Whether you just recently graduated college or completed your degree several years ago, you likely took out one or more student loans to help finance your degree. At the start of the 2019 - 2020 school year, roughly 19.9 million students will attend colleges and universities;1 and of those currently enrolled students and college graduates, roughly 44.7 million people have student loans with an average loan amount of $37,172.2
It may seem like a daunting task, but with a little determination and these budgeting and debt payoff strategies, you’ll be able to pay down your loans faster and save on interest.
- Develop a plan. Before you start paying down your debts, it’s important to create your monthly budget to fully understand your current financial picture. To determine that specific dollar amount, take your monthly income after taxes and subtract monthly expenses, such as: rent, insurance, utilities, and groceries. Then evaluate your student loan debts so you know how much you owe in total; refer back to your budget to see how much you can afford to pay each month to make sure you’re still living within your means.
- Make payments during the grace period. Many student loan lenders offer a “grace period,” which usually lasts six months from the time you graduate. During this time, you are not required to make student loan payments. The purpose behind the grace period is to give recent graduates time to find a secure paying job and to select a repayment plan.3 This grace period can vary based on the loan type, any military activity, or if you consolidated any of your loans. If you can begin making payments right way, you’ll be ahead of the game in the long run. Essentially, the longer it takes you to pay off your student loans, the more you’ll accumulate in interest and the more you’ll pay during the lifetime of the loan.
- Pay off high interest loans first. If you have several student loans, prioritize and pay off the loan with the highest interest rate first. The quicker you can pay down the higher rate loans, the less interest you will accumulate which will save you more money in the long run.
- Make more than the minimum payment. During your repayment period, you’ll be billed monthly, but in most cases, you can make larger payments than the amount due. By paying more than the amount due when you can, you’ll not only shorten your repayment period, but also the amount of money you’ll pay in interest. Because interest is compounded, even paying an additional $100 toward your monthly payment could save you hundreds down the road.
- Split your bill into two monthly payments. If you have larger monthly payments, try breaking the payments into two payments instead. This can be helpful when managing your monthly budget, so you don’t spend money in other places. Plus, with bi-weekly payments you’ll end up making one extra payment a year, shaving months and years off your loan term.
- Set up automatic payments. To avoid missing any payments and keep you on track with your repayment plan, set up automatic payments just like you can with other loans. By doing so, you’ll avoid paying late fees and retain a good credit score. Additionally, some lenders offer rebates or interest rate reduction options when automatic payment is set up. 4
- Refinance if conditions are right. If you have a steady income with a good credit score, you could be eligible to refinance your student loans. When you refinance, you essentially take out a new loan and use the funds to pay off the old loan. Refinancing makes sense if you’re able to get a shorter-term length, a lower interest rate, or both. You may also want to consider consolidating your student loans when you refinance to combine multiple student loans into a new, single loan for convenience.
- See if your company offers repayment assistance. As an employee benefit, some employers help pay back their employees’ student loans. The amount compensated can vary, nonetheless, it’s still a great option to consider. Talk to your Human Resources department to see if your organization offers this type of perk.
- Deduct student loan interest from your taxes. As you pay off your student loans, you’re also paying student loan interest. When it comes time to pay your taxes in April, take advantage of the Student Loan Interest Deduction on your federal tax return. You can deduct as much as $2,500 in total interest on federal and private student loans, which can greatly reduce your tax liability by several hundred dollars.5 Even better, use this money from your tax return to make an extra payment to your student loans.
When you develop your student loan payoff plan early on, you’ll set yourself up for success from the beginning. It may seem overwhelming but take it month by month and you’ll see the total amount you owe dwindle overtime and even shorten the time it takes to pay back.
- How Student Loans Impact Your Credit
- Preparing Taxes, the First Time After College
- Calculator: How Long Will It Take to Pay Off My Loan?
- Calculator: Should I Consolidate My Loans?
1 National Center for Education Statistics Back to School Statistics
2 Nitro College Student Loan Debt
3 Student Aid When do I begin repaying my federal student loan?
4 Credible I Missed a Student Loan Payment – Should I Be Concerned?
5 The Motley Fool Your 2019 Guide to the Student Loan Interest Deduction