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How to pay back your student loans

Your grace period is almost over and soon you'll have to pay back your student loans. Here is every possible way you could do that.

Paying off student loan debt may seem like a small step on your financial path – but for some people, it’s a lengthy journey all on its own. A 2013 survey found that the average borrower took over 20 years to pay back their loans.

If you’d like to become debt free in your 20s, you’ll need a plan that takes into account your personal circumstances and all available repayment options. We’ll help you come up with the best strategy in the article below.

Pros and cons of paying off student loans early

Pros

  • Save on total interest
  • Remove the psychological burden of student loans
  • Make it easier to qualify for other loans

Cons

  • May earn more money by investing extra funds
  • Can delay other financial and personal milestones
  • May miss out on future loan forgiveness opportunities

How to pay off student loans early

Paying off your student loans early is just like paying off any other debt. You’ll need to get your information together so you  know you what you’re dealing with. Then you’ll choose a loan to focus on and start paying them off one a time, paying as much extra as you can.

Two things that can make the pay off go even faster are lowering your interest rate on private loans and increasing your income. Lower interest rates means more money goes to your balance and more income will mean you can make larger payments.

Organize your loans

If you recently graduated and don’t know how to find your student loan information, log onto the Federal Student Aid (FSA) website to locate your federal loans. You will need your FSA ID and password. If you don’t remember your username or are having trouble logging in, contact the FSA at 1-800-433-3243.

The FSA website will only list your federal loans. To find your private student loans, check your official credit report from all three credit bureaus at www.AnnualCreditReport.com. Your credit report should list any private student loans taken out.

Before you start throwing extra money toward your student loans, you should figure out how much you owe. Open a spreadsheet and write down the following information for each loan:

  • Lender name
  • Monthly payment
  • Interest rate
  • Total loan amount
  • Federal or private loan

Having all the information in one place will help you determine the most efficient debt payoff strategy.

Research loan forgiveness options

If you have federal student loans, you may be eligible for several loan repayment and forgiveness programs. Taking advantage of these programs can help you pay less each month while also saving on total interest.

The Public Service Loan Forgiveness (PSLF) program will cancel any remaining balance after 120 monthly payments while working for an eligible nonprofit or government organization. Borrowers must be on an income-driven repayment plan during that time to qualify for PSLF, so their monthly payments will be lower than normal.

There are also many loan repayment programs geared toward professionals in the healthcare and legal fields. You can have tens of thousands of loans forgiven in exchange for working in an underserved community for a few years.

Choose a loan repayment strategy

If you want to pay off your loans ahead of schedule, you can choose between the debt snowball or debt avalanche method.

The debt snowball method involves paying extra on the loan with the lowest loan balance. Once that loan is paid off, you will add extra money to the loan with the next smallest balance. The debt snowball method has been proven to be more motivating to borrowers.

The debt avalanche method means adding extra to the loan with the highest interest rate. Once you pay off that loan, you will focus on the loan with the next highest interest rate. The avalanche strategy will result in saving the most money on total interest, though it may take you more time to repay individual loan balances.

Refinance private student loans

Borrowers with private student loans may be able to refinance those loans to a lower interest rate, saving them more interest in the long run. Start by comparing your current interest rates to overall market rates. If your rates are higher than what other lenders are offering, it may be time to refinance.

If you have multiple private loans with high interest rates, you may be able to refinance all of those loans into one loan with the same lender. This will also simplify repayment.

Borrowers with federal student loans should think twice before refinancing, as those loans will then be converted into private loans. Once you refinance federal loans, you will lose all the perks and benefits like income-driven repayment plans, loan forgiveness programs and long deferment and forbearance options. It’s best to leave federal loans as they are.

If you need to refinance your private student loans here’s our list the best companies for student loan refinancing.

Make extra payments correctly

When making extra student loan payments, it’s important to ensure that these funds are being diverted correctly. Some lenders will take the extra funds and apply it to the next monthly payment instead of adding it to the principal.

Contact the lender and ask them how to ensure your extra payment will go toward the principal. Then, double check each month to verify that your payment has been applied correctly.

Find ways to earn more money

If you can’t afford to pay extra on your loans and want to, it’s time to evaluate your budget. But as inflation continues to plague regular Americans, cutting expenses may not be enough. Getting a side hustle or increasing your salary may be the only way to funnel more money toward your loans. Here are some ideas for how to make extra money.

What about Biden’s student loan forgiveness program?

There have been a lot of headlines over the past two years about the Biden administration’s plan to forgive over $400 million in federal student loans. Unfortunately, the Supreme Court shot down Biden’s student loan forgiveness plan.

There is some relief available, however, under the new SAVE plan which can reduce student loan payments for qualifying borrowers.

Summary

Paying off your student loans early may seem like the best financial decision you can make – but don’t do it at the expense of your other life goals. For example, if you want to buy a house, you will have to save for a down payment. If you want to quit your job and become self-employed, you may need some start-up funds.

Also, don’t forget to invest for retirement while paying off your loans. The power of compound interest means you can reap huge rewards when you start investing early. You should also have a substantial emergency fund in place before you pay extra on your loans. This will prevent you from having to take on more debt if something unexpected happens.

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