Many college students and recent graduates take advantage of student loans throughout their college experience. Student loans are relatively easy to acquire, and often, they provide the money necessary to cover tuition and other school expenses without needing a substantial savings account or college fund. However, repayment begins on student loans shortly after you leave school or graduate. And at Teachers Federal Credit Union, we understand that depending on how much you borrowed for your education, paying off student loans can feel like an uphill battle.
Should you pay off student loans quickly?
Fortunately, several strategies exist to help speed up the pay-down process. Utilizing a pay-down strategy can mean saving on interest over the life of the loan, not to mention the peace of mind that comes from eliminating monthly payments early. However, before beginning one or more of the methods mentioned below, it’s helpful first to understand the “why” behind the process. Answering the following questions is a great place to start.
Is It Smart to Pay Off Student Loans Quickly?
For many students, paying off student loans early is a priority among their financial goals. This doesn’t mean, though, that it’s the right move for every student or graduate. Early student loan payoff strategies may require having extra money to put toward the loan each month. That isn’t feasible for everyone, particularly those who may have a lower-paying job directly out of college. If paying extra on your student loans means you aren’t paying other bills on time or aren’t able to save, speeding up your loan repayment may not be the best choice.
Can You Afford to Pay Off Student Loans Immediately?
You do have the option to pay off student loans immediately, either as a student or a recent graduate. Doing so can eliminate ongoing monthly payments, and it may free up a significant portion of your income you can use for other spending or saving. However, by paying off student loans immediately, you may be using all or a large portion of your savings, and doing this could make it harder to cover emergency expenses that may come up in the future. Typically, having a balance between having savings and paying off debt makes more financial sense.
Three Ways to Pay Off Student Loans Faster
After you’ve answered these questions and have a better idea of where your finances stand, take a look at these three tips that you can use to pay off your student loans fast.
Pay More Than the Minimum
One of the easiest ways to get started involves paying more than the minimum payment. Whether federal or private, each student loan comes with a minimum monthly payment based on the loan’s principal balance, interest rate, and the original length of the loan. You can, however, pay above and beyond this minimum each month if your budget allows.
For example, let’s say your minimum student loan payment is $125 per month. If you can come up with an additional $75 in your budget each month, you can add this extra to your student loan payment. This additional ongoing payment reduces the total balance owed faster and ultimately speeds up the process of getting your student loan amount to zero. Most student loan servicers allow you to make extra payments either manually or by setting up automatic payments for the higher amount.
Another option for speeding up student loan repayment involves refinancing—the process of taking out a new loan to replace the original loan. Refinancing may afford you better terms on your loan balance, including a lower interest rate or a shorter repayment term. A lower interest rate reduces the amount of money borrowers pay on the loan. This means more of each payment goes toward bringing down the principal balance, which can speed up the loan repayment process. Alternatively, a shorter repayment term, often with higher monthly payments, can decrease the time it takes to pay off a student loan.
Refinancing can be a smart strategy for speeding up loan repayment. However, borrowers must qualify first. Student loan refinancing is offered through private lenders, not the federal government, meaning income and credit score requirements must be met. If you have a stable job and a strong credit history, you may be a good candidate for refinancing. A co-signer may also be used to boost the chances of getting approved for a refinance, but note that a co-signer is equally responsible for the loan’s repayment. Be sure to consider the requirements and responsibilities before pursuing a refinance with a co-signer.
Apply Extra Income to Student Loans
Beyond increasing your monthly payment or refinancing, paying down student loans quickly can be achieved through larger, one-time payments. Additional income, including that from bonuses, a tax refund, or a second job, can be applied directly toward your student loan balance. All loan servicers allow for extra one-time payments in just about any amount. These additional payments can be put toward accrued interest or the principal balance, depending on your loan. In either case, they can have a significant impact on student loan repayment.
If you don’t have any of these sources of income, consider using your next raise to increase your payments. Even a few dollars extra each month can move the needle on your student loan repayment.
The Bottom Line
Paying off student loan balances fast can be a beneficial financial move. Increasing monthly payments, refinancing, or using extra income for periodic, larger payments can reduce the balance owed quicker than paying only the minimum amount due each month. However, consider your ability to speed up student loan repayment before getting started. Evaluate your budget first, then follow up with the strategy that makes the most sense for you and your finances.