Many people dutifully make their student loan payments every month, only to feel like they’re progressing slowly — or not at all — toward debt freedom.
That could be due to the fact that when paying down student loans, much of your hard-earned money goes toward interest. To really make a dent in your balance, you’ll want to pay more than your required payment each month — but also to do so strategically, and perhaps in combination with other methods, like refinancing.
Here are 7 ways to pay off your student loans fast:
1. Understand how interest works
2. Talk to your loan servicer about your payments
3. Consider refinancing your student loans
4. Focus on earning more
5. Look into a federal direct consolidation loan
6. Set up automatic student loan payments
7. Make lump-sum payments whenever you have extra funds
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1. Understand how interest works
The first step to paying down student debt quickly is to understand how student loan interest works.
Lenders collect interest from you in exchange for borrowing money. It’s calculated as a percentage of the amount borrowed, and on federal student loans, for instance, interest accrues daily.
To better understand how interest works, here’s an example. Let’s say you have a $50,000 federal student loan with an APR of 7%.
To find out how much interest accrues per day, use this formula:
(Interest rate) x (current principal balance) ÷ (number of days in the year) = daily interest
Here’s how the example looks using the formula above:
(.07) x ($50,000) ÷ (365) = $9.59
This shows you are being charged close to $10 per day just in interest. In a 30-day month, with this example, you’ll pay $287.70 in interest. That means if you make a monthly payment of $500, only $212.30 is going toward the principal.
Private loans may calculate interest differently. Your private loans may also come with variable interest rates, which can change over time, rather than a fixed rate.
Ultimately, it’s important to look at your repayment history to see exactly how much the lender applies to interest and how much it applies to the principal balance.
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2. Talk to your loan servicer about your payments
Make sure you also understand how your loan servicer distributes your payments. For example, if you make an extra payment and have multiple loans managed by the same company, the way that payment is applied depends on your loan servicer. The company may put the extra toward the highest-interest loan, or it may apply it to a future monthly payment.
But if you want to get out of debt fast, paying off high-interest loans first is the best route.
For example, let’s say you have a federal undergraduate loan with a 4.53% interest rate and graduate loans with 6.08% and 7.08% interest rates.
Focus on paying off the 7.08% graduate loan first. That’s because it’s currently costing the most in interest per month.
If it’s not clear how to designate your loan payment to a specific loan on your servicer’s online portal, discuss your options with the company. Provide instructions in writing if necessary.
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3. Consider refinancing your student loans
Student loan refinancing could help you cut down on interest, and making it easier to pay off loans faster, especially if you have private student loans. Here’s why:
- Private student lenders often charge higher interest rates than what you’d get with federal student loans.
- Your interest rate may be variable, meaning it can increase over time. Refinancing gives you the option to switch to a fixed rate.
- Refinancing federal loans turns them into a private loan, and you’ll no longer be able to take advantage of certain federal loan benefits. But your private lender may have limited deferment, forbearance, payment reduction or forgiveness programs, meaning you have less to lose by refinancing.
If you have both federal and private student loan balances, be sure to first assess whether you should refinance your federal student loans. Consider the following:
- Do you qualify for one of the several federal student loan forgiveness programs? If you refinance, you’ll lose your eligibility.
- Do you plan to use special federal repayment plans like income-based repayment? Few private lenders offer these options.
- Will you save money? Depending on the type of federal loan, you may already have a low, fixed interest rate.
To get started with refinancing, explore multiple lenders and find the best rate for you. Many companies give prospective borrowers the option to get an interest rate quote without submitting a full application, which can help you compare offers.
Use a refinancing calculator to calculate how much you could likely save, which can help you decide whether refinancing is a smart choice based on your circumstances.
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4. Focus on earning more
Making additional payments toward your loans can be difficult if the majority of your discretionary income is already going toward them. But one way to pay down loans faster is to focus on earning more money.
Consider starting a side hustle, getting a part-time job or selling items you no longer use. Commit to putting any extra money you make toward debt.
Working extra might sound difficult now, but think of it as a temporary solution so you can make progress on your loans. Celebrate when you hit key milestones, like paying off individual loans or getting your balance down to a certain threshold, to keep yourself motivated. Use a prepayment calculator to see just how much time and money you can save by adding a little more to your payments each month.
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5. Look into a federal direct consolidation loan
If you have multiple federal student loans, look into combining them into a single direct consolidation loan. Consolidation can make your loans easier to manage, organize and repay by giving you one monthly payment from a single servicer.
Note, however, that consolidation may leave you with a longer repayment term, which could mean a lower monthly payment, but more interest charges overall. If you’d like to use it as a strategy to pay off loans fast, consolidate federal loans to streamline bills — then put extra money toward your payment each month to get rid of the balance.
In order to qualify for a direct consolidation loan, you must have at least one direct loan or Federal Family Education Loan (FFEL) that is in repayment, deferment or default status, or in its grace period. In-school loans are not eligible.
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6. Set up automatic student loan payments
Setting up automatic student loan payments has multiple benefits that will help you pay down your balance faster. First, many lenders offer an interest rate reduction of 0.25% in exchange for having autopay in place. While a fraction of a percentage point may not sound like much, you will save money over time and a greater portion of your monthly payments will go toward paying off your principal.
Automatic payments will also help you ensure you pay your bill on time, every single month. That’s important for keeping your credit strong; payment history is the biggest contributor to your credit score, which helps determine whether you may qualify for loans or credit cards in the future.
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7. Make lump-sum payments whenever you have extra funds
There may be times when you have more money in your pocket than usual, like when you receive a tax refund or a year-end bonus. Consider applying at least some of that cash to your student loan balance.
As is true when making additional payments through other methods, this ensures that more money than usual will go toward your principal. Use a lump sum extra payment calculator to get a sense of just how big of a difference that larger-than-normal payment will make.
Having a student loan balance is no fun, especially when it feels like so much of your money is going toward interest. But with a plan of action, you can start to tackle your student loans and make progress.
Tara Mastroeni contributed to this article.
This article originally appeared on StudentLoanHero.com and was syndicated by MediaFeed.org.
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