If you or someone you know is considering their options on how to best repay their student debt, you are not alone. Nearly 70% of bachelor’s degree students graduate with student debt. Roughly 40 million Americans currently owe student loans. It has become increasingly difficult to pay for education without taking on debt. Many people are aware that Federal Student Loans offer many flexible options and repayment programs, however Private Student Loans can be very different when it comes to repayment, leaving many borrowers wondering: “What is the best way to pay off private student loans?”
Step One: Set clear goals.
First things first. To start to develop any kind of debt repayment strategy, you need to look at and understand your entire financial picture, and have clear goals in mind. “Paying off Student Loans quickly” is a good goal, but it can and should be more specific. Do you want to accomplish this in 10 years? Five years or even two to three years? What other financial ambitions do you have? Would you like to buy a home, take a vacation or simply be able to save more? Once you’ve clarified your goals, and given yourself a more specific time frame to try to work within, it will help you figure out what you will need to do to make it happen.
Step Two: Make a plan.
Begin by taking a look at your budget or spending plan. How much income do you have coming into your household and how much is goings out in expenses? Without having a detailed spending plan in place, you will not be able to know what you can realistically afford. Many times we only think of our budget consisting of our larger, regular expenses like rent/mortgage, utilities, auto expenses, etc. But many times we have quite a few more expenses that we may not think about like auto repairs, clothing and gifts. Even our morning coffee run can have a cost that is impacting our budget that we just don’t think about. Tracking your expenses for 1-3 months can be very beneficial to figure out where all your money is going, then make changes if need be.
Step Three: Prioritize your debt.
Many people have a mixture of both Federal and Private Student Loan Debt. Since your federal loans typically offer more flexibility and potential forgiveness options, and can also carry lower interest rates, many times it makes sense to focus on paying down your Private Loans before your Federal. You will want to take a detailed look at your loans to see what interest rates you’re paying and what your repayment terms are.
Step Four: Look for ways to increase the amount you can contribute to debt.
Once you have a clear financial picture for yourself, you will know if you have any extra funds that can be dedicated to your loans. One of the easiest ways to pay off your Private Student Debt more quickly is to pay more than your minimum payment. If you feel as though you are “paycheck to paycheck” and have nothing extra to go toward your debt, try to see if you’re able to make any budget adjustments or reduction to your spending. Small changes can add up. If you make your coffee at home and save yourself $20-$50 a month, that can be money added to your loans to speed up your repayment. If you get paid bi-weekly, paying half your student loan payment every pay day will equate to one extra payment per year without feeling the burden of an extra payment.
Increasing your income can be another way to help tackle your debt. Are you fulfilling your earning potential at your current job? Are you able to take on a second job, make and sell goods, or earn extra dollars helping people with odd jobs or errands? Sometimes we can put in additional work, even for a short period of time, to generate extra income to help jump start debt repayment.
Step Five: Explore your options for lower interest.
One of the most important things to consider when repaying your Private Student Loans is what interest rate you’re paying. If you’re interest rates are higher, you may be able refinance your loans to get a lower interest rate. You can also potentially consolidate your Private Loans while doing this. Consolidating can be helpful in simplifying your financial obligations giving you a better handle on where things are at. Refinancing can also allow you to choose your repayment term, so you could potentially stretch repayment out longer. While this would give you a lower monthly payment, you will most likely end up paying more interest in the long run. The shorter your repayment term, the less you will pay overall.
Refinancing or Consolidating Private Loans is different from doing the same with Federal Student Loans as it is a credit based decision. Depending on your credit and financial situation, you may be required to have a co-signer to get approved. It is important to shop private lenders to see who is offering the lowest interest rates, and the best terms to fit your situation. You also will need to choose between paying a variable or fixed interest rate. Fixed rates tend to run higher, but can be less risky. If interest rates rise, your fixed interest rate and payment amount will not be impacted. If you choose a variable rate, your rate and payment will often be lower to start, but you run the risk of having the rate and payment increase if rates rise.
Another way to get an interest reduction is to sign up for auto-pay. Many servicers offer a 0.25% interest reduction if you sign up for auto-payments from your bank account. Automatic payments can generally help you stay on track, and the added interest reduction will save you money, especially if you have larger loan balances.
One of the most effective ways to structure repayment of your loans is to use the debt avalanche or snowball method. With this method you make your minimum monthly payments on all of your debts, but tackle any extra funds toward your highest interest rate loan (or your lowest balance loan). Once that loan is paid off, you take the amount you were paying monthly to that loan, and add it to the regular minimum payment of your next highest interest rate loan (or your next smallest balance). Ordering your debt repayment by highest interest rate generally will pay off your debts more quickly, but tackling them in balance order can help keep you motivated as you will see tangible results more quickly.
Another idea is to dedicate any extra funds, or windfall money to go toward your debt repayment. Examples of this could be a tax refund, bonus, inheritance, winnings, etc. It is important to have some savings as well, so you may want to set some funds aside into savings if you don’t have any yet. Then you would focus the remaining “extra” funds toward your debt. Making large payments gives visible results, and can help you keep motivated as well as saving money in interest. Another strategy is to take any overtime you earn, or even the amount you gain in an annual raise to dedicate to your debt repayment. It may not seem like much at first, but over time those extra payments add up.
Step Six: Be cautious when offered payment postponement or special hardship programs.
The final tip to help repay your Private Student Loans more quickly is to not take advantage of any payment postponement or special hardship programs your servicer may offer. Although not as flexible as Federal Loans, many private loan servicers offer some amount of forbearance time or extension of payment. During a forbearance your interest continues to accrue and is added to your existing loan balance. This can make your loan grow quickly. Extending your repayment term, or reducing your monthly payment will result in increased interest paid over time as well.
Private Student Loans can be tough to handle, but with clear goals in mind, hard work and planning, faster and less costly repayment can be achieved. It is also good to know there are NFCC certified counselors on hand to take an individualized look at your situation and help you develop a plan to achieve your goals. Set up a counseling session to get started today!
About the Author:
Lisa Frankenberger has been a Certified Credit Counselor at Consumer Credit Counseling Service of Buffalo, Inc. for 11 years. She also has six years’ experience in the banking industry working in both collections and sales.
Her certifications include:Certified Credit Counselor, Housing Counselor and Student Loan Counselor through the National Foundation for Credit Counseling. Certified Foreclosure Intervention and Default Counselor through Neighborworks