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The United States is in the midst of a student-loan crisis. The cost of education has far outstripped people's ability to pay and students have racked up more debt than ever before. Where students in the 60's and 70's could often pay most of their academic costs with summer jobs, now students need to work part-time jobs throughout their college years just to cover living expenses, not to mention books and other fees.
For these and other reasons, students and graduates often seek financial advice on how to quickly pay off their student loans. Here’s some information and techniques that can help you do just that.
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What Affects the Speed of Loan Repayment?
The rate at which you achieve full student loan repayment is affected by several factors. One of the key factors is the principal amount of the loan. That means the actual cost of the goods purchased, in this case your tuition and the other costs associated with school – this includes the entire amount that was disbursed to the school on your behalf. The higher the principal amount, the longer it will take to repay that debt. After all, if you are paying for a two-year degree, your principal amount will be at least 50% less than a four-year degree.Read More
Another key factor is the interest rate on the loan. The higher the interest rate, the faster it will grow. Some high-interest loans have been known to inflate a $500 payment into thousands of dollars of debt. In fact, the interest rate is the key factor that extends loan repayment. Luckily, it is possible to reduce your interest rate and increase the speed of repayment.
However, if you have a poor credit rating or have missed a few payments, you may find that refinancing or otherwise expediting your loan is more difficult. In fact, low income or poor credit might mean that your initial loan terms start out with higher interest and high monthly payments.
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Tips for Speeding Up Your Repayment
- Enroll in Autopay:
Autopay is helpful in a number of ways. First, you'll never forget to make a payment on your student loans because the funds will automatically be deducted from your account. Secondly, you will likely see a reduced interest rate as a result of signing up. Loan companies are very motivated to get you signed up because it makes it more likely they will get paid.
- Pay Off Capital Interest:
If you can make extra payments to offset whatever capital interest has accrued on your loan, you can expedite your loan repayment. This can be achieved by making extra payments and exceeding the minimum payment. Your ordinary budget might not allow such extra expenditures, but you can add to your income with additional side jobs or a regular part-time gig. For instance, some people will do temporary work on their days off and at night, as a way to generate money to pay off capital interest.
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- Make Biweekly Payments:
The more regular payments you can make, the faster you will repay your debt. That is, if you take your regular monthly payment, divide it in half, and make these half-payments every two weeks, you will expedite your loan repayment by making one extra payment per year. That's because, every year, because of the longer months of the year, you'll end up make 26 half payments rather than 12 whole payments. This method can also be employed on a home mortgage, so be sure to investigate it when applying for a home loan.
- Refinance if your credit has improved:
Refinancing a loan is a great idea that enables you to consolidate all of your private and federal loans in one neat package. When you have your financial house in order and your credit score is acceptable, explore this option. Generally, you will want to have a credit score of 700 or greater. Loan refinancing can yield better interest rates, which result in faster student loan repayment. Furthermore, consolidating loans will simplify your monthly payments.
- Use windfalls or unexpected income as extra payments:
When you receive an unexpected influx of cash, put that money towards loan repayment. Even if you get a raise at work, use that extra money to increase your loan payments. If you maintain your current standard of living, you won't even have to do any belt-tightening. Since student loans allow extra payments, you can use other windfalls, such as a bonus at work or a tax refund to make an extra loan payment.
- Use a budget:
Create a financial plan that includes ample room for your student loans. You don't want them to spiral out of control with interest so prioritize repayment and you'll see your debt decrease rapidly. If you are still young and wish to save money, consider taking money from your savings account to make periodic bonus payments on your loans. You should leave yourself a cushion for a rainy day but when you make as many as two extra payments per year you will see your debts decrease in short order.
- Pay higher than the minimum interest:
Your loan payments include a minimum interest payment. However, if you exceed that on a regular basis you can speed your loan repayment. If you budget your payments based on this higher than minimum payment, you will be effectively giving yourself a cushion for a month when you might want extra money, such as around the holidays. However, be mindful to always exercise fiscal prudence. If you make a minimum payment one month, find a way to make up for that shortfall in following months, or dedicate all of your bonus check or tax refund to your student loans.
- Apply extra payments to your principal:
Though sometimes you will incur a fee for making extra payments on a loan, investigate this option with your loan carrier. If you can make extra payments that reduce the principal loan amount you will save money in the long-term. That's because the interest you pay is based on the principal loan amount. When the principal decreases, so does the interest. Paying off interest is also a good idea, but that won't have the same long-term impact.
- Gain employment that offers repayment assistance:
Some volunteer efforts offer this as well: There is a small but growing number of employers who offer student loan repayment assistance. Some will kick in as much as $100 per month to help you pay down your student loans. Rather than using this as an offset to your normal monthly payment, add this benefit to your normal payment.
- Consolidate multiple loans:
Loan consolidation will help you simplify and even expedite your loan repayment plan. If you financed your education with loans from a mix of private and federal sources, you might find that each is charging a different interest rate and has different repayment terms. If you have a healthy credit score of 700 or greater, investigate consolidating these loans into a single payment with a uniform, hopefully lower, interest rate.
