it benefits your credit portfolio to have installment loans!
If your student loans are your only installment loans (i.e. you don’t have an auto or home loan), then your credit might take a hit after you finish paying your loans.
This might sound concerning, but:
- Paying off your loans results in less interest paid over time;
- That means more money in your pocket!
- Paying at least the minimum on time shows lenders you are reliable;
- This will have a long-term, positive effect on your score!
Seriously. Finding ways to eliminate your student loans as quickly as possible is beneficial for you in the long term. You can find alternative ways to boost your credit score. If you need a start on how to improve your credit so you can finally start adulting, check out this in-depth guide.
I can’t stress this enough, but: student loans accrue interest, and that interest adds up! Once you get into the mindset that paying interest is like giving away money, you can find the determination to pay off your debt faster!
The Stark Reality of Interest: Money I Would Never See
When I made my first payment of $4,000 towards my unsubsidized loan, the reality of how quickly “small” interest adds up on large loans finally hit me. Over 25% of my first payment went towards interest. So that was over $1,000 that would never benefit me.
It was over $1,000 I would never see.
More recently, in the last six months, I’ve paid more than $500 towards interest for my unsubsidized federal loans.
In short: interest turned my college education into a much more expensive investment.
Student loan rates are much lower than interest on home or auto loans. Still, I can’t believe it took me so long to be hit by this brick of reality.
Whatever. Now that I understand how interest works, I’m motivated to pay my loans as quickly as possible. I want more of my money to go towards the principal balance of the loan instead of interest! Don’t you?
Every time I make a payment on my loans, I see how much interest accrues. That interest is just money I will never put to use.
To estimate how much daily interest that may accrue on your student loans every month, first convert the interest rate to a decimal (so 5.875% turns into .05875). Then, use this simple equation.
principal balance * (decimal of annual interest rate) / 365
As an example, let’s find out the potential annual interest of a loan of $30,000 with a 5.875% interest rate.
$30,000 * .05875 = $1,762.50
The potential interest that accrues there annually is $1,762.50. If you then divide $1,762.50 by the number of days in a year (365), you see that (rounded up), the daily interest that accrues will be $4.83.
Think about it. If you let that balance sit there all year, that’s almost $2,000 you’ll be paying in the future.
Luckily, you can use three strategies to reduce the overall interest you will pay over time: refinancing your student loans, avalanching your student loan payments, or snowballing your student loan payments.
Refinance Your Student Loans
You can refinance your loans with a private lender for a lower interest rate. Refinancing is when a private company pays your federal loans off. So instead of owing money to your federal lender, you owe money to them.
But, how does this benefit you?
- You can get a lower interest rate on your loans
- Lower interest rate means less paid over time
- There is a potential for a lower monthly payment
Refinance your loans with the understanding that you will be paying a minimum rate every month, and ineligible for certain federal programs. Once you refinance your loans, they become private loans. That means you will be ineligible for income-driven repayment plans and federal forgiveness programs!
So only refinance your loans if you can afford to pay a minimum rate every month! Refinancing may not be a good option if you rely on income-driven repayment plans. However, if you have room in your budget, you really should consider refinancing to qualify for the lower interest rate!
If you are seriously considering refinancing your student loans, use LendEDU to compare interest rates from up to 12 respected student loan refinancing companies including Commonbond. Submitting your application to LendEDU does not affect your credit! To start using LendEDU is simple:
- Take three minutes to complete your free application to LendEDU;
- They will perform a soft credit check, which does not affect your credit!
- You can compare interest rates from up to 12 student loan refinancing companies.
Yeah. LendEDU offers a freaking painless process at no cost to you that seriously takes only a few minutes. After you complete your application (which only takes a few minutes), they will let you compare interest rates from up to 12 student loan refinancing companies.
If you can get a lower interest rate, refinance your loans! Future you will thank you.
Avalanche Those Payments
Whether or not you choose to refinance, avalanching your payments is a great way to lower the amount paid over time to your loans.
But, what the heck does it mean to “avalanche” a loan?
Well, it means you throw as much money as possible towards your loan with the higher interest rate each month.
The bigger your payments are every month means more money paid on your principal balance. By reducing the amount of principal balance, you also reduce the amount of interest that will accrue. This mean you will pay less on interest in the long run!
The avalanche method requires you to:
- Pay the minimums on your lower-interest rate debt every month;
- Target your debt with the highest interest rate; and,
- Make huge payments on your high interest debt to accrue less interest over time, and pay this debt faster!
Sometimes the avalanche method feels dissatisfying. Right now, I am making huge payments towards my loans, but don’t anticipate paying them off for another three years. Just remember, with the avalanche method your debt gets paid off quicker! Plus, more of your money will go towards your principal balance instead of towards interest!
So even though you may feel discouraged after the first few months, just know that your debt is getting paid off quicker using this method.
Or, Snowball Your Payments
If you see yourself getting very discouraged because the avalanche method does not pay your debt quickly enough, you might need to try an alternative.
The Snowball method requires you to:
- Prioritize your debt from the smallest amount (first) to the largest amount (last);
- Target your smaller debts first;
- Make larger payments on your smaller debts;
- Pay the minimum amounts on your larger debts.
It feels freaking good when you accomplish something! Right?
The snowball method is perfect for you goal-oriented go-getters. Focus your efforts on completely paying off your smallest debts and get that feel-good feelin’ when you pay a debt off completely.
Be Money Smart
The most important tip of all: be smart with your money!
Need more money-saving tips?
- 5 Ways to Improve Your Credit and Finally Start Adulting
- 8 Simple Ways to Make and Save Money in Your 20s
Now that you know how quickly interest adds up, find ways to eliminate that huge cost! Look at your monthly budget and figure out which method works best for you.
After you submit your quick, free application to LendEDU, you might find that refinancing your loans will be a great way to decrease the amount of interest accrues over time. Or, you could find yourself either benefitting from avalanching or snowballing your student loan payments.
I feel sooo chained down by my student loans. I can’t wait until I pay them off so that I can either put that money towards my future, or towards living a more fulfilling life. I’m sure that you feel the same.
I can’t wait to hear about your experiences with student loans!
Do you have any tips that will help others pay off their student loans? Or, what are your plans for the extra money that you will have in your budget after you pay them off?!