Personal Finance

How to Pay Off Student Loans in 5 Easy Steps

erasing student loansThere’s an old saying: “If you think education is expensive, try ignorance”. Yeah well, ignorance doesn’t charge 7.9% interest and that’s the current rate of most student loans right now. Millions of college kids around the country are graduating this summer and many of them will join the ever-increasing number of Americans who will be saddled with thousands of dollars of student loan debt for the next five to ten years, or even longer.

Carrying student loan debt can be some of the most difficult to pay off, particularly because of interest rates cutting into the money you’re trying to pay back on the initial principal. That debt isn’t doing your credit rating any favors either (especially if you miss a payment) and it’s going to be an albatross around your neck until it’s fully and finally paid off.

I know what you’re thinking, easier said than done. You’re right, it’s not a simple proposition by any means and as these college students become young professionals in their chosen fields the challenge of wiping out this debt often results in living paycheck to paycheck and many graduates may face the reality that one job won’t cut it. So they may have to get a second job on the side if they hope to get ahead, or even just hope to move out of their parent’s house and be out on their own.

The other option often pursued is debt refinancing which can be both a benefit or a disadvantage depending on the situation. But before taking any action in one direction or another, you need to really do a clear evaluation of your financial picture and the amount of debt you need to wipe out. You may be buried under other forms of debt as well, such as credit cards or maybe even medical debt, and these can also have a significant impact on your ability to pay off your student loans.

But don’t worry if one or all of these concerns sound like something you lie awake at night pondering until the wee hours of the morning because there is hope for you yet; you do have some options to help you clear out that student loan debt once and for all. It’s going to be hard work and you may not pay it all down in a year or two but getting on the road now will get you to your debt-free destination a lot sooner.

Paying Early

After all of that preamble, the first heading you’re seeing is about paying student loan debts off early — but stick with me here. The truth is paying off early is the best and quickest way to get out from under your student loans and it can save you a lot of money, particularly if you’re working with that 7.9% interest rate. For some students, this is a distinct possibility because they didn’t borrow very much and what they still owe reflects a dramatically smaller number than the average.

Now if you happen to be one of the lucky ones who can get this done, wait a second. It’s a good idea to do so but only under certain circumstances, mainly through taking into consideration the other debt you may be wrestling with at the moment. For example, let’s talk about credit card debt. How much do you have and is it a more onerous amount than your student loan? Think about your interest rates, if you have a student loan with a rate of around 7.9% and you have credit card debt accruing at a rate of 29.99% then you are most certainly going to want to take care of that credit card bill first.

Another factor to keep in mind before you pull the trigger for early pay off is the type of student loan that you are working with currently. Is it a private loan or federal? This can play a big role in whether or not to pay early (and paying it off in general) because it comes back around to your rate once again. Student loans are considered an installment arrangement, in that you’re making monthly fixed payments, and federal student loans come with a fixed rate that won’t increase. If you’re paying off a private loan from a bank or other lending facility, then you may be subject to a variable rate which can increase in the future and you’ll be paying more on the interest. If you have both types of loans, then it will behoove you to pay down the private loans first before you pay off the federal.

So keep this in all in mind if you are debating an early pay down of your student loan (or loans). The money you save could be substantial when you’re not worried about the interest hanging over your head, even if those payments are tax-deductible. But it may not be worth carrying your loan just to enjoy the tax break. You want to be debt-free as fast as possible.

1. Refinancing Your Loans

If you have loans at rates that are just eating up most of your payments every month without paying down much on the initial principal, then you may want to consider refinancing your student loans. But this choice isn’t the best option for everyone. The main reason to explore refinancing is to reduce your monthly loan payments and reduce your rate so you ultimately pay less in interest over the full term of the loan. For some people, refinancing makes a lot of sense whether or not their loans are federal or private but there are a few things you should be aware of before you decide to go down this road.

To begin with, federal loans bring with them certain protections that you would be giving up should you refinance them with a private entity instead. Payment flexibility is one of the biggest advantages to keeping a federal loan because borrowers have the ability to readjust their payment schedules for whatever reason that may come up.

