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For most college graduates, the first priority after graduation is finding a job—any job—that will allow them to start making the minimum monthly payments on their student loans.
But, wait, what’s this? It’s a year later and you’ve gotten a promotion, and a nice fat raise along with it. What to do with all of that wonderful disposable income? Sure, you could use that money to travel, or to buy a nicer, newer car, but ultimately you decide that paying your student loans back faster would be the best thing for you and your finances.
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Congratulations! In my opinion (and the opinion of countless financial planners and advisers), you’ve made the right decision.
But now you head is probably swimming with questions. How do I pay off my student loans faster? Where do I start? Which student loan should I pay off first?
The good news is, all it takes is a little preparation and know how, and you’ll be on your way to crushing your student loans in no time at all.
Track Your Student Loans and Choose a Student Loan Repayment Plan
If you want to win the fight against your student loans, you need to enter the battle prepared. And to be prepared, you should do two things:
- If you aren’t already doing so, you should begin tracking your student loans so that all of your loan information is in one place and you can reference it quickly.
- You’ve got to pick a student loan repayment strategy so that you have a clear plan to pay down your debt.
Once you’ve done these two things, you’re ready to start plowing extra money into your student loans.
Strategies for Paying Your Student Loans Off Quicker
1. Pay whatever extra you can each month (or week).
Whether you have a lot of extra money to work with each month or just a little, you can make a lot of progress in paying down your student debt by simply adding extra to your regularly-scheduled monthly payments.
Don’t believe me when I say that a little extra can add up to big savings? Adding just $25 extra dollars to your monthly payment means that you’ll be paying off an extra $300 in student loan principal each year. That means that you’re paying less in interest each year, since your principal is lower (less principal = less interest).
It also means that you can pay off your loans a lot faster than if you didn’t pay any extra: After 10 years (the average life of a student loan on the normal payment plan) you will have paid an extra $3,000. That definitely isn’t chump change.
And if you’ve got even more money to apply to your monthly payments you’ll save yourself even more time and money in the form of interest payments. If you have an extra $500 to apply each month, you’re looking at an extra $6,000 of student loan principal paid off every year ($60,000 over the life of a 10-year loan). If you can pay that much extra each month, you’ll be done paying back your student loans in no time, and can get on with the other big financial goals in your life (like saving up for a home down payment or a car).
2. Round up your payments.
This is really just a variation of #1. Instead of making your minimum monthly payment, you’re going to pay a little extra by rounding up.
For example, if your monthly payment is for something like $255, then you should round up your payment to $300. This will be an extra $45 of student loan principal paid off every month, or $540 each year ($5,400 over the life of a 10-year loan).
Of course, if you can afford to pay even more each month, then go ahead! But this “rounding up” strategy is an easy way to keep pay a little extra without really missing the money. Everyone has an extra $45 or $50 a month to put towards their student loans; not everyone has an extra $100 or $200 or $500. Do yourself a favor and sign up for autopay (with this new, rounded up payment) so that you don’t even have to think about paying extra each month—you’ll just do it automatically. You’ll also earn a .25% reduction from your interest rate, in most cases, making for extra savings!
3. Instead of paying monthly, make bi-weekly payments.
Typically, student loan repayment plans are set according to a monthly schedule. But you can save yourself a lot of time and money over the course of your loan by paying on a different schedule: Bi-weekly (or, every two weeks) instead of monthly.
If you decide to pay bi-weekly, you would take your monthly payment amount and divide it by two. Then, instead of making one full payment each month, you’ll make a half payment every two weeks (making sure they get to your loan servicer by the due date each month).
Because there are 52 weeks in a year, you’ll be making 26 half-payments a year, which equals 13 full payments a year instead of 12 on a normal schedule. Over the life of your student loans, this can add up to hundreds of dollars saved in interest and it will shave months or years off of your repayment plan.
Need an added benefit to sway you into bi-weekly payments? Student loans typically accrue interest daily. That means that by making bi-weekly payments, you’re cutting into your student loan principal more frequently than if you make a single monthly payment, saving yourself even more money in the form of interest.
If you can afford to make two full payments a month, all the better: You’ll come out even further ahead. There’s a nifty calculator here that can show you the difference between monthly and bi-weekly payments (it calls itself a “mortgage” calculator, but it’ll work for any loan); it’ll show you exactly how much you’ll save in interest by switching to a bi-weekly payment plan.
