College can be a tough four years, but for many, the real challenge starts after graduation, when you have to begin paying back your student loans. People are often surprised by the total amount of debt they wind up with as well as their monthly payment amounts.
Considering the fact that the average graduate has more than $34,000 in student loan debt, it’s a good idea to spend some time to come up with a solid strategy for paying them off as quickly as possible.
There are many options when it comes to developing a strategy to pay off your student loan debt, and as you might have guessed, the one you choose will ultimately be based on your particular situation. Before you embark on this journey, you’ll need to take note of both the student loans’ interest rates and the terms (i.e., the length of time you have to pay back a loan).
You’ll also need to think long and hard about how you can reduce spending and increase income, because the fact of the matter is, paying off student loans faster almost always requires more money. So figure out how much you’ll be able to spend on your student loans beyond the minimum payments required—and then figure out ways to increase that number!
Once you do these things, you should be able to start strategizing. Here are some of the options for paying off your loans fast:
1. Figure Out Your BudgetRegardless of what strategy for paying off your student loans you end up pursuing, your first step must be to figure out your budget. Regardless of how many student loans you have, or how much your minimum monthly payment is, it’s important that you figure out how much extra cash you have available beyond that minimum payment. That extra cash will likely be your key to paying off your debt faster.
Over time, you’ll want to maximize the amount of extra money you have by either cutting expenses or increasing income. You’ve probably heard some of this before, but there’s more than one way to skin this cat. In terms of cutting expenses, it all comes down to how much you’re willing to sacrifice. You can live at home with your parents to save rent money or stop eating out.
Cut down on shopping and when you do, only go to the budget stores. In terms of boosting income, consider a second job (assuming you’ve got the first one) or look into part-time gigs like driving Uber, tutoring, babysitting or grabbing some shifts at a restaurant. You’ll have to hustle because working more than one job is never easy, but you’ll be glad you did when you’ve paid off those loans early and see how much money in interest payments you’ve saved.
Most importantly, talk about this with people you trust, because often the best ideas for how to save or make extra money can come from these conversations.
2. Apply Extra Cash to Student Loans with the Highest Interest RatesOnce you’ve figured out how much extra cash you can devote to your student loans, the next thing you need to do is figure out how to allocate it. If you have just one student loan, then all that cash can go to one place. If, however, you’ve got more than one loan, you’ll have to decide how much cash goes where.
One common practice is to pay the minimum amount due on all of your loans and take the extra cash on hand and spend that only on the loan with the highest interest rate. The reason here is that this loan, because of the interest rate, is your most expensive loan, so the faster you pay it down, the more money you will save over time.
Once you’ve paid that loan off, you can devote all your extra cash to the loan with the next highest interest rate, and so on, and so one. This tactic is also known as the “debt avalanche” method and it is commonly used by people paying off multiple credit cards.
Other folks prefer the “debt snowball” method, where they pay down the loans with the lowest balance first. The idea here is that because they will be able to pay those loans down the fastest people will feel bolstered by the sense of accomplishment that comes when paying off a loan. It will the kind of positive reinforcement one needs to stay focused on a challenging, long-term goal like this.
3. Apply Extra Payment Towards Principal, Not Interest
When you’re paying off your student loans each month, the money for each loan gets directed to one of three different buckets:
Alternatively, the bank might automatically apply the extra towards future monthly payments, otherwise known as advancing the loan, which generally won’t help you as much in the long run. The goal is to chip away at the principal as fast as possible because as you lower the principal, you’re also lowering the amount of interest that builds up over time.
4. Refinance to a Lower Interest RateRefinancing some of your loans or consolidating all of your loans into a single loan with a lower interest rate can be a good way to lower your required monthly minimum payments, leaving you with more money to devote to paying down your principal faster. Paying off one big loan can also make your life a lot simpler. It’s important to remember, however, that often refinance means you are extending the term of your loan.
Let’s say, for example, you originally took out 10-year student loans, and you are two years into paying them back, which means you’ve got eight years left. You decide to refinance all of your existing loans into a single loan which has a lower interest rate but a term of 20 years. So your loans are spread out over a longer period of time, which brings down the monthly payment amount but raises the amount of interest you’ll pay over time.
It’s important that if you do this, you continue to apply the extra money toward the principal, and that there are no penalties for paying off the loan early. Just because they give you more time to pay off the loan, doesn’t mean you have to take all the time they give you.
5. Research Loan Forgiveness Options (Private and Public)One of the best ways to get rid of student loan debt is through student loan forgiveness programs. These programs are available to people who work in specialized industries, usually aligned with public service of one type or another.
Typically, the way it works is that in exchange for working for a particular organization for a set period of time, the organization in question will pay off all or a portion of your student loans, provided that up until then you continue to pay them down and you’re maintain your status as a solid employee.
Some of the jobs that offer student loan forgiveness programs include those in the public service, educators, nurses, doctors. There are also a number of federal programs that provide student loan forgiveness, some of which are tied to income-based repayment plans.