It’s easy to put off paying for your student loans, since some student loan repayment plans have repayment periods upward of 20, 25, and 30 years. However, if you don’t want to spend a few decades paying off your student loans, you can take steps right now to pay them off fast, including making payments while you're still in school, making larger and/or additional payments, and more.
- The more you pay while you’re still in school, the less interest will get added to your principal balance after graduation.
- Some student loan lenders offer discounts just for activating autopay, allowing you to reduce how much you’ll pay in interest over the life of your student loans.
- For borrowers with private student loans (or a mix of federal and private student loans), refinancing student loans pays off your existing loans, leaving you with one payment for the new refinanced loan.
1. Pay While You’re in School
If you’re currently a student, every little bit you can pay now will help you in the long run. If you can afford to chip away at your loans while in school, then you’ll owe less when you graduate. You can even make payments during your six-month grace period for direct subsidized, unsubsidized or Federal Family Education Loans (FFEL). The more you pay before your loans capitalize, the less interest will get added to your principal balance after you leave school.
2. Pay More Than the Minimum
Based on the size of your loan, your repayment plan will have a minimum amount that must be paid each month to pay off that debt within the repayment period. Making the minimum payment is enough to keep you on track with your repayment plan, but nothing is stopping you from paying more than the required amount each month. If you can add even just a few more dollars to your minimum monthly payment, then you could begin to shave months off of your repayment period.
For many loan servicers, paying extra may go toward your next month's payment, which includes principal and interest. Applying your extra money to your principal will pay off your loan faster as it diminishes that amount that is earning interest. To focus your efforts on your principal, check with your loan servicer. There may be a spot to apply extra money to principal alone.
3. Make an Extra Payment
Whether you come into a work bonus or get a nice tax refund, you can use a lump sum of extra cash to pay down your student loan debt. You can pay toward your principal to focus on lowering the overall amount you owe.
4. Activate Autopay
There’s nothing quite like “set it and forget it.” Some student loan lenders, including federal loans, offer autopay discounts, so you could lower how much you’ll pay in interest over the life of your student loans as a benefit for staying on track with your repayment period.
5. Stick to the Standard Repayment Plan, if You Can
When you leave school, you’re automatically enrolled in the Standard Repayment Plan, which is set to help you pay off your loans in 10 years. This is the fastest repayment plan available, and you’ll pay the least in interest over your repayment period. Compare this to income-driven repayment (IDR) plans, which have longer repayment periods of either 20 or 25 years (depending on the plan).
The monthly payments for income-driven repayment (IDR) plans are typically set as a percentage of your discretionary income, whereas the Standard Repayment Plan is based on your outstanding loan balance divided by 10 years. As a result, each of the Standard Repayment Plan’s 120 payments is the same every month, whereas IDR plans can change annually based on family and income changes.
6. Tap Into Employee Benefits
Some jobs and companies offer matching student loan repayment benefits. They’ll match your payments every month, up to a certain amount. Employers can offer employees up to $5,250 per year in tax-free student loan repayment benefits through 2025. Not every company offers student loan repayment matching, but you may want to ask your employer if they have any special benefits like this. It could help you pay off your loans much faster.
7. Find a Secondary Source of Income
If you’re struggling to find extra funds to put toward paying down your student loans, consider turning a hobby into a source of additional income or use your extra time to get involved in the gig economy. You could deliver groceries, walk dogs, sell homemade creations online, etc. If your primary source of income is used to pay your other bills, then you can use your secondary source of income to chip away at your student loan debt. Just be mindful—jobs that are considered 1099 contractor status do not have taxes taken out. You'll have to set aside money from each paycheck or face a hefty tax bill at the end of the year.
8. Revise Your Budget
If you’ve made a budget that only has you making the minimum monthly payment, you will most likely take longer to pay off your debt. If you have the means, change your budget to focus on paying off your student loans faster. That might mean less money going toward other things, such as dining out, traveling, or shopping. Freeing up those funds means you can devote more money toward paying down your student loans.
9. Check Tax Deductions
The student loan interest deduction lets borrowers claim up to $2,500 in student loan interest payments from last year, depending on their modified adjusted gross income (MAGI). You don’t need to itemize deductions to claim this, and it’s available for federal and private student loans. You then put this tax deduction toward paying down your student debt even further. There might be other deductions and credits for which you’re eligible. Keep in mind that the student loan interest deduction is gradually reduced and eventually phased out for higher-income taxpayers.
For the 2023 tax year, the MAGI phaseout for single, head-of-household, or qualifying widow(er) filers begins at $75,000 and ends at $90,000. If you are married and filing jointly, the MAGI phaseout begins at $155,000 and ends at $185,000.
