How Increasing Your Monthly Payments Can Slash Your Student Loan Balance

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.

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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Want to Pause Your Student Loan Payments? Here’s What You Need to Know

You might be able to postpone your student loan payments, but make sure you've considered the financial consequences before you do.

If you’re struggling with a medical emergency, unemployment or other financial crisis, making your student loan payments can be impossible. Rather than fall behind, you can opt to put your payments on hold through student loan deferment or forbearance.

Deferment is an option that lets you postpone both your principal and interest payments. If you qualify, you can pause payments for up to three years. Forbearance is more temporary — you can postpone or reduce your monthly payments for up to 12 months.

However, delaying your payments through deferment or forbearance can have serious financial repercussions. Depending on the type of loans you have, your loan balance can continue to grow due to interest and other fees.

Choosing Deferment or Forbearance

Below, find out how your loan type affects deferment and forbearance, and what alternatives you may have.

Deferring Federal Loans

With certain federal loans, you don’t have to worry about interest payments if you enter deferment.

If you have federal Perkins loans, Direct subsidized loans or subsidized Stafford loans, the government will cover the interest that accrues on your loans while your loans are in deferment. With your interest taken care of while you get back on your feet, you will have less to pay back in interest.

If you have unsubsidized federal loans or PLUS loans, the government will not pay for the interest that accrues during deferment. If you defer your loans, they will continue to gain interest, possibly causing your balance to balloon and costing you thousands. Not to mention your debt-to-income ratio will get worse, making it more difficult to qualify for new credit such as a mortgage or car loan. (Not sure where your credit stands? You can view two of your scores, with updates every 14 days, for free on Credit.com.)

Before entering deferment, use a student loan deferment calculator to find out how much interest will accrue on your student loans if you postpone your payments.

Federal Loans and Forbearance

Unlike deferment, your federal loans will continue to accrue interest in forbearance, regardless of the loan type. Because interest continues to build, entering forbearance can be costly, but it’s still better than missing payments and defaulting on your loans.

Is Deferment/Forbearance Available on Private Loans?

Technically, deferment and forbearance are federal loan benefits. Not all private loan servicers offer similar options — but some do. For example, SoFi offers deferment for students who are going back to school. And if you’re facing a financial difficulty, you may be able to enter forbearance for up to a year.

If you’re experiencing financial hardship, it’s worth asking your servicer if deferment or forbearance is an option. Just keep in mind that entering deferment or forbearance with private loans can be more expensive than federal loans. There are often fees you have to pay, and interest will accrue while you postpone your payments.

Alternatives to Deferment or Forbearance

If you want to avoid pausing your student loan payments completely, there are other ways to manage payments when they’re too high:

Income-Driven Repayment Plans

If you have federal student loans, you may be eligible for an income-driven repayment (IDR) plan. There are four IDR plans available today: income-based repayment (IBR), income-contingent repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).

Under each plan, the basics are about the same: The federal government extends your repayment term 20 to 25 years and caps your monthly payment at a percentage of your discretionary income. At the end of the term, your remaining balance (if any) is discharged. You still have to pay income taxes on the forgiven amount, however.

Enrolling in an IDR plan can drastically reduce your payments and give your budget more breathing room. Depending on your income and family situation, you may qualify for a payment as low as $0 per month.

Refinancing

Unfortunately, if you have private loans, your options are more limited. But one effective way to reduce your monthly payments is to refinance your debt. By refinancing, you take out a new loan that pays off your old private loans. Your new loan will have completely new terms, including — ideally — a lower interest rate.

Refinancing private loans can help lower your payments and help you pay less in interest over time. It’s a smart way to save money while giving yourself more room in your budget. Be sure to keep in mind that if you refinance federal student loans with a private lender, however, you forfeit federal protections such as IDR and deferment/forbearance eligibility.

Deciding What to Do in a Hardship

Student loan forbearance and deferment are useful options when you experience a financial hardship. If you’re facing an emergency and can’t keep up with your payments, deferment or forbearance can give you a much-needed break while you get back on your feet.

While entering deferment or forbearance is a much wiser option than defaulting on your debt, there are still consequences. Make sure you understand the financial impact of postponing your payments, as putting them off can add thousands to your student loan balance. And in the case of private loans, postponing may not be an option at all.

If you’re struggling to keep up with your loans, the most important thing is to be proactive and talk directly with your servicer to find out what options are available to you.

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