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Student Loans

How to Pay Off Student Loans Faster

Tired of putting all your extra income toward your student loans every month? There are ways to pay off your student loans faster and save a bundle in interest—and free up your cash for other financial goals.

You can pay off your student loans more quickly using several strategies, from making payments while still in school to adding extra to your monthly payment. Loan refinancing can also lower your interest rate and eliminate the balances quicker. Here's what to consider when trying to fast-track your student loan payoff.

Choose the Right Student Loan Repayment Plan

If you have federal student loans, your loan servicer will enroll you in a repayment plan when it's time to begin making payments. If you don't choose another option, you'll be placed on the Standard Repayment Plan, which comes with a 10-year term and fixed monthly payments. You'll typically pay the least over the life of the loan with this plan.

There are other repayment options available, however, which can help make student loan payments more affordable:

  • Graduated Repayment Plan: This plan also has a 10-year term, but starts with lower payments that increase every two years.
  • Extended Repayment Plan: This plan gives you up to 25 years to repay the loan, but you must have at least $30,000 in federal student loans to qualify.
  • Income-Based Repayment Plan: Repayment on this plan is 10% or 15% of your discretionary income per month over up to 25 years, after which the loan is forgiven.
  • Income-Contingent Repayment Plan: Payment is 20% of your discretionary income or the amount you'd repay if you had fixed payments for 12 years, whichever is less. Any amount left over after 25 years is forgiven.
  • Revised Pay As You Earn Repayment Plan: Payment is 10% of your discretionary income for up to 25 years, after which the loan is forgiven.

While the idea of eventual loan forgiveness may be appealing, keep in mind that any amount forgiven as part of an income-based repayment program is considered taxable income.

You can also request a different repayment plan if your financial situation changes, which could help you pay off your loan faster. It's not a simple process, however, so try to choose a repayment plan you think will work for you long term. If you're looking to pay off your loans as quickly as possible and are able to make the payments, a standard repayment plan is the best choice.

Private student loans are not eligible for alternative student loan repayment plans. You will need to contact your loan provider to inquire about repayment plan options.

Start Paying Off Your Loans as Soon as Possible

Student loan interest starts accruing the day you receive the funds. But by starting the payments before they're due, you can effectively lower the amount that you'll have to pay.

If you have a subsidized federal loan, the federal government will take care of the interest payments while you are enrolled and for up to six months after you leave school or graduate. Making payments during this time will reduce the principal loan amount that's used to calculate interest. To illustrate, say you borrow $30,000 and make payments totaling $5,000 before your first payment is due. You will only pay interest on $25,000 when the repayment period begins.

In the case of an unsubsidized loan, the interest is your responsibility from the day the loan hits your bank account. You don't have to make payments until your enrollment drops below half-time or until the six-month grace period after you leave school ends. It's still a good idea to pay at least the interest that accrues before your first payment is due, though—otherwise it will be added to your loan principal, or capitalized, and begin accruing interest.

Private lenders have different policies for assessing student loan interest. Some charge interest from day one, and others wait until students leave or graduate. Either way, it's a good idea to start repaying your loans as soon as you can to reduce the principal balance or interest if it's tacked on while you are in school.

Pay More Than the Minimum Each Month

If you can manage, it's a good idea to make more than the minimum payment each month. Any extra funds you pay throughout the month or include with your monthly payment will help you save on interest and pay off your loans faster.

To illustrate, assume you have a 10-year, $15,000 student loan with a fixed interest rate of 6%. Your monthly payment will be $166.53, and you will pay $4,983.69 in interest over the life of the loan. If you decide to pay an extra $75 per month, you will pay off the loan in a little over six years and save $1,977.64 in interest.

Be sure to tell your loan servicer that you want the extra amount added to the current month's payment. This will ensure the additional funds reduce the principal of the loan. Otherwise, the lender will apply the funds to the following month's payment.

Look at Consolidating Your Loans

Simplify the repayment process by consolidating your federal student loans into a direct consolidation loan. It rolls all your outstanding balances into a single loan product, though your interest rate will be an average of what you're already paying.

However, the loan term is stretched to 30 years, which could lower monthly payment but increase overall loan costs. If you want to pay off your loans faster, you can increase the amount you pay each month.

Consider Refinancing if Your Credit Has Improved

If your credit is in good shape, you may be able to refinance your student loans to get a lower interest rate and pay down the balances faster. For example, let's say you owe $30,000 on your student loans and have seven years left to make payments. If your current interest rate is 7% and you reduce it to 5% by refinancing, you will save $2,416 in interest.

Lenders will check your credit and confirm you have a steady income source before approving you for a new loan. Many lenders offer a prequalification tool on their website that allows you to check your interest rate without submitting a formal application. It won't impact your credit score since a soft inquiry is generated, and you can get an idea of the loan terms you may qualify for.

You can also bring a cosigner, such as a family member, on board if your credit score is a little low but you can afford to make the loan payments. Your cosigner will need to meet the credit and income criteria and agree to make loan payments if you default on the loan agreement.

Keep in mind that you will lose access to perks, such as deferments, forbearance, income-driven repayment plans and loan forgiveness, if you refinance a federal loan with a private lender.

Utilize Automatic Payments

Enroll in autopay to ensure you never miss a student loan payment, get charged late payment fees or have a late payment reported to the credit bureaus. You may even get a small interest rate reduction by signing up for automatic payments.

Federal student loan recipients get a quarter-point interest rate discount if they sign up for automatic debit. Some private student loan servicers also offer interest rate discounts if you sign up for autopay. Reach out to your loan provider to inquire.

Get a Side Hustle

You can shave years off your repayment period by increasing your income with a side job that provides extra income you can put straight toward your loans. If you're still in school, apply for a part-time job on campus or get a paid internship to earn extra money. Tutoring and food delivery are other viable options.

If you're already working full time and can squeeze in some extra work hours, you could pursue freelance opportunities online. There are options for many skill sets, such as writing, graphic design, social media advertising, digital marketing and web development.

The Bottom Line

Whether you have federal or private student loans, you can reduce your remaining balances faster by making extra payments each month. You can also earn more income to free up funds for student loan repayment, or explore refinancing options to help you speed up repayment.

In the meantime, stay on top of your progress by checking the dashboard provided by your loan servicer and frequently reviewing your profile to confirm your payments are correctly applied and accurately reflected in your credit report.

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