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5 Smart Ways To Pay Off Student Loans Faster
Updated On November 2, 2021
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
Want to pay off student loans faster?
In the U.S., there are more than 44 million borrowers with nearly $1.4 trillion in student loan debt. According to The Institute for College Access and Success, nearly seven in 10 seniors who graduated from public and non-profit colleges in 2015 had student loan debt.
The good news is that when it comes to getting student loan debt under control, the ball is in your court.
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Here are five action steps to pay off student loans faster:
1. Make an extra student loan payment
One of the best strategies to pay off student loans faster is to make an extra payment. Since there are no prepayment penalties, you can either pay more than the minimum payment each month or make as many extra payments each year as possible. For example, if your monthly minimum payment is $400 per month, and you have more discretionary income, consider paying $500 per month. Similarly, in addition to making 12 monthly payments per year, consider an extra payment of any amount once every three months for a total of 16 payments per year.
Contact your lender and explain that you want to make higher monthly payments and/or additional payments several times per year. Your lender should be willing to accommodate this request. Be sure to specify that you want to apply any extra payment above the minimum payment to principal only (not to next month’s monthly payment) to limit the amount of interest that accrues.
2. Refinance your student loans
Student loan refinance is often the single best strategy to lower your student loan rate. Student loan refinance enables you to pay off your existing student loan and assume a new student loan with a lower interest rate. There are multiple private student loan lenders who offer interest rates as low as 2% to 3%, which is substantially lower than government loans and in-school private loan interest rates. You can choose both fixed and variable rates (and with some lenders, hybrid loans with both a fixed and variable feature) and loan terms ranging from 5 to 20 years. Each lender has its own eligibility requirements and underwriting criteria, which may include minimum income, FICO and free cash flow. To maximize your chances of being approved for a you should apply simultaneously to multiple lenders.
3. Apply for loan forgiveness
If you are a teacher or public servant, or considering a career as a teacher or public servant, there are student loan forgiveness programs that will forgive a portion, or all, of your student loans. The federal government created these programs to encourage promising individuals to give back to their communities.
Teacher Student Loan Forgiveness is for full-time teachers with five years of teaching experience in a designated elementary or secondary school or educational service agency that serves students from low income families. Teachers with federal direct loans or Stafford Loans are eligible to have up to $5,000 forgiven and up to $17,500 forgiven for elementary and secondary special education teachers and secondary math and science teachers.
Public Service Loan Forgiveness is for student loan borrowers with direct student loans or consolidated student loans who are employed full-time in an eligible state, local or federal public service job or 501(c)(3) non-profit job who make 120 eligible on-time payments. Public servants who qualify for this type of student loan forgiveness can have 100% of their student loans forgiven.
4. Take advantage of student loan repayment benefits
Speak with your human resources department to inquire if your company offers student loan repayment benefits. If not, now may be the time to make your pitch for a new employee perk. According to the American Student Assistance 2015 survey, 76% of respondents said that if a prospective employer offered a student loan repayment benefit, it would be a deciding or contributing factor for the respondent to accept the job.
Companies such as Fidelity, PwC, Penguin Random House, Aetna and others are now offering their employees student loan repayment benefits in addition to 401(k) and health insurance benefits. According to the Society of Human Resource Management, 4% of companies are currently offering a student loan repayment benefit. Each company has its own eligibility criteria, but typically you need to be employed for a certain amount of time and make regular monthly student loan payments.
For example, Fidelity employees at the manager level and below are eligible to receive up to $2,000 per year up to $10,000 toward their student loans. PwC pays up to $1,200 per year for six years toward an employee’s student loan debt. Last month, Penguin Random House announced it will pay $1,200 per year up to $9,000 in student loan repayment benefits. Aetna offers up to $2,000 in matching student loan payments so long as an employee earned a degree within three years of applying for the benefit.
The student loan repayment benefit is considered income so the employee is responsible for the associated taxes.
5. Use tax refunds, bonuses and raises for student loan repayment
Create a monthly financial budget. Your goal should be to live off your base salary without using any funds from your tax refund, bonus or raise. If you can pay your housing, transportation, student loans, necessities and other personal expenses with your base salary, then you are in a solid position to apply any additional cash windfall that comes throughout the year toward student loan debt payment.
Your first inclination might be to spend your tax refund, bonus or raise on a vacation or other personal purchase. However, the wiser move is to apply all or a significant portion toward paydown of principal on your student loans. Not only will you save on additional interest expense, but you can also make a meaningful impact to reduce your outstanding loan balance. And that will help you accelerate your path to financial freedom.
Other Resources: Pay Off Student Loans
Mentor can help you learn more about these various options:
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