I’m not going to sugarcoat it. Paying off student loans takes work. Like all the other areas of our personal finance endeavors, it takes a strong focus and relentless effort. But the best news is, it is completely doable.
Over 42 million Americans carry federal student loan debt, averaging $37,584 per person. And another 2 million have private student loans. In other words, if you have student loan debt, you’re not alone.
Paying off your student loans may not be your top financial priority right now. With President Biden extending the loan interest accrual and payment deferment period until September 30th, 2021, your focus may have slipped off your federal student loans. Or maybe you do want to pay them off at some point, but you’re wondering if right now is the time.
But eventually, your federal student loans have to be paid back. And this temporary reprieve from the government doesn’t apply to your private student loans. So what are the practical, realistic steps you can take starting now to pay off your student loan debt once and for all?
1. Understand what you owe
The absolute first step to student loan payoff is understanding what you owe. This may sound obvious, but it’s meant to remind you how confusing it can be dealing with your student loans.
You either have federal loans, private, or a mixture of both. Each one has its own loan terms and interest rates. The only way to know what you’re dealing with is to know exactly what you owe. Take time to sit down and write out the specifics. Identify the important information for each one:
- Type of loan (federal, private, personal)
- Federal loan type (if applicable) such as subsidized, unsubsidized, PLUS loans, etc.
- Interest rate of loan and is it fixed or variable?
- Student loan balance
- Loan term
- Loan servicer
- Minimum payment required
- Total amount of loan to be paid, including interest
Once you have the facts in front of you, then you are better equipped to understand how to deal with each loan.
2. Student loan refinancing and debt consolidation
You can’t have a conversation about paying off student loans without addressing refinancing or consolidation. At some point, you need to crunch the numbers to see if either option works for your student loans. The great part about refinancing and debt consolidation are you can use these in conjunction with other payoff methods we’re discussing.
Student loan refinancing
You keep hearing about interest rates at historic lows. But the reality is, this impacts your private student loans and not your federal loans. Lenders for private loans base the interest rates on the average market interest rates and the London Interbank Offered Rate (LIBOR).
The federal student loan interest rates are controlled by Congress. This is critical to understand as you’re contemplating refinance options. So unless there is a literal Act of Congress, your interest rates on federal loans remain unchanged (although Congress does vote every year on this).
Benefits of refinancing
Refinancing your loans has numerous benefits, including:
- Potential lower interest rate: Depending on your credit agreement, your new interest rate may be lower, which means you’ll pay less interest over the life of the loan. Federal loans tend to have a higher interest rate.
- Longer loan terms: Get relief with lower monthly payments by stretching out your student loan payment terms longer. Although with this option, you’re likely to pay more in interest over time.
- Remove a co-signer: Refinancing gives you the opportunity to remove a co-signer from your loan.
- New lender: Refinancing allows you to choose a new private loan lender, which means you might receive better customer service or added convenience with your new one.
Pitfalls of refinancing
But refinancing into a private loan isn’t the answer to all your loan payoff questions. Before you choose to convert any loans into new ones, make sure you’ve weighed the pros and cons.
- Do you have federal or private loans? If you refinance a federal loan, you lose quite a bit of advantage, such as: no credit score required; forbearance and deferment options; student loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF); a repayment grace period; income-based repayment plans, such as PAYE and REPAYE that lower your payments while your earnings are lower; no co-signer required.
- Credit score: Private loans use your credit score is a determining factor for refinancing.
- Income requirements: Private loans have income requirements, whereas federal student loans do not.
- Your term length will change: The terms of your loan will change but are you saving any money now that your loan is stretched over more months or years?
The most critical point to remember is with federal loans, you can refinance into a new private loan, but you lose all the federal benefits. Once your federal student loan converts to a private, you can never revert back.
However, a private loan can be refinanced into a new private loan at any time. And if the interest rate reduction benefits your wallet and financial goals, then it’s worth it.
Along similar lines of refinancing is debt consolidation. Often you hear these two terms used together, but consolidation is actually a form of refinancing. It’s the process of refinancing all your loans into one loan, which results in one payment.
With consolidation, the weighted average of interest rates for your loans are used to calculate your new interest rate. The advantage to consolidation is you have one, singular payment. This helps for budgeting purposes and simplification of your finances.
You should note if you’re pursuing the government loan forgiveness programs, such as PSLF, borrowers are required to consolidate federal loans into a Direct Consolidation Loan.
3. The avalanche method
In addition to refinancing or consolidation, there are debt payoff strategies such as the Avalanche method that you can apply to your student loans.
The avalanche method requires you to start with your student loan with the highest interest rate first. Then you put all your effort into paying towards it first. As you’re doing this, you only pay the minimum payment on all other student loans. Once the first loan is paid off, then you move onto the second-highest interest student loan. You pay the same amount you were paying towards the first loan, plus the minimum payment.
This method allows you to knock out high-interest payments first, which means you end up spending less on interest over the long run. However, it also means it could take a while to see progress on your payoff, and that can get discouraging after a while.
4. The snowball method
If you like the idea of using a strategy to pay down your loans, but you want to see progress earlier, then consider the snowball method. This is the same concept as the popular debt payoff method that personal finance expert Dave Ramsey recommends for credit card debt and all other debt.
The snowball method for student loans means you pay off the smallest loan first then work your way to the largest. Like the avalanche, your first goal is to put all available money towards a specific loan — in this case, the smallest one — while only paying the minimum payments on all other loans.