10. Look Into Refinancing
If you have private student loans or a mix of federal and private student loans, you may want to think about refinancing your student loans. Refinancing means you’ll take out a new, private loan that pays off your existing loans, and then you’ll make one payment to your new, refinanced loan. Make sure you can get a lower interest rate than what you’re paying now and craft your repayment plan around what you can reasonably afford. There are several student loan companies for refinancing to choose from, each with different benefits and interest rates.
Remember that you lose all federal benefits and protections when you refinance, such as Public Service Loan Forgiveness (PSLF), Saving for a Valuable Education (SAVE) eligibility and deferment and forbearance options. Only take this route if you don’t plan to use federal benefits.
What Is the Smartest Way to Pay Student Loans?
Perhaps the smartest way to pay off your student loans (as well as one of the fastest) is to pay more than your minimum payment. As you reduce the principal balance of your debt, the amount of interest that you’ll owe over the life of the loan also decreases.
Is There a Downside to Paying Off Student Loans Early?
There can be a downside to paying off your student loans early. Although student loans do charge interest, compared to consumer credit cards, that rate is fairly low. If you prioritize paying your student loan over paying down higher interest debt, you may end up paying more in the long run. Eliminating your student loans will also reduce the diversity of your credit mix. In the months immediately afterward, you may see a dip in your credit score, but it will quickly return to normal as you continue to make other debt payments on time.
Can You Negotiate Student Loan Payoff?
While it's entirely possible to negotiate a student loan settlement, this possibility won't be an option for everyone. For one, some lenders will be unwilling to accept a debt settlement. If your lender is open to negotiating, then your loans will likely have to be either severely delinquent or in default before a settlement would even be considered. Additionally, if you do manage to secure a debt settlement, this will likely hurt your credit score, and the forgiven debt will be taxed as income.
The Bottom Line
Paying back your student loans might feel overwhelming, but there are a few different ways that you can pay them off sooner. Set clear goals, revise your budget, and take advantage of employer benefits and educational tax breaks.
The more you focus on paying off your student loans right now, the more money you’ll have for yourself once you do.
As an expert in personal finance and student loan management, I've navigated the intricacies of student loans, repayment plans, and financial strategies to empower individuals in their journey towards financial freedom. My extensive experience in this field allows me to provide practical insights and evidence-based recommendations to help you make informed decisions about paying off your student loans efficiently.
Now, let's delve into the key concepts discussed in the article:
Pay While You’re in School:
- Making payments while still in school can significantly reduce the interest that accumulates on your principal balance after graduation.
- Payments during the grace period for direct subsidized, unsubsidized, or Federal Family Education Loans (FFEL) can further minimize the interest.
Pay More Than the Minimum:
- Repayment plans have a minimum monthly amount, but paying more than the required minimum can accelerate the payoff process.
- Additional payments can be applied to the principal, reducing the overall amount subject to interest.
Make an Extra Payment:
- Lump-sum payments, such as work bonuses or tax refunds, can be used to make extra payments toward the principal, speeding up the loan repayment.
- Autopay discounts offered by some lenders, including federal loans, can reduce the total interest paid over the loan's life.
- Setting up autopay ensures timely payments, potentially earning you additional benefits.
Stick to the Standard Repayment Plan:
- The Standard Repayment Plan, set for a 10-year period, minimizes the total interest paid compared to income-driven repayment (IDR) plans with longer repayment periods.
- Monthly payments are fixed, simplifying budgeting compared to IDR plans that may fluctuate annually.
Tap Into Employee Benefits:
- Some employers offer matching student loan repayment benefits, contributing to your payments up to a specified amount.
- Up to $5,250 per year in tax-free student loan repayment benefits may be provided by employers through 2025.
Find a Secondary Source of Income:
- Exploring secondary income sources, such as gig economy jobs or turning hobbies into income, can provide additional funds for loan repayment.
- Caution is advised for 1099 contractor status jobs, as taxes may not be deducted.
Revise Your Budget:
- Adjusting your budget to allocate more funds towards loan repayment can accelerate the payoff process.
- Sacrifices in discretionary spending areas like dining out or traveling may be necessary.
Check Tax Deductions:
- Utilize the student loan interest deduction, allowing borrowers to claim up to $2,500 in interest payments, potentially reducing the tax burden.
Look Into Refinancing:
- Refinancing private or mixed federal and private loans involves obtaining a new loan with a lower interest rate, consolidating existing loans into one payment.
- Caution is needed as federal benefits and protections, such as Public Service Loan Forgiveness (PSLF), are forfeited.
Remember, the smartest way to pay off student loans involves a combination of these strategies tailored to your financial situation. While paying off loans early is beneficial, consider the potential downsides and explore the options that align with your overall financial goals.