4. Apply your raise, bonus, and/or tax refund to your student loan principal.
The good thing about getting a raise, or bonus, or tax refund (or gift, or inheritance, or any other kind of “found money”) is that it’s usually not something that you expect. You might hope for a tax refund or raise every year, but you know that it’s foolish to just assume that you’re going to get one, and so you build your budget for the year as though your salary is all that you’re going to get.
Then, when you get that extra money, you feel as though you can do whatever you want with it, since you know that you don’t need it. You can use it to go on vacation, buy a new car, upgrade your wardrobe, you name it. But the smart thing to do would be to use it to pay down your student debt.
Remember: You don’t need the money to survive (if you do need it to survive, then you really need to get better at budgeting). If you get a raise and simply use the extra money, then eventually you’re going to get used to making the extra money until it no longer feels like “extra” (this is called “lifestyle creep” —it’s what happens when you let your living expenses continue to rise with your income). And the same concept applies to bonuses, tax refunds, or inheritances. If you have extra money, it’s only a matter of time before you spend it.
By using those windfalls to pay down your student debt instead, you’ll be locking in some pretty significant wins. You’ll be saving yourself both time and money because you’ll be paying less in interest over the life of the loan. Just pretend like you never got the money: Your future, student-debt-free self will thank you.
5. Go nuclear: Pay as much extra as humanly possible.
The previous strategies are all fine if you want to pay a little bit extra each month or year, but they’re not anything particularly drastic. Over the course of a 10-year loan, they can save you hundreds of dollars in interest and can shave months (or years) off of your repayment plan. And that’s great, but that still means that you’re going to be carrying your student debt with you for many years, which means you will have less money to spend on the general necessities of life (rent, mortgage, bills, etc.).
Don’t want to be stuck paying back your student debt for the next five, eight, or 10 years? Then you might just need to invoke the nuclear option: Funneling as much money as humanly possible towards your loans.
If you’re still living with your parents, or sharing an apartment with friends, then you could keep your living expenses as low as possible and just pile the rest of your income into paying back your student debt.
Sure, you won’t be able to go out for happy hour quite as often, and you won’t be taking any vacations for the next year or two, but depending on your student loan balances, you can finish paying back your debt in just a year or two instead of 10. And then you can go to as many happy hours or on as many vacations as you want, pleased with the fact that you’re free from your loans.
6. If you’re married and both of you work, use the Starve and Stack Method to pay down your student loans.
The starve and stack method is essentially the “nuclear” option for married couples who have student loans.
What is starve and stack? Starve and stack is a financial strategy where a married couple lives off of one person’s salary while using the other person’s salary to pay down debt, save money, or invest. Starve and stack can be used to pay down credit card debt, a mortgage, and of course, student loans.
On top of getting rid of your student loans faster, using starve and stack will help you keep your living expenses in check (since it’ll limit the “lifestyle creep” that often happens when you start making more money), and like #5 above, it will shave years off of your repayment plan. Then, after a year or two of (relative) deprivation, you’ll be debt-free, and will have hundreds of extra dollars every month that you can use to invest, save for retirement, or just use to live more comfortably.
Why is it called “starve and stack”? Well, the idea is that you starve (or deprive) yourself now so that you can stack your savings.
Consider Pairing One of the Strategies Above With Student Loan Refinancing
The strategies above are great ways to pay off your student loans ahead of schedule. Each of them works because they help you pay down your balances faster. But you could double your ability to pay down your student loans faster by attacking them another way, too: By refinancing them so that you have a lower interest rate.
If you are able to refinance your student loans to a lower interest rate, then your debt immediately becomes less expensive. This means that more of your minimum monthly payments goes towards the principal, and less of it to interest. And that means that the strategies above will be even more powerful in helping you pay off your debt.
Know Where Your Money is Going
Ultimately, whatever your method for making extra payments to your student loans, you want to make sure that your student loan servicer is applying your extra payments the way that you want them to be applied.
Extra payments to student loans are usually applied like this: They cover any outstanding fees, then unpaid interest, and then finally are applied to principal. But if you have multiple loans with one servicer, then a large extra payment is often split between the loans, which often flies in the face of a student loan repayment plan.
If your goal is to pay off a certain loan (either because it has a higher interest rate, or a lower balance, or for whatever reason), either send your servicer/lender written instructions with your check explaining how you want your extra payment applied, or call them so that you know the payment is actually going where you want it to go.