- Avoid repayment programs that lower your payment:
Lower payments may feel great in the short-term, but they will cost more in the long-term. So, don't fall prey to plans that entice you with lower monthly payments. Invariably these programs will lengthen the term of your loan and may possibly involve an inflated interest rate. If you can bite the bullet and make the higher payments, you will save yourself money and hardship in the long run.
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Strategies for Debt-Payment
Debt Snowball is an interesting approach to student debt repayment. The method asks that your organize your debt payments from smallest to largest. Then, you focus your primary efforts on the smallest debt. You will make minimum payments on every debt except for the smallest one, which you will pay more than the minimum. Thus, that smaller debt will be repaid faster.
You may need to take an extra job or fit in a side-hustle to generate the extra funds, but it will be worthwhile. You might see this as a negative feature of the Debt Snowball approach, but if you think with a long-term view, you'll see that all that extra money you put towards your smallest debt will make it soon disappear.
Once you've paid that smallest debt, you can apply the money that went toward it to the next largest on your list. This will require a bit of fiscal discipline, but if you immediately increase that next-largest payment, your budget will not know the difference. Eventually you will pay off all of your debts with the least possible impact to your budget and lifestyle.
It may seem intuitive to reverse the snowball effect and work on the largest debt first. However, this method takes longer for you to see progress. The Debt Snowball method is designed to start taking items off your list as soon as possible. Consider that, when you've successfully paid a debt or two, your credit rating will likely be higher, and you may be able to consolidate your debts. Thus, you can use smaller debts to reduce your long-term payments on larger accounts.
The Debt Avalanche is the opposite of the Debt Snowball. That is, rather than focusing on the smallest debt first, it begins at the top; and instead of focusing on how much you owe, you’ll focus on interest rates. You'll take the debt with the highest interest rate and focus on that one first. Even if it's the debt with the smallest principal amount; if you make minimum payments, it's the one that's most likely to spiral out of control. Once that high-interest debt is discharged, you can apply its payments to the next smallest loan.
To start the avalanche, make a budget that accounts for each debt's minimum payment. Then, allocate even more funds to the debt with the highest interest rate. The higher your monthly payment, the sooner you can begin to pay off the principal amount of the loan. To achieve this, you may need to pick up extra money from side gigs or even a part-time job. You will also need tremendous fiscal discipline.
This is seen by many as a severe disadvantage to this approach. However, if you find yourself in debt as a result of your normal income, its only reasonable to assume that you need additional income to dig out of that hole. Nevertheless, people at certain income levels may find this method untenable.
The chief benefit, however, is that once you've paid that high-interest debt, you can add its payments to lower-interest debts. Furthermore, your credit score should increase as a result of the discharge. A higher credit rating can help you consolidate and achieve lower overall interest rates. Thus, a bit of extra work and discipline can pay off in the long-term.
Continue to Live Like a Student
When you graduate from college and embark on your first professional job, you might want to rent a luxury apartment in the hippest part of town and wear only the most current fashions. However, you still have loads of student debt to take care of. Though your first job may pay more money than you ever saw as a student, if you stick to a student-sized budget you can eliminate your debt even faster.
Since one of the largest parts of a budget is usually housing, look for an apartment that's a bit farther from the main action. You might also look for roommates to split the rent on a larger home. Even more adventurous, you could find partners to go in on a home purchase. This way you can split a mortgage while gaining equity and long-term wealth.
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You can look for other ways to cut costs such as shopping budget grocery stores for your staples, only purchasing used clothing, and carpooling or using public transportation where available. If you can maintain your frugal college student mindset, your professional income will overflow your accounts, enabling ever-larger student loan payments.
Refinancing Loans with the Highest Interest Rates
If you've been making regular payments on your loans, have a high enough credit score, and have ample income, you can often refinance loans and reduce your interest payments. Refinancing a loan usually involves lowering the interest rate and thus the long-term cost of the loan, not to mention facilitating a faster repayment schedule.
First, you need to be approved for the refinancing. As is often the case in the world of credit, you need to be a faithful participant in the credit system. That means making regular, on-time payments that were either at or above the minimum required monthly amount. If you've run into trouble in the past, you can still regain your former status. Simply recommit to making full, timely payments on your high interest loans.
Once you have an established payment record, you should see your credit score increase. Remember that it's not a good idea to check your score too often, you should wait approximately a year into your regular payment routine before requesting a credit score. Though it may seem odd, too many score requests can damage your score. Although you can get a preview of your likely score by using a credit card that gives you access. Wait until your score is at or above the 700 mark.
When you have a solid credit score, healthy income, and a good payment record, initiate the refinancing process. If you don't yet have a job, make sure that you at least have a written job offer to show a credit counselor. When all of your fiscal ducks are in a row, seek out several lenders and apply to them for refinancing. Take your time amassing a list and submit your applications all at once. This should result in multiple credit-score queries. This is important because, if they are all posted within 30 days, the group will be counted as a single query.
Once you have successfully refinanced you debt, you will see up to $20,000 in long-term savings. This amount is even higher if you are carrying debt from medical or law school.