Three ways to lose student loans faster

College tuition continues to rise – with recent grads racking up an average of more than $37,000 in student-loan debt by commencement day. And while federal loan repayment plans are usually structured to ensure the balance is paid off in 10 years, studies show that, on average, bachelor-degree holders actually take 21 years to pay off their loans.

1. Consider the “6% Rule.”

It’s a financial dilemma as old as time: Save, or pay down debt? This is especially concerning for recent grads who likely don’t have an emergency fund in place and have student loans to pay off. When it comes to that conundrum, Shannah Compton Game, a certified financial planner and Millennial money strategist, offers her clients the 6% rule as a guide.

“If you have a student loan that’s under 6% interest, you’re better off just paying that off over time and taking the rest of your money and putting it to work – investing it, growing your emergency fund, doing all of those things that are actually going to get you ahead,” she says. But on the other hand, “If you’ve got student loans over 6%, work on paying those puppies off.” Focusing on high-interest loans before you double down on other money goals can dramatically shave off how long you’ll be making payments.

2. Focus on one target at a time.

Whether you get a bonus at work, a stack of Benjamins for your birthday, or just managed to trim some extra money from your monthly budget, try throwing that extra cash towards your student loans. When you go above and beyond the monthly minimum, you’re paying off more of the loan’s principal, which means you’ll pay less over the long run and finish making payments sooner.

Don’t spread your windfall between the loans – you’ll get a bigger boost of motivation if you focus on one loan at a time and see the impact your extra payments are making, says Compton Game. You can either attack the loan with the highest interest first or the one with the smallest balance. “Either method you choose, you’re going to win,” says Compton Game. “You’ll be paying off debt much faster than you would if you’re just throwing payments all around the place.” Once that loan is paid off, take the amount you’ve been allocating each month and apply it toward another loan.

3. Consider refinancing. 

A few percentage points might not sound like a lot, but when it comes to student loan interest rates, it could be the difference between hundreds or even thousands of dollars. If you have a good credit score, some lenders will refinance your loans to a rate as low as 2%. “It’s so close to zero it’s ridiculous,” says Compton Game.

Refinancing is often a better approach than, say, using a variable payment plan. That’s because with a variable payment plan, your payments start off small and increase over time. “Right now a variable payment saves you money, but interest rates are not going to stay this low,” Compton Game warns. “In a few years, your monthly payment could balloon and you might not be able to handle it.”

FOR MORE INSIGHT

On loan repayment and forgiveness
Learn about how, when, and to whom you make your federal loan payments (Office of Federal Student Aid)
Repay Student Debt (Consumer Financial Protection Bureau)
Income-driven Repayment plans (Office of Federal Student Aid)
Repaying your Federal Student Loans (Office of Federal Student Aid)
How to get your student loans forgiven (moneysmartfamily.com)

The content on missionmoney.org provides general information and does not constitute legal, tax, accounting, financial, or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information; do not endorse any third-party companies, products, or services described here; and take no liability for your use of this information.

After – and only after! – you have exhausted scholarship and grant opportunities, consider taking out a student loan. This will help to cover the balance after your grants and scholarships are applied.

Another option before you consider loans is a Federal Work-Study, which provides part-time jobs (both on- and off-campus) for students. Earnings from this position go toward your college tuition, helping cover gaps in funding. Like scholarships, grants, and loans, Federal Work-Study involves an application and acceptance process.

Businesses might use your credit reports to determine whether to offer you insurance; a rental contract on a house or apartment; or cable TV, internet, cell phone service or other utilities.

3. Establishing an emergency savings account
   Among the 78% of Americans living paycheck-to-paycheck, every unplanned expense becomes a crisis – and when there is no money to cover the emergencies, you will be tempted to borrow on credit. That can begin a vicious cycle, which is tough to escape if you’re not disciplined and intentional. An emergency savings account is just that: An account set up for unexpected expenses like car issues, job loss, appliance breakdown, accidents, and more. In general, experts advise keeping enough in emergency savings to cover a minimum of three months of expenses, and six months to be extra safe. It’s important to note that this is not an account for planned expenses like car maintenance or house upgrades; it is for true emergencies. 

FOR MORE INSIGHT

On credit
How to establish good credit

The content on missionmoney.org provides general information and does not constitute legal, tax, accounting, financial, or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information; do not endorse any third-party companies, products, or services described here; and take no liability for your use of this information.