Strategies for Paying Off Student Loans Quickly
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As the Biden administration continues to move the deadline for student loan repayment further away, it can be easy to forget that you were at one point paying for student loans. However, even with the $10,000 student loan cancellation executive order hanging in the balance, forgetting about your student loans is not a good idea.
Barring any major forgiveness measures for federal student loans, you will have to tackle your student loan balance sooner or later. If you’ve already tackled high-interest credit card debt and other loans, the next stage in becoming debt-free might be paying off your student loans. This can be a daunting task depending on how high your student loans are.
While it may be tempting to use some of the extra money you save by not paying your student loans for more fun endeavors, now is a great time to face your student loans head-on. Thanks to the interest rate reduction, any additional payments you make while your loans are in forbearance can be applied directly to the principal balance of your loan. This can be a huge advantage while you wait for the repayment term to restart.
So, what are the best ways to take charge of your mounting student loan balance? And are there any disadvantages to paying off your student loans faster? Check out the following strategies for paying off your student loans quickly and getting one step closer to debt-free.
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Strategies for paying off your student loans
If you’re focusing on tackling your student loan debt, the following strategies and approaches can help you make the most of your money. In some cases, you may be able to combine multiple strategies to ramp up how quickly you can pay down your student loans.
5.62% - 16.85% VARIABLE rate APRs 4.39% - 16.49% FIXED rate APRs
- Check your eligibility in just 2 minutes
- Fast application and decision-making process
- Flexible repayment options
- No fees for origination, disbursement, prepayment, or late payment
- Skip a payment once per year (once repayment period restarted)
- Covers up to 100% of the school's certified cost of attendance
- 9-month grace period (3 months more than most lenders)
Use windfalls effectively
Not everyone gets a surprise inheritance or windfall from a distant relative. However, any extra amount of cash can be helpful when tackling your student loan payments.
One common windfall you may get each year is your tax refund. Applying this to your loan principal helps lower your overall loan amount and also helps reduce the interest your loan is accruing. Don’t forget that you can take a tax deduction of up to $2,500 each year for interest paid on your student loans, too! This can help you maximize your return.
Other windfalls you may want to leverage to get debt-free faster include bonuses from work or any month you get paid three times instead of twice. It can certainly be tempting to put this money towards new electronics or vacations, but you can stay focused by planning your payments ahead of time.
Make biweekly payments
If you currently make monthly payments on your student loan, a simple way to increase the amount you pay is by paying biweekly instead. Setting up automatic payments in half the amount of your student loan every other week aligns your payments with your pay periods, ultimately resulting in an extra full payment each year.
Because you’re scheduling these payments for the days you get paid, you’re not likely to notice the extra money leaving your bank account. Plus, if you set up everything on autopay, you don’t have to think twice about making the necessary payments and sticking to your strategy.
Pick up a side hustle for some extra cash
It’s important to take stock of your financial goals and recognize when your income is (or isn’t) aligned to make those dreams a reality. If your current income isn’t enough to handle anything other than the minimum payment, it may be prudent to pick up a side hustle.
Not all side gigs are created equally. Some are serious, part-time jobs, while others are things you can do in your spare time watching Netflix at home. If you want to jumpstart your side hustle search, consider checking out these seven easy side gigs you can cash in on at home. From Etsy to websites like WFH Pad, finding flexible side gigs is easy if you know where to look.
One of the best things about picking up a side hustle is that you don’t need to continue it once you’re done paying down your loans. Especially if you’re trying to reduce the number of years it will take to pay off your student loans, increasing the amount of discretionary income you can apply towards this task can be the single most powerful tool in your arsenal.
Be smart about student loan refinancing
Refinancing your student loans and getting a lower interest rate can be a great way to stave off some of the dollars your loans accrue in interest. This is especially important if you have private student loans that aren’t eligible for the grace period of deferment from the government.
When looking at refinancing options, finding a loan servicer and loan term without a variable interest rate is a good idea. Variable interest rates could put you at risk for a higher rate in the future, which, obviously, doesn’t help you pay down your student loan debt any faster.
Keeping these facts in mind when you refinance can help you find a solid lender and set yourself up for success — especially if you plan on combining this strategy with another tactic on this list.
5.62% - 16.85% VARIABLE rate APRs 4.39% - 16.49% FIXED rate APRs
- Check your eligibility in just 2 minutes
- Fast application and decision-making process
- Flexible repayment options
- No fees for origination, disbursement, prepayment, or late payment
- Skip a payment once per year (once repayment period restarted)
- Covers up to 100% of the school's certified cost of attendance
- 9-month grace period (3 months more than most lenders)
Consider student loan forgiveness programs
Not everyone will qualify for income-driven repayment plans, but for qualifying borrowers, these are a great way to tackle your student loan debt once and for all. To get these types of repayment assistance, you’ll be required to provide documentation about your income and family size annually.
