How to set a deadline for paying off your student loans
For student loan borrowers, the financial help they were looking for to improve their future may now prevent them from achieving their dreams. According to a Citizens Bank study, 60% of millennial student borrowers expect to make loan payments into their 40s, a burden that keeps many from pursuing the careers they truly want.
If you want to beat this grim prediction, you’ll need to double your student loan debt. The best way to pay off your student loans fast so you can meet future debt is to make a plan and stick to it.
Should you repay your student loans early?
Prepaying your student loans early saves you money on interest and shortens your repayment years.
Let’s say you have $ 10,000 in student loans with an interest rate of 5% and you’ve signed up for a 20-year repayment plan. If you pay $ 100 more per month on top of your required monthly payment, you’ll reduce over 14 years of payments and save $ 4,267 in interest charges. If you really want to get rid of your debt fast, you can devote an additional $ 500 per month on top of your monthly payment, and you will be debt free in about a year and a half, saving you $ 5,390 in interest. .
You can really see the benefit of paying off your student loans sooner when you are considering a much larger loan amount. Let’s say you have $ 120,000 in student loans with a 7% interest rate and you have a 30-year repayment plan. Paying just $ 50 more per month will save you $ 32,852 in interest and save you 5 years of payments. If you spend an extra $ 500 per month on top of your monthly payment, you’ll save $ 113,902 and pay it off in just over 11 years instead of being tied to your student loans for 30 years.
The answer is simple: the sooner you pay off your student loans, the less you will pay over the life of your loans.
Strategies to Pay Off Your Student Loans Faster
Paying off your student loans early seems a no-brainer, but it takes good planning. Here are some strategies to explore to help you get started on the road to financial freedom.
Refinancing of student loans
Refinance your student loans can be a good option to pay off your loans quickly and save money in the long run. The refinancing process involves paying off your current student loans with a new loan with better terms.
However, you will need to have good credit to qualify for the best student loan refinance rates. Otherwise, refinancing can increase your interest rate or extend your repayment period. Plus, refinancing your federal student loans will lose your access to more flexible repayment plans and loan cancellation options.
Student loan consolidation
Consolidation is similar to refinancing in that it involves taking out a new loan to pay off your current student loans. however, student loan consolidation focuses on paying off multiple student loans with one loan, which simplifies repayment by giving you only one loan to manage in the future.
Sometimes student loan consolidation can lower your interest rate, but often it will raise your rate – not the best solution if your goal is to pay off your loans sooner. Consolidation tends to be better for borrowers who need to reduce their monthly payments and increase their repayment term because they are unable to meet their current student loan obligations.
the debt avalanche method is a repayment strategy that encourages you to make your minimum monthly payments and then use any remaining income to pay off the highest interest rate debt first. Once you’ve paid off your debt balance with the highest interest rate, you focus on the balance with the second highest interest rate.
This is the most effective repayment strategy, mathematically speaking, because it saves you the most money on interest. However, in practice, people tend to be more successful with repayment strategies that produce quick results.
With this strategy, after you have made your minimum monthly payments on all debts, you will first allocate any additional money to pay off your smallest debt balance, followed by the next smallest, and so on. So if you have three student loans, one with $ 800 remaining, one with $ 5,000 remaining, and one with $ 7,000 remaining, you would invest all the extra money in the student loan with a balance of $ 800, regardless. interest rates.
Although this method is a bit slower than the debt avalanche, many borrowers have more success with the debt snowball method because it offers faster psychological payoff. Seeing one of your balances paid off early motivates you to keep paying off your loans.
Seven steps to establishing and meeting a schedule to repay your student loans
Now that you’ve explored some proven repayment strategies, let’s take a look at how you can create a calculated action plan to deal with your student loan debt.
1. Evaluate your debt situation
Start by assessing your current financial situation. Add up all your debts and list all the important details, such as interest rates, minimum payments, and repayment periods. If you have multiple outstanding balances, pay attention to the interest rate on each account to determine the cost of each loan.
2. Optimize your monthly budget
Create a budget to plan and track your monthly income and expenses. Look for areas where you can reduce your expenses and increase your income. Consider asking for a raise or taking a side gig to increase your disposable income, and try to cut back on unnecessary expenses like dining out or paying for cable. Your goal is to change your budget so that you can afford your monthly payments – or, ideally, spend more money on prepaying your loans.
3. Examine your repayment options and the forgiveness of your student loan
If you have federal student loans, consider the different repayment options and student loan forgiveness programs available to you. Make sure you are on a student loan repayment plan that matches your financial needs and goals to help you strategically repay your student loans.
Some of the income-based repayment plans are also eligible for loan remission after a while. While this may not necessarily pay off your loans quickly, it could save you money if you can only afford to pay the bare minimum.
4. Consider refinancing or consolidating
Now that you’ve figured out your interest rates and budget, it’s time to figure out if refinancing or consolidating would be a good option for you. If you have good credit and can afford your monthly payments, consider refinancing. If you’re having trouble managing multiple loans or can’t afford your current student loan payments, consider bundling them together.
5. Play around with a student loan repayment calculator
Analyze your budget and determine the maximum amount you can afford to pay on your student loans each month. Play with the numbers and figure out how much you’ll save by increasing your monthly payments based on your available budget.
6. Set a deadline
Once you’ve determined the maximum you can afford to repay each month and have considered any future income increases, set a deadline for paying off all of your student loans.
Be reasonable, but don’t be afraid to set a lofty deadline: Lofty and lofty goals tend to be more motivating than easy goals, and they’ll force you to find creative ways to pay off your loans sooner. Evaluate this deadline periodically to make sure you are sticking to the plan.
7. Allocate your monthly payments
You have now determined how much you can afford and need to pay each month in order to eliminate your student loan payments before the deadline. Set up automatic payments to avoid mishaps and avoid spending extra money on late fees and extra interest. If you have multiple balances and can afford more than the minimum required payments, allocate any extra money using the snowball or avalanche method mentioned above, depending on what you think is most effective for you.
Now that you have a plan of attack, it’s up to you to make it happen. Stick to your schedule and reassess your budget every month. The more you get involved in the cause, the sooner you will be on the road to financial freedom.