Paying off your student loan faster not only frees you from debt, it also slashes years off your loan term and will save you a tidy sum in interest payments.
I’m going to show you a number of really meaningful hacks to help you to pay off your student loans fast.
Some will have greater financial effects than others, but if you know them all, you’ll be able to apply whichever hacks you feel are fitting for your unique circumstances.
One of the most crucial ways to reduce the term of your loan and save a substantial amount of interest is to …
Get The Best Interest Rates Possible
Whether it be borrowing or investment, interest rates have a really profound effect on one’s financial outcomes.
Whilst approximately 96% of all student loans in the USA are Federal loans, they have some serious shortcomings.
From a financial perspective, the greatest disadvantages of Federal student loans are:
- High interest rates.
- Interest rates are fixed for the term of the loan.
Interest rates are tied to the Treasury Note plus a fixed margin and are set each year.
So if rates reduce after your loan was effected, you’re at an immediate financial disadvantage.
Your only choices are to ….
Refinance Your Student Loans
Refinancing your student loans can ultimately prove to be very lucrative.
Considering that the Federal interest rate is currently 6.8% and refinance rates start as low as 2.57% (per year), you could realize an interest rate saving of 4.23% per year.
Consolidate Your Student Loans
Obtaining a Federal loan this year doesn’t automatically mean that you qualify for the following year.
Each year, you must re-apply for a student loan.
Besides this being very cumbersome and inconvenient to manage, what if you’re refused a future loan?
Your credit score or your qualification criteria could change.
Consolidating multiple student loans brings them all under one roof, at one rate of interest. It’s pretty much the same as refinancing but with multiple loans.
Okay, it’s time to look at …
The Dollars You Can Save With A Lower Interest Rate
A $40,000 Federal loan at an interest rate of 6.8% over a 10 year term.
Monthly repayment: $460.32.
Total interest paid over the term of the loan: $15,238
Provided that you have a good financial repayment history and that your credit score permits, let’s assume you qualify for the refinancing interest rate I mentioned above (2.57%). Loan term: 10 years. Loan amount $40,000.
Monthly Repayment: $378.35
Total interest paid over the term of the loan: $5402
This alone provides you with an interest saving of just under $10,000.
But let’s take this a step further. Let’s see what happens if you ….
Pay Extra Each Month
Now, because you’ve already been making payments of $460.32 per month, lets see what happens if you simply maintain this payment with the lower interest rate.
This reduces the term of the loan to 8 years (96.25 months), in turn reducing the total interest paid to $4306.
This represents an interest saving of just under $11,000.
Can you scoff at that?
Sure you can’t.
But we can make things even more attractive.
For the sake of this illustration, I’m going to round up the monthly contribution to $1000. That’s $540 per month more than what you started off with.
The term of your loan now drops to 3.5 years (41.86 months).
And the total interest paid over the term is under $1860.
This represents a total interest saving of $13,377.
And that’s how to pay off a $40,000 student loan in 3.5 years and save over $13,000!
Naturally, your own circumstances will dictate how much extra you can pay, so I’ve made you a student loan calculator that automatically works out the new term of a loan based on your increased payment. It also shows you the total interest paid over the term and the dollar amount of interest you save with a better interest rate and extra payments.
Go ahead and play around with some figures. I’m sure you’ll find a solution to pay off your student loans fast.
Enter your original loan details on the top row and then enter your new payment in the red cell. You can then change the interest rate in the top row to see the effect it has on your finances.
PLEASE US COMMAS WHEN ENTERING DECIMALS – (SORRY MICROSOFT GLITCH)
But in order to do this, you have to be in a position to afford more money or you have to ….
Earn More Money
If you read my article about how to make money, you’ll see that about 30% of the American workforce partakes in the gig economy.
I believe that the motivating factors are to pay down debt, live a richer life and save for retirement, or early retirement.
Hell, wouldn’t you like to kill two birds with one stone?
You can get yourself a brilliant education and be completely debt free before you leave university!
Then you can use your money to start investing for your retirement.
Imagine what it would be like to be in that position?
Additional Tips To Pay Off Student Loans Fast And Save You Even More Money
Better interest rates and additional payments (even if sporadic) have the greatest money saving impact, so that’s where you should concentrate most of your efforts.
Nevertheless, whilst some of the tips below may only have a minor impact, the cumulative effect of including as many money savers as you can manage, will still make a difference.
Pay In Advance Instead Of In Arrears
Paying in advance whilst maintaining the same repayment of $460.32 chops an entire month off the loan term.
Additionally, it will save you an extra $443.
Take Advantage Of Auto-Debit
An automatic debit facility will likely land you a discounted interest rate.
This could be anywhere between 0.25% to 0.5% depending on whether you have a Federal or Private Loan.
A 0.25% reduction in interest rate translates to a term reduction of 3 months and an interest saving of $1259.
A 0.5% reduction reduces the loan term by 5 months and will save you $2070.
The above figures are based on maintaining a payment of $460.32.
Maintain The Same Payment When Interest Rates Reduce
This applies only when you opt for a floating interest rate.
The concept is much the same as above.
Effectively, the extra contributions reduce the loan capital which in turn reduces the loan term and total interest.
IMPORTANT: Loan providers don’t always apply extra payments to the capital account. It is pretty much standard practice to allocate extra funds in the following order:
- To outstanding amounts
- To interest
- To principal
Besides the fact that any outstanding amounts will increase your capital and will counteract much of the interest savings you aim to achieve, they can also affect your credit record.
Other than that, make sure to talk with your loan provider so as to ensure that your additional amounts are applied to reducing capital and not used to prepay for the following month either.
As above, a 0.25% reduction in interest rate translates to a term reduction of 3 months and an interest saving of $1259, whilst a 0.5% reduction reduces the loan term by 5 months and will save you $2070.
Pay Down The Highest Interest Bearing Loans First
The higher the interest rate, the more costly the loan.
So it stands to reason that any extra payments you make should be applied to the highest interest bearing loans, until fully paid.
Maximize Lump Sum Windfalls
Have a maturing policy? Or an inheritance?
What about a tax deduction? Don’t let it get caught up in the system. Use it effectively.
Unless you have a guaranteed way to make more money than that which you can save in loan interest, in most instances the best investment you can make is to pay down debt first.
Applying any lump sums to your student loans effectively guarantees you a return equivalent to the current interest rate being charged. That’s better than any short term estimated return on stocks that may or may not materialize.
Never Defer Payment
One of the biggest mistakes you could ever make is to defer paying your loan until you finish studying.
By the time you start paying, you’ll likely have a huge debt ahead of you.
From the time the loan goes “on books”, interest starts to accrue. This adds to your original loan capital incurring compounding interest on your initial debt.
You may be forced to refinance over a longer period (leading to greater total interest paid) or find yourself struggling to pay the due contributions.
Unless you’ve got more dollars than sense, just don’t do it to yourself!
Being savvy and saving yourself a load of money is really not difficult to achieve.
It starts with simple awareness, that’s all.
By applying just a few of the suggestions above, you’ll be able to achieve greater financial outcomes for yourself.
So tell me, what are you going to do to pay off your student loans fast and save yourself a whole lot of money?
Leave me a comment and let me know.