There are four types of repayment plans that are offered: standard, graduated, extended and income-driven, and if you are currently borrowing on a federal student loan then you are likely well aware of the differences between them. What’s advantageous about these plans is that they afford you the ability to switch from one to the next in the event you experience some financial changes, either good or bad, in your life during the term of the loan. One plan may make sense for your financial situation at one time, while another may be more beneficial to you later on. You can move from plan to plan at your discretion, but be careful – moving around too often might actually be detrimental to your long-term goal of paying off this debt as one plan may only cover the interest without putting much of a dent in the principal versus another that requires you to pay more per month.

Another factor that bears discussion is the capacity for loan-forgiveness that you can only receive from the government. There are some restrictions that come with these options, but if you qualify you could enjoy the benefits of having your debt drastically reduced or “forgiven”. If you refinance your debt into a private loan, you will forfeit that claim in the event you become unemployed or experience some other type of financial hardship. So refinancing may not be something you want to explore if you have a federal loan, even at a slightly higher rate than what you would receive elsewhere.

Conversely, if your financial situation is stable for the foreseeable future and you don’t feel the need to make use of the different payment flexibility plans that come with federal loans, then you may want to seriously explore the possibility of refinancing. However, if you’re working with high interest rates on a private loan then those options are irrelevant since most private lenders don’t offer much in the way of flexibility and they certainly don’t provide you with any forgiveness opportunities. Some of them do, however, provide you with unemployment protection.

bank2. Finding the Right Lender

Should you decide to go the refinancing route, you need to do some homework first on the best lender for your loan. There are a litany of banks, online and otherwise, that are eager for your business and selecting the right one is going to help you make the most of your decision to refinance. But there are a lot of components that come into play when seeking the right bank and some lenders may be more willing to work with you than others based on your particular financial circumstances.

When looking for a lender the first place to start is with their rates. If you are paying somewhere around 8% on your current loan, then finding a lender who offers rates in the ballpark of 3% to 6.75% is going to benefit you greatly by keeping more money in your pocket over the course of the term. That’s not all you need to be cognizant of either in making your choice, however.  While most lenders in the marketplace try to remain competitive with one another where their rates are concerned, they provide a variety of terms and conditions among them that might make one lender more attractive than another. Many lenders have similar requirements of prospective clients in order to meet their underwriting criteria.

So making the best choice often relies on that extra additional benefit that the other guys just don’t have. Some of the bigger lenders not only have good to great rates, a range of terms for repayment that can be as little as five to as many as twenty years, and no origination or application fees, but they also offer various discounts and no minimum income requirements. Qualifying for a refinancing loan from any lender is going to be dependent upon a number of factors, most of which are commensurate with standard industry practices. When you apply, you will be evaluated by your credit score, savings, annual income, and most importantly, the type of degree you earned in college (or if you are still in school, your enrollment and degree being pursued). Under these assessments, the lender will determine if you are eligible for a refi or consolidation of your current student loans.

If you do not make the cut based on your information, you’re not entirely out of luck as some of these lenders are willing to work with co-signers. It also helps if you are or were part of a bachelors or graduate degree program in a certain field, such as medical, legal, or engineering. These academic backgrounds often have an easier time of it when the credit score isn’t getting the job done.

3. Negotiating with Your Employer

This step is going to be useful whether you decide to refinance or stay with your loan payments at their current rates and terms. Student loan debt is sometimes looked upon by employers as a necessary component of education and many of them are willing to help you out as part of your compensation package with the company. But don’t think that your boss or anyone in accounting or HR is going to just come up to you one day and ask to help you pay off your outstanding college debt. This is a conversation you will have to initiate for yourself and that can be a tough nut to crack for some people, especially if they’ve just snagged their first big job after graduation.

