Paying Off Your Student Loans Isn’t Just a Fantasy: Here’s How to Do It
January 8, 2020
If you’re struggling with your student loans, you know how desperate the situation can feel. For recent graduates, the problem is worse than ever. The average amount of student loan debt has skyrocketed in recent years. According to Experian, Americans have an average balance of $35,620 in 2019. In 2009, the average balance was just $20,560. That’s a 73 percent increase over the past 10 years.
With student loan debt reaching such devastating heights, paying off student loans ahead of schedule or even on time may sound impossible. However, it doesn’t have to be an unrealistic fantasy. Here’s what you need to know to tackle your debt — and get rid of them forever.
Repaying your student loans
When it comes to student loan repayment, your minimum monthly payments can be quite expensive. According to TD Bank’s Student Debt Impact Study, student loan payments ate up 20 percent of survey respondents’ take-home pay. Worse, 24 percent of survey respondents said they’d need 10 years or more to repay their student loans.
With most student loans, the standard repayment term is 10 years. However, there are some cases where your repayment term could be even longer.
- Private student loans: Some private loans have repayment terms of 12, 15, or even 20 years.
- Income-driven repayment plans: If you have federal loans and sign up for an income-driven repayment plan, your repayment term could be 20 or 25 years.
- Direct Consolidation Loans: If you consolidate your federal loans with a Direct Consolidation Loan, your loan term can be as long as 30 years.
A longer loan term can be appealing because you’ll get a more affordable monthly payment and more breathing room in your budget. However, you’ll pay more in interest charges over time, causing you to pay back far more than you originally borrowed.
How to pay off your student loans faster
The key to paying off student loans and saving money is to pay off your debt early. To do so, follow these seven tips:
1. Make extra payments
To pay off student loans ahead of schedule, focus on paying more than the monthly minimum payment. If that sounds impossible, try to put just a little extra toward your loans. Even an extra $10 per month can make a big difference over the long run, cutting down on interest charges and shortening your repayment period.
For example, let’s say you had $35,000 in student loan debt with a 6% interest rate and a $400 minimum monthly payment. If you could find an extra $10 per month to put toward your student loans — raising your payment to $410 — you’d pay off your loans five months ahead of schedule. And, you’d save $391 in interest charges.
2. Tackle the loans with the highest interest rate first
The best way to pay off student loans and save money is to follow the debt avalanche repayment strategy. With this approach, you make all the minimum payments on your debt. However, any extra money you have is put toward the loans with the highest interest rate first, rather than the loan with the smallest balance. By tackling the debt with the highest interest rate, you’ll save more money over the length of your repayment.
3. Cut your expenses
If you want to aggressively pay down your student loans so you can become debt-free, you’ll have to make some significant sacrifices and lifestyle changes. Look at your budget and identify areas where you can cut back.
Some common categories include:
- Housing: Your rent is likely your biggest expense. According to Abodo, the average rent for a one-bedroom apartment is $1,025. You can dramatically reduce your housing bill by downsizing to a smaller apartment or getting a roommate. It may not be an ideal living situation, but you’d free up hundreds of dollars each month that you could use to accelerate your debt repayment.
- Food: The Bureau of Labor Statistics reported that the average consumer spends $3,459 on food consumed outside the home. If you skip eating out and instead bring your lunch to work and brew coffee at home, you could save thousands each year.
- Entertainment: Disney+, Netflix, Hulu, heading to the movies, and running up a tab at the bar with friends can all add up. Downsize to just one streaming service, use the library to get free access to movies and books, and look for free or cheap events to cut down on your entertainment costs.
4. Boost your income
Unfortunately, there are only so many ways to cut corners. If you’ve already cut your expenses to the bone, you’ll need to increase your income to pay off your student loans early.
Launching a side hustle can be a great way to make extra money in your spare time when it’s convenient for you. According to BankRate’s side hustle survey, Americans make $1,122 per month working 12 hours per week completing tasks related to their side hustle, on average. Over the course of a year, working a side hustle could help you put an extra $12,000 per year toward your student loans.
5. Refinance your loans
If your loans have a high interest rate, another effective strategy you can use to speed up your debt repayment is student loan refinancing. With refinancing, you work with a private lender to take out a new loan for the amount of your current debt. The new loan has different terms, including interest rate, loan term, and minimum monthly payment.
If you have good credit and a stable income, you could qualify for a refinancing loan that has a significantly lower interest rate, allowing you to save money.
For example, let’s say you had $35,000 in student loans at 6% interest, with a 10-year repayment term and a minimum monthly payment of $389. Over the course of your loan term, you’d repay a total of $46,629. Interest charges would cost you $11,629.
But if you refinanced your loans and qualified for a 10-year loan at 4% interest, your minimum monthly payment would drop to $354 per month. Over the length of your repayment, you’d repay just $42,523. Taking just a few minutes to refinance your loans would allow you to save over $4,100.
6. Use your windfalls
Whenever you get some unexpected extra cash, such as a birthday gift, a bonus from work, or your tax refund, make your money work harder for you by using it to pay down your debt. Since you weren’t expecting that money, you won’t miss it, and it can make a big impact on your debt.
According to the IRS, the average tax refund was $2,725 in 2019. Let’s say you had $35,000 in student loans at 6% interest and a 10-year repayment term, and you received the average tax refund. If you put the full refund toward your student loans, you’d pay off your loans a full 13 months ahead of schedule. Even better, you’d save $2,091 in interest charges.
7.Track your progress
Paying off your student loans can take a long time, and it requires a lot of work and sacrifice. To make sure you stay focused, track your progress. Check your loan statements regularly to see how much of the principal you’ve paid off, and see how extra payments affect your loan term. By reviewing your progress, you can stay on track and get rid of your loans early.
Managing your student loans
If you’re overwhelmed with your student loan debt, it’s important to take action right away. While the debt may feel insurmountable, you can make progress and even pay off your loans early by coming up with an aggressive repayment strategy.
Student loan refinancing can be a smart way to accelerate your debt repayment. If you decide that refinancing is right for you, use Purefy’s Compare Rates tool to get quotes from multiple lenders, with no impact on your credit score.