The snowball method is good for those who are motivated by quick wins. You can see results pretty quickly, especially when you have small loan balances to begin with.
Whether you choose the avalanche or the snowball, both methods force you to focus on your student loan payoff. Choosing one of these methods is a matter of personal choice since both have positive results.
5. Set up autopay for your payments
Whether you have small loans, big ones, or use the avalanche or snowball, one easy tactic you can use right away is to set up autopay for your loan payments.
It sounds so simple, but it’s effective for two reasons.
First, it keeps you from missing a payment or paying late. Both federal and private loans report your payment history to the three credit bureaus. This means your payment cadence is on your credit file. By setting up automatic payments, you lessen the chance of getting dinged in your credit history for late payments.
Not to mention you avoid potential late fees.
Secondly, most private loan lending institutions offer an interest rate reduction if you enroll in autopay. If you set this up with several loans, imagine the savings in loan interest you’ll end up with over the years. These same institutions may offer a further rate reduction if you have other accounts with them, such as a savings account or checking. Be sure to ask so you’re taking advantage of every opportunity.
6. Pay your loans bi-weekly
Another payment option is to pay your qualifying student loan monthly payments on a bi-weekly basis, instead of once per month. By adding this one strategy to your student loan payoff, it’s equivalent to making one extra payment per year.
If you want to see what a difference bi-weekly payments make over the life of the loan, use a payment calculator designed to show the difference. With this simple trick, you might save thousands in interest over time.
Some days the financial gods smile down upon us and we end up with an unexpected little money gift. It could be a bonus from work, a returned check for an overpayment, or a check in the mail from Grandma. Whatever it is, take the gift and use it wisely.
When this happens, take advantage and put the extra money towards the principal balance of your loans. You have a choice between paying towards the interest or the principal. Always choose the principal because it lowers the amount of interest you pay over time.
Is this an exciting way to spend “found” money? Nope. Does it hurt a little to spend it on student loans versus the new piece of furniture you’ve been eyeing? Yes, it hurts.
But what hurts worse is having the student loan debt hang over your head for years and years. And if additional money comes your way and you can’t bear the thought of using it on loans, focus on how good the debt payoff will be.
8. Bring in extra income and dedicate it to loans
Speaking of extra money, you don’t have to wait on Grandma to feel sorry for you and send you a check in the mail. If you’re serious about debt repayment, another tactic is to bring in additional income and dedicate it entirely to your student loans.
There are a number of side gigs you can take on that work with your jam-packed schedule, either from home or office. Even if you earn an extra $200 per month, by applying this amount to your loans you’re accelerating your debt payoff by months and years.
If you need a little inspiration on what to do for extra money, here are a few to consider:
- Rideshare driver
- Tasker for TaskRabbit
- Selling items on eBay and Etsy
- Offer freelance services
- Become a virtual assistant
- Open an online store
- Teach for VIPKids
- Create an online course
Whatever you decide to do, take advantage of the extra income and dedicate it solely to your loans. Then one day when your loans are paid off, you can focus on a new money goal.
If you don’t want to take on a side hustle, next time you earn a raise for your job then put the additional funds you’re earning towards your loans. Since you’re used to living on the lesser amount anyways, you will hardly miss the additional money coming in going to your debt.
9. Use a budget
If you want to change your spending habits and develop smart financial patterns, then developing a budget gets you there. When it comes to student loans, a budget exposes where you have “extra” money each month so you can put it towards loan payoff.
Having a budget allows you to see exactly how your money is coming in and where it’s going. Once you know this, then you adjust your spending on other items to accelerate the debt payoff for your loans.
Think of a budget as the framework for your spending. This allows you to design a plan that works for your goals. And if your major money goal is student loan payoff, then a budget helps you achieve that goal.
How does a budget help you? Once you analyze your current spending to put a budget in place, you’ll likely find an area where you are overspending. Maybe it’s your cable bill. Perhaps it's your auto insurance. Or it could be the $200 you spend each month on cat treats.
Once you see the areas of spending that need improvement, then you earmark this money and pay it towards your student loans. The only way to know what’s going on with your money and where you have room to improve is with a budget.
10. Set up a reward system for your progress
I’m not going to lie. It takes a lot of focus and energy to pay off your student loans. To make sure you stay on track with your challenge, set up a reward system for yourself.
Think about what motivates you and then set up goals to earn these rewards. Set up a goal for every $2,500 you pay off or $3,000. For instance, when you pay off your first $2,500, treat yourself to a nice dinner out. When you knock out $10,000 in debt, give yourself permission to go on a road trip and make new memories.
Having rewards along the way is a small way to stay motivated. Do something for yourself you normally wouldn’t do. This way, when you’re tempted to spend money on anything but your student loans, you have something to look forward to.
11. Know that some months are challenging
While rewards are fun and provide the extra morale boost you need, there are some months in your student loan payoff that are harder than others. There are months where you won’t be able to pay extra or you’re sick and can’t bring in extra income.
It’s ok, that’s how life goes sometimes. When this happens, it doesn’t mean your progress is over. The important thing to remember is this is your payoff plan over time. Stay focused and the next month you’ll get back on track.
The bottom line
Student loan debt is the same as other debt in your life — once you begin focusing on it, you’ll notice progress quickly. There are numerous strategies you can use starting today to help you through your payoff journey. From paying bi-weekly and automatically, to using a budget and finding extra spending to put towards your loan payments. Whatever you choose to do, you will chip away at the student loan debt. And eventually, you’ll be able to kiss all those student loans goodbye forever.