If you aren’t already on a student loan forgiveness program, it may not be a bad idea to consider these programs and talk to your loan servicer about them. Here are some of the most common repayment options that include provisions for loan forgiveness.
Income-based repayment
As the name suggests, this loan forgiveness program puts a maximum limit on how much you will pay each month toward your student loans. The cap is generally 15% of your total discretionary income, and at the end of 25 years, your remaining balance is forgiven.
Pay As You Earn
With the Pay As You Earn student loan forgiveness program, you’ll only pay 10% of your discretionary income towards your student loans. After 20 years of on-time payments, the remaining balance of your loans will be forgiven.
Income-Contingent Repayment
Income-contingent repayment calculates the amount you would pay two different ways and then chooses the lesser amount of the two options. On an income-contingent repayment plan, you will pay either 20% of your discretionary income or what you’d be charged on a 12-year repayment plan. Following 25 years of on-time payments, any remaining loan balance is forgiven.
Revised Pay As You Earn
The Revised Pay As You Earn plan is similar to the Pay As You Earn plan, with a cap of 10% of your discretionary income and your loan balance being forgiven after either 20 or 25 years. When your loan is forgiven is based on when you took your loans out.
Costs
Unless you’re working with a student loan consolidation service that charges a variable interest rate, it’s unlikely that you will face any extra costs when paying off your student loans more quickly. Instead, paying off your loans faster likely impacts your personal finances more from an opportunity cost perspective. After all, if you’re trying to lower the total interest your loans are accruing by putting extra money against the principal of your student loans, you can’t use that money for other purchases.
One thing to note, however, is that depending on your tax situation, if you’re enrolled in a repayment plan with a loan forgiveness component, you may be charged income tax on the amount of your loan that is forgiven. In all cases, this number will be far less than the remaining principal you owe, but it is important to recognize and plan for as you near the final years of your repayment plan. Obviously, this fee only applies to you if you’re on a repayment plan, allowing you to plan for it ahead of schedule.
5.62% - 16.85% VARIABLE rate APRs 4.39% - 16.49% FIXED rate APRs
- Check your eligibility in just 2 minutes
- Fast application and decision-making process
- Flexible repayment options
- No fees for origination, disbursement, prepayment, or late payment
- Skip a payment once per year (once repayment period restarted)
- Covers up to 100% of the school's certified cost of attendance
- 9-month grace period (3 months more than most lenders)
Pros and cons
Not everyone sees paying their student loans off early as a cut-and-dry decision. Here are some pros and cons of aggressively tackling your student loan debt.
Pros
- You’ll pay less interest. The interest you pay on your student loans can be crippling on what are often five and six-figure loans. By paying down your principal sooner, you are reducing the time you’re throwing money away in interest fees. That can account for thousands of dollars in savings in your lifetime.
- You’ll gain financial freedom. If you value flexibility in your finances, freeing up a portion of your budget that you were previously forced to use towards student loan payments can feel like a big win.
- You can boost your credit score. In addition to illustrating that you can make on-time payments, paying off your student loans faster will lower your overall debt-to-income ratio and improve your credit score. If you plan on making a big purchase, such as a house, this can be advantageous when getting a competitive interest rate.
- You’ll gain peace of mind. Student loan debt (or any form of debt) can be incredibly stressful. It’s hard not to overstate just how mentally freeing it can be to know that you don’t have a massive amount of debt weighing on your back as you go through your day-to-day life.
Cons
- You might owe taxes. As mentioned earlier, if you’re on an income-based repayment plan and qualify for loan forgiveness, you may owe taxes on the amount of your forgiven loan.
- There’s an opportunity cost. When you put more discretionary income toward your student loans, you can’t invest in stocks or bonds. While this is an opportunity cost, it is a good idea to weigh your potential interest savings alongside the potential for income-earning dividends from investing.
- Can be financially challenging. Tackling a high amount of debt takes mental fortitude and focus. Especially if it will take you years to pay off your student loans ahead of schedule, it can be financially challenging to maintain and sustain that kind of focus.
The bottom line
Even if you qualify for financial aid or scholarships, the odds are high that you may graduate from college and owe some student loans. It’s tempting to ignore these while student loan repayments are paused due to the pandemic, but doing so just postpones the inevitable.
Of course, there are sacrifices that you’ll need to be willing to make to pay down your student loan debt ahead of schedule. While some of these disadvantages, such as the potential tax burden, are outweighed by the remainder of your loan you’ll have forgiven, others are a bit trickier to calculate.
For example, some people may feel more stress trying to pay their loans down quickly than thinking about paying a large monthly payment in perpetuity. On the other hand, the opportunity cost of not being able to invest in retirement as fully may also be a reason to forego paying off your student loans early.
Rather than wait for a looming due date that seems destined to be pushed further into the future, taking charge of your student loans in the here and now is not a bad idea. If you have the discretionary income to begin to pay down your loans faster, it’s hard to think of many reasons why becoming debt free sooner rather than later is a bad idea.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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