Stuck in what seems like never ending payments to your student loan? Below are 5 tips to pay off your student loan faster!
- Pay more than you owe
- Specify payments per loan
- Increase your payment every year
- Set Up Automatic Payments
- Refinance for a lower interest rate
What does principal mean on a student loan?
The principal balance refers to the amount owed less any interest. For example, if you borrowed $10,000, your total principal due would be $10,000.
How much will I have to pay in interest on my student loan?
The amount you pay in interest is dependent on 3 factors: 1. Amount borrowed, 2. Interest rate, 3. Repayment terms (i.e. how many years you have to pay off the loan). Using the example above:
- Amount Borrowed: $10,000
- Interest Rate: 5%
- Repayment Terms: 10 Years
You could expect to pay about $2,800 in interest over the 10 years.
How do I pay off my student loan faster?
Below are 5 tips on how to pay off your student loan faster. Student loans are daunting however, they should be treated as any other debt and paid off! Just think the faster you pay off your student loan, the sooner you have a little more to go towards savings, towards that new car, a down payment on a home, or just a little extra to go towards your next vacation.
Tip 1 | Pay More Than You Owe
This may sound like a no brainer, however, most would think you need to pay hundreds over your minimum payment for it to make a difference. This is not true. For example, even if you paid $20 over your minimum, you could be covering what is due in unpaid interest, so another $20 of your payment can now go toward principal.
Let’s break this down in to payment terms. Your minimum payment on a $10,000 loan is $200, this covers both interest accrued and principal. If your interest rate was 5%, then each month you would expect, on average, to pay about $20+ in interest. So now of your $200 payment, $180 would go to principal and $20 would pay accrued interest.
If you added an extra $20 each month, then a full $200 goes to paying down the principal, and that extra $20 covers the unpaid interest. Now, I understand $10,000 isn’t even half of some student loans, but the concept can be applied at scale. Paying more than you owe on a student loan will help you to pay off your debt faster!
Tip 2 | Specify Payments Per Loan
I learned this one the hard way, after paying one single payment for 3 of the 7 years! So what does specifying payments per loan mean? Typically student loans are made up of multiple loans. That same $10,000 may be 2 $5,000 loans, 1 per semester.
For ease of this example, let’s say you did have 2, $5,000 student loans. Each month you paid your minimum $200. The bank or lender then takes that $200 and splits it evenly across both loans. This works if you don’t mind paying for the full 10 years. However, if you want to pay off your student loan faster, specify your payments per loan. The best way is to pay only the accrued interest on one loan and put the rest of your payment towards the other. Doing this will pay down the principal of one loan quicker and thus less (interest) would be owed.
Tip 3 | Increase Your Payment Every Year
Increasing your student loan payment every year, again doesn’t mean you need to increase it by hundreds. I added $50 more to my payment each year. Since I paid for 7 years, that’s an extra $300 per month by the end!
Think baby steps here. Each year I got a raise at my job, it may have been small, but it equaled out to about $50 more per month. I simply would take that extra money and put it towards my loan. This is not the same for everyone, so live within your means and do what makes the most sense for your situation.
Tip 4 | Automatic Payments
Typically automatic payments can help you pay off your student loan faster. Why, you ask? Most banks/lenders offer an interest savings or reduction to your interest rate when you set up automatic payments. It’s like a little reward for paying on a consistent schedule.
If you know every month on the 15th, you will have that $200 payment ready and waiting, then set up automatic payments. Again, this doesn’t work for everyone. I actually never set up automatic payments because over the course of repayment, some jobs paid every 2 weeks, some paid bi-monthly, etc… It never worked out or made sense for me to set them up.
If you don’t set up automatic payments, you should still try to be consistent in when you pay. The longer between payments equals more time for interest to accrue.
Tip 5 | Refinance For A Lower Interest Rate
Refinancing your student loan for a lower interest rate will help you to pay off your student loan faster. Simple, think lower interest rate = less accrued interest = more of your payment goes toward principal.
Bonus Tip | Budget
Budgeting is absolutely one of the best ways to stay on track with paying off your student loan. I kept a simple excel document in which every month I tracked how much I paid towards each loan. Doing so allowed me to budget for the future and determine when/how much faster I could pay off each student loan. It actually served as motivation. I am just now reaching the last 9 months of paying off my student loan and can’t wait to make that final payment!
In summary, paying off your student loans can seem like a never ending process, however if you apply even just a few of these tips, you are sure to pay off your student loans faster!