Student loans are designed to help college students afford an education and build their future. But they may also cause problems down the road.
The sooner you pay down your student loan debt, the better. Not only does it save you on interest if you make extra payments, it can also shorten your repayment term considerably.
The Standard Repayment Plan for federal loans is 10 years while private student loan terms can range from five to 25 years. Income-driven repayment plans also push your payoff date by 20 to 25 years.
If you don’t want to wait a decade or longer to be debt-free, learn how paying a little extra on your student loans each month can slash years off your loan payments.
Doing the Math
Using a student loan prepayment calculator, it’s easy to quickly find out how much time and money making extra payments can save you.
For example, say you just graduated with $20,000 in student loans and have a 10-year loan term. With an average 6% APR, your monthly payment would be $219.
If you were to add an extra $100 a month to your student loans, you’d finish paying them off more than three and a half years early. You’d also save $2,725 in interest along the way. You could do a lot with that extra cash.
If you can’t afford an extra $100 a month, even a small amount can make a big difference. For example, add only $25 extra each month — a couple of lunches or a cheap dinner with your significant other — to your payment. You’d still make a difference, reaching a zero balance 16 months early, and you would save $982 in interest.
No matter how much more you put toward your student loans every month, you’re doing yourself a favor. Unfortunately, not everyone has the means to do so. That doesn’t mean you can’t find other ways to save time and money as you try to dig yourself out of debt.
1. Make Interest Payments During the Grace Period
After you graduate college, you’ll typically have six months before you need to start making payments on your federal student loans. This grace period offers a much-needed reprieve to graduates who are still trying to figure out life after school (private loans usually do not offer a grace period).
However, if you have unsubsidized federal student loans, interest begins accruing as soon as you’re done with school.
Paying the interest as it accrues during the grace period keeps it from being added to the principal. This is known as capitalization — and it’ll result in a bigger balance to pay off once the grace period is over. If you start out with $20,000 and an average 6% APR, for example, you’ll be looking at a higher balance by the time your grace period is over.
That bigger balance will increase your monthly payment by nearly $10 per month, and you’ll pay more over the life of the loan. It’s almost as much as you’d save paying an extra $25 per month.
2. Consider Refinancing
There are several banks that offer student loan refinancing, each with different features that may suit your needs. For example, you can refinance at a lower interest rate and even a shorter repayment term.
Keep in mind that refinancing also gives you the option to extend your term and, most likely, lower your monthly payment. This can be a great way to ease the burden of your monthly student loan bill. However, doing so will mean staying in debt longer and paying more in interest.
If you can’t afford your federal student loan payments, a better option is to look into income-driven repayment plans. Note: These plans are not available to you if you refinance with a private lender.
3. Use Autopay
Setting up automatic payments is a great way to ensure you’re on time every month. Even better, many student loan servicers give you a 0.25% discount on your interest rate if you enroll in autopay.
Taking our previous example, if you decrease your 6% APR down to 5.75%, you’ll save in interest.
4. Avoid Deferment & Forbearance
Federal student loans are eligible for deferment and forbearance if you’re struggling financially. But while student loan payments off your plate for even a few months may sound refreshing, find other solutions if you can — deferment and forbearance should only be used as a last resort.
Deferring subsidized loans freezes interest accruement, but unsubsidized loans don’t offer this benefit. If you choose forbearance, interest will continue to accrue during the pause in payments regardless of the type of loan you have.
5. Claim Your Tax Deduction
Each year, you’ll receive a 1098-E form showing how much interest you paid the previous year on your student loans. You can deduct up to $2,500 of student loan interest on your tax return each year, which will lower your adjusted gross income. This can also boost your tax refund a bit, or, if you owe money, lower your payment.
Remember to Be Proactive & Save
There are quite a few ways to save time and money as you’re paying down your student loans. The best way to do it is to proactively add more to your payments each month. If you’re not able to make that work, though, there are plenty of other ways you can make your student loans less of a burden. (You can see how your student loans are affecting your credit scores by viewing your free credit report card on Credit.com.)
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