Negotiating for such a component to your compensation may have you feeling uncomfortable, but there are smart ways to go about this sensitive conversation. If you have a background in some fields that require a specialized degree, particularly in the technology and finance sectors or the medical field, then you may have a much easier time of achieving success. Recent graduates finding their first gig can incorporate this discussion into their salary negotiation by willing to make some concessions of their own, namely taking a reduced annual salary for the time being and making a commitment to a specific period of employment with that company. That way, your employer will feel like he or she is getting real value in exchange for paying off your debt.

You may get better luck with this benefit at a larger corporation but certain midsize entities might also be willing (and perhaps even eager) to make this compensation arrangement with you because it would actually cost them less in salary paid out to you over the long term. So just keep that in mind if you decide to take this step towards paying off your student loans, don’t view it as you asking them to do something out of the ordinary. Instead, think of it as contributing to the health of the company’s bottom line. You’re not even a full fledged employee yet and you’re already helping them save money! They might just see it the same way and agree to your terms.

What’s really beneficial about paying off your student debt this way is that, while you’ll be getting less in salary, you won’t have those interest rates hanging over your head anymore and you’ll be saving money in the long run by no longer having to contend with that loan balance accruing each month. This will really be useful if you’ve been having trouble paying down the principal after the interest rate has eaten up most of your monthly payments. So give it a shot, the worst thing they can do is decline the proposal. But this is one of the most overlooked methods towards paying down student loans and more people should know about it. Now you do.

4. Budgeting

Any major financial challenge requires a proper budget and it’s no different with paying down your student loans. It starts with getting a clear picture of your financial situation across the board and determining how much you have coming in compared to what you owe. So have a seat and start making a list of what you’re working with on a month to month basis. Get a picture of what your monthly expenses look like along with your student loan payments. This analysis will help you get on the road to budgeting your money properly and allow you to set up at least the minimum monthly payment to put towards your loan or loans.

Your lenders have likely given you monthly minimums that are already due on your balances so tallying them up into one lump sum for budgeting purposes can provide a more realistic picture of what you’ll need to come up with every month. Paying the minimums alone is a good start but it’s the least you can do, if you have the resources available you may consider trying to up your monthly minimum payment within your budget to go slightly above what the lender mandate amounts might cost. Obviously, the quicker you pay these off the better. If you have just the one loan, then this will be much easier to budget for in addition to your other monthly expenses.

But also keep in mind the terms and conditions that come with your loans when you’re budgeting for repayment. You may want to allocate more of your money towards paying off those loans with higher interest rates and more restrictive terms. Prioritizing your finances can then help you take the next step towards a smoother process for repayment. That way if you get a windfall of revenue or some extra money from a gift or some other source, you can allocate those additional funds accordingly towards your repayment strategy.

dont be late envelope5. Automating Your Payments

This is another often overlooked method towards paying off student loan debt. Many lenders are willing to lower your interest rate if you sign up for automatic bill payment. This can be a double-edged sword for some borrowers. On the one hand you don’t need to worry about making sure you remember due dates and sending payments in as they are automatically and immediately deducted directly from your banking account each month. Combine that with the lowered rates and it sounds like a great idea.

On the other hand, if you’re having trouble scraping together the necessary funds just to make sure those auto-deductions go through, then you’re going to need to be monitoring your account closely to ensure those payments are made and you have enough in your checking account every month. But automated payments can also be helpful in effective budgeting as it will make you adhere to that budget more closely. After all, being late with a payment is only going to add fees and penalties to your balance and that’s only going to make things worse. So consider automating your payments and you’ll see you’re out of this hole much quicker.

Our Final Thoughts

This may all seem overwhelming at the moment, but you can get out from under your college debt. It’s going to take some dedication, some sacrifice, and some homework to determine the right path for paying off your student loans. These steps are just a few of your options, there are many others you could explore. Getting additional revenue from a side job or business alongside your main form of employment will certainly be of benefit from the extra cash coming in.

But what it really requires is the right kind of prioritization and a clear commitment to wanting to get out of debt. Whichever way you do it is up to you, but it starts with coming up with a plan and adhering to it until you reach your goals. These steps should help you do just that.

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