Things You Must Do If You Want to Pay Off Your Student Loans Early

Kailey Hagen, The Motley Fool

Updated Mon, Sep 23, 2019, 12:00 PM 5 min read

Student loans are a necessity for many students who are interested in higher education, but they also bring with them an enormous financial burden that many graduates struggle with in the months and years after they leave school. Paying off your loans early can help reduce the amount you pay overall, but freeing up the cash to do that is difficult for most young adults. Here are a few tips you can try that might make repaying your loans a little easier.

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1. Choose the right repayment plan

Federal student loans offer several repayment plans so you can choose the option that works best for your budget. Income-driven repayment plans are popular because they enable you to pay less when your income is lower and more when your income is higher. But these plans often have longer repayment terms, which means you end up paying more in interest overall.

If you can afford it, the standard repayment plan is your best option because you'll pay back the full balance of the loan within 10 years. If this isn't an option, choose the repayment plan that offers the highest monthly payment you can reasonably afford.

Many private student loans don't give you a choice of several repayment terms, but they may enable you to defer payments while still in school. Federal student loans give you this option as well. But if you can pay down your balance while you're still in school, you're better off doing so because it'll reduce the amount of interest you'll owe overall.

2. Make more than the minimum payment

Whenever possible, pay a little extra money each month. This will help reduce your principal balance and consequently, the amount of interest you pay overall. In order to free up the extra cash to put toward your student loans, you may have to cut spending on discretionary items such as clothing or dining out. You could also work overtime or start a side hustle to get more money coming in.

Another option is to create an extra month in the year by making half a payment every two weeks instead of a full payment every month. This shouldn't strain your finances too much, and it adds up to 26 half-payments, or 13 full payments, over the course of the year.

3. Pay your student loan with the highest interest rate first

You must make at least the minimum payment on all your student loans in order to avoid getting hit with late fees or going into default. But if you plan to pay extra on your student loans each month, it helps to target them one at a time. Focusing on the one with the highest interest rate first will reduce the amount you pay in interest overall. Once you've paid that one off, put all of your extra cash toward the student loan with the next-highest interest rate and keep doing this until you have paid them all off. If you're not sure what the interest rates are on your student loans, check with your student loan servicer to find out.

4. Refinance or consolidate your loans

Refinancing your student loans can help you secure a lower interest rate, which can slow how quickly your balance grows. But this does not always make sense. If current student loan interest rates are higher than what they were when you initially borrowed the money, you're better off sticking with the loan you've got. You also have to weigh the flexibility of the repayment plans and any other fees associated with the new loan to decide whether it's the best option for you.

Consolidating your loans can also make repaying them easier because you'll only have to worry about a single monthly payment instead of several payments. But consolidating your loans essentially means taking out a new loan that pays off all the old, smaller loans, so you still have to be mindful about the new interest rates you'll be paying.

You also have to be mindful of the loan term when refinancing or consolidating loans. Even if the interest rate is the same or lower on your new loan, you could end up paying more overall if the payback period is longer. But this shouldn’t concern you if you plan to pay more than the minimum each month.

5. Take advantage of student loan forgiveness, if it's an option

The federal government offers public service loan forgiveness (PSLF) and teacher loan forgiveness to federal student loan borrowers who have a qualifying repayment plan, work for a qualifying employer, and make at least 120 on-time student loan payments. If you meet all these requirements, the government will forgive any outstanding federal student loan balance. The military also offers student loan forgiveness programs to Army, Navy, Air Force, and Coast Guard members. Check with your student loan servicer to see if you qualify for any of these forgiveness programs and to learn more about the requirements.

Some employers are now offering student loan forgiveness as an employee benefit to draw in new college graduates, so this is another avenue you could explore if you don't qualify for any of the government programs. If your employer or a prospective employer offers this, talk with them about the benefits and any limitations on it so you understand what you're getting into.

Paying off your student loans early isn't easy and it may not be possible for everyone, but you can give yourself a better shot by trying out a few of the tips above.

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