According to the personal finance website Make Lemonade, there are more than 44 million people who collectively owe $1.5 trillion in student loan debt.
What’s the best way to pay off student loans?
Here are your four best strategies to slay your student loans for good.
1. Refinance Your Student Loans
Your best bet to pay off your student loans fastest is to refinance student loans.
Student loan refinancing allows you to combine your existing federal and private student loans into a new, single student loan with a lower interest rate.
You can choose a fixed interest rate or variable interest rate, and flexible loan terms ranging from 5-20 years. With student loan refinancing, you will make one monthly payment and have only one student loan servicer.
You can refinance federal student loans, private student loans or both. You can check your new interest rate online for free within two minutes and no impact to your credit score. You can also apply online.
To get approved, you typically need to be employed (or have a written job offer), have some work experience, a strong credit score and income, and a history of financial responsibility. When you refinance federal student loans, you do give up certain benefits such as forbearance and deferral.
However, many lenders now offer some form of employment protection and other hardship benefits if you later lose your job or can’t afford your payments.
Let’s look at an example with this student loan refinancing calculator. Let’s assume you have $100,000 of student loans at 8% payable over 10 years, and you can refinance those student loans with a private lender at 3%.
With student loan refinancing, you would lower your student loan monthly payment by $248 and save $29,720 in total.
2. Consolidate Your Student Loans
With federal student loan consolidation, you combine your existing federal student loans into a single Direct Consolidation Loan.
Unlike student loan refinancing, federal student loan consolidation does not lower your interest rate or monthly payment.
Rather, student loan consolidation helps you organize your federal loans into a single student loan with a single monthly payment.
With a Direct Consolidation Loan, your resulting interest rate is a weighted average of your existing student loans, rounded up to the nearest 1/8%. Therefore, your student loan interest rate could increase slightly with student loan consolidation.
3. Increase Your Monthly Student Loan Payment
Wait, increase my monthly payment?
At first glance, this may sound expensive and not practical for many. However, it’s one of the best strategies to pay off student loans faster.
For example, if you can increase your monthly student loan payment by even $100 per month, you can save significantly on interest costs over the long-term.
With this student loan prepayment calculator, let’s assume that you have $100,000 of student loans at an 8% interest rate with a standard 10-year repayment term.
By paying $100 more per month, you can save $5,554 in interest costs and pay off your student loans 1.08 years earlier. Here is how much time and money you can save if you increase your student loan payment by the following monthly amounts:
- Extra $200 / month: $9,871 total savings (1.92 years earlier)
- Extra $300 / month: $13,325 total savings (2.67 years earlier)
- Extra $400 / month: $16,157 total savings (3.25 years earlier)
- Extra $500 / month: $18,521 total savings (3.75 years earlier)
4. Make A Lump Sum Payment
If you are not able to make a higher monthly payment (or if you have enough funds to pay extra), you can make a one-time, lump sum extra payment on your student loans.
Make sure to instruct your student loan servicer in writing that any extra payments should be applied to the current monthly payment (not a future monthly payment).
If you have credit card debt or a mortgage that has a higher interest rate than your student loan debt, then paying off the higher balance loan may make better financial sense. Similarly, you could use those funds to contribute to a retirement plan and invest to earn a higher return than the cost of your debt.
Here is a recap:
1. Student loan refinancing = lower your interest rate, payoff student loans faster
2. Federal consolidation = same interest rate, organize your student loans
3. Higher monthly payment = same interest rate, reduce principal
4. Lump-sum payment = same interest rate, reduce principal