For many, the repayment process of a debt like a student loan is often an overwhelming experience. In most cases, the repayment term for a standard federal student loan is around a decade. But it has been observed that most average borrowers take nearly double the time to completely get rid of the debt. Fortunately, there are some ways that can be followed when one is thinking about how to pay off student loans faster.
Use the debt avalanche method
One of the best strategies for student loan repayment with multiple loans is to follow the debt avalanche method. For instance, if a student has a combination of Subsidized, Direct Unsubsidized, and Parent PLUS Loans, which are all federal loans; usually, Subsidized and Unsubsidized Loans have lower interest rates, which can be anywhere around 3.4%. Meanwhile, Parent PLUS loans tend to have higher interest rates.
In such cases, using the debt avalanche method can be a good idea to pay off the debt faster. For this, simply list down all the loans in the order of their interest rates. The ones with higher interest must be at the top. Then, continue to make minimum payments on all the loans with the priority of putting aside additional money towards the loans with higher interest. This way, the most expensive loan can be dealt with first, leading to substantial slashing of the interest rates and saving money.
Make additional payments to the loan’s principal amount
In most cases, there is no penalty imposed on paying more than the minimum amount or paying off the loan early. But many loan providers often have a clause related to the prepayment of the loan. Whenever an extra payment is made towards the loan, the bank or financial institution offering the loan will use it to advance the due date. This means, the additional amount is applied to the payment for the next month. Also, the extra payment generally goes to the payment of accrued interest and late fees (if any) prior to going toward the principal.
So, in most cases, advancing the due date of the student loan is not quite helpful in paying off the loan faster. This is why a top tip to pay off student loans quickly is to give instructions to the loan provider to apply the overpayments to the principal balance. Let them keep the due date of the next month as has been planned previously.
Sign up for autopay
A useful student loan payoff hack is to opt for an auto payment process. It can help to steadily lower the interest rate of the student loan while adding more money to the principal balance. Many providers of federal student loans have offerings that include quarter-point interest rate discounts whenever a customer enables automatic deductions of payments from their bank account.
Several top private lenders also offer the facility for an auto-pay deduction. This can easily lower the interest rate by a few percentages, allowing quicker repayment of the loan. Make sure to consult with the lender to learn all about the autopay deductions and discounts related to it.
Pay off interest before it begins to capitalize
Except for the student loans subsidized by the federal government, all the others have accrued interest when one is completing their degree. The interest continues to accrue during grace periods of the loan as well as during periods of student loan forbearance and deferment. Once the repayment begins, the interest starts to capitalize. This means the interest starts adding to the principal loan amount. So, one will end up paying interest on a bigger amount, which invariably increases the total loan amount that will be paid over time.
This is why, when thinking about how to reduce student loan debt faster, it can be useful to consider making interest-only student loan payments every month when one is in school. This can be done even during the grace period or forbearance period. This can help to avoid capitalization.
Stick to the standard repayment plan
Most federal student loans automatically have a standard repayment plan of 10 years. Some borrowers may get the option to choose a different plan. But if one is unable to make extra payments on student loans, it is recommended to stick to the standard repayment plan in order to pay it off quickly. This way, the total debt is split up along with the interest into around 120 monthly installments over a period of 10 years.
In some cases, one can also get the option of income-driven repayment or IDR plans from the federal government. This helps lower the monthly payment based on a person’s total income. But IDR plans can stretch the timeline of payoff to at least 20 to 25 years. Sticking to the standard repayment plan is a good idea when considering the fastest way to pay off student loans.
Look for refinancing options
To manage student loans efficiently, one can look into refinancing options. These can help pay off the loan quickly without any additional payments. With refinancing, multiple private or federal loans can be replaced by one private loan. In most cases, this single loan has a lower interest rate. To ensure a faster repayment process, make sure to pick a loan term that is lesser than whatever is remaining in the current loan.
