Student management

The 9 fastest ways to pay off student loans, according to experts

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Your student loans can eat up a big chunk of your budget each month, especially when you’re starting out on your own, making it that much harder to save for a home, build up your retirement savings, and pursue other financial goals. It’s also not uncommon to still be saddled with student loan debt well into your thirties or beyond.

Learn: 10 ways to pay off your student loans in a year
Also: Women and student loan debt by the numbers: Why it matters to experts

You may have had a bit of a break from your loan repayments over the past two years when the federal government suspended student loan payments and interest due to tough financial times. But payments are expected to resume on May 1, 2022, so now is the perfect time to prepare.

If you’re doing well financially, now might be a good time to come up with a plan to pay off your student loans even faster. Taking advantage of special programs, breaks, and strategies could save you thousands of dollars in interest and years off your student loans. To make it happen, consider the following steps – straight from the experts.

Reassess your repayment options

This is a good time to analyze your numbers through StudentAid.gov’s student loan repayment simulator to learn your repayment options and terms based on your loan balance and income. You can use this tool to learn about income-contingent repayment plans, which can lower your monthly payments based on your income and also extend the term of your loan.

You can also learn about options to pay off your loans faster. Choosing the repayment plan with the highest monthly payment you can afford will pay off all loans faster and save you the most money on interest, said Mark Kantrowitz, financial aid expert and author of “How To to appeal for more university financial aid”. .” Just make sure the amount fits your budget without falling into other more expensive types of debt.

See: When is it time to talk to a financial advisor about student loans?

Sign up for automatic payment

When your monthly loan payments are automatically transferred from your bank account to the lender, you make the payments without having the option of spending the money on anything else. Your lender can also lower your interest rate by 0.25% to 0.50% if you sign up for autopay, Kantrowitz said. It can also help psychologically, when you don’t have to think about those payments every month. Contact your lender to register.

Add extra money to your loans at the highest rates

Make a list of all your student loans, their terms and their interest rates. Pay extra for your highest rate loans whenever you can, either by increasing your monthly payments or adding a lump sum each time you get extra money, like a tax refund or a premium.

“Let the lender know that this is an additional payment and not an advance payment of the next installment,” Kantrowitz said.

You can use the student loan repayment simulator to see the impact that increasing your payment or adding a lump sum can have on the repayment date and the total amount paid with interest. Consider taking extra money out of your budget to increase your payments for several months. This might mean foregoing some short-term expenses to get out of your student loans faster, but it will help you find yourself in better financial shape in the long run. After paying off the first loan, use some of the extra money to increase your monthly payments until the next loan on your list.

Make payments while you’re still in school

If you have a subsidized federal student loan, the government pays interest on the loan while you’re in school and for a six-month grace period afterward. If you have an unsubsidized loan, interest will accrue while you study, even though you are not yet required to make any payments. Either way, making payments while you study, even a small amount, can make a difference in the long run.

“Even if students and families only pay loan interest, in-school payments will make payments more manageable after the student leaves school and help reduce the total cost of the loan,” said Connor Peoples, spokesperson for Sallie Mae. Some lenders, like Sallie Mae, offer discounts to students and families who choose to make payments in school.

Related: 2 Key Ways Student Debt Burdens Are Taking Women’s Freedom Away

Refinance at a lower interest rate if advantageous

You might be able to lower your rate and pay off your loans faster with refinancing, but you might be locked into a higher monthly payment that could become difficult to pay if your income changes, and you might not be eligible for part of it. income – options for loan repayment or cancellation in the future depending on how you refinance.

“The lowest fixed interest rates on a private refinance will imply a shorter repayment term, as short as five years,” Kantrowitz said. “The monthly loan payment will be higher despite the lower interest rate, due to the shorter repayment term, and your debt will be paid off sooner.” However, if the new rate is higher than most of the interest rates on your current loans, it may be best not to refinance and accelerate the repayment of the loan at the higher rate, he said.

He also said to be careful before refinancing federal loans into a private student loan. “It will only save money if the borrower has excellent credit or if the federal loans are from several years ago when interest rates were higher,” he said. If you refinance federal loans into private loans, you may lose some special benefits of federal loans, such as longer deferrals and forbearances, income-based repayment, payment pause and interest relief, and student loan forgiveness options, he said.

“Be aware of what you’re giving up when you leave the federal system,” said Roger Young, director of thought leadership at T. Rowe Price, which recently conducted a study comparing student loan repayment options.

Check Out: 4 of the Best Student Loan Refinance Companies

Take advantage of the Employer Student Loan Repayment Assistance Program (RRAP)

About 8% of employers offered these programs in 2019, according to a study by the Society for Human Resource Management. “The number is likely higher now because Congress passed legislation to make LRAPs tax-exempt until December 31, 2025,” Kantrowitz said. “Employers can provide up to $5,250 a year in student loan repayment assistance. A typical LRAP provides $100 per month for an employee’s student loans. »

Reassessing Civil Service Loan Forgiveness

If you work for a federal, state, local, or tribal government agency or qualifying nonprofit organization, you may qualify for the Civil Service Loan Forgiveness Program on your federal student loans, which forgives the remaining balance on your loans after making 120 qualifying monthly payments. . It was notoriously difficult to qualify for this program in the past, but on October 6, 2021, the U.S. Department of Education announced a temporary period during which borrowers can receive credit for certain past repayment periods that would otherwise would not be eligible. See its public loan forgiveness page for more information.

Make the Most of Student Loan Tax Breaks

When determining how much you can afford to pay each month for your loans, keep in mind that you could get some money back at tax time. For 2021 and 2022, you can deduct up to $2,500 in interest paid on qualifying student loans. The deduction amount is phased out if your adjusted gross income was $140,000 to $170,000 if you are married and filing jointly in 2021 ($145,000 to $175,000 in 2022) and $70,000 to $85,000 for single filers and head of household. Married taxpayers filing separately cannot take advantage of the deduction, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.

The interest deduction can only be claimed if the taxpayer has a legal obligation to pay the interest, which may be the parents or the student, he said. A dependent on another person’s tax return cannot claim the deduction. To be a qualified loan, the loan must be taken out only for qualified higher education expenses, such as tuition, fees, room and board, books, supplies and equipment, a-t -he declares.

Integrate your student loan repayment into your overall financial plans

While paying off your student loans early can help you save money in interest in the long run, be careful not to jeopardize other parts of your finances. Student loan rates tend to be lower than other types of debt, like credit card debt, so you want to avoid getting into a situation where you’re paying so much for your student loans that you end up with higher interest debt if your income changes. or you have unexpected expenses. “Before you speed up your student loan repayments, build or increase your emergency fund,” Kantrowitz said.

Also, remember to continue contributing to any 401(k) or other retirement plans you may have at work, especially if you have employer matching and other employment opportunities. tax-efficient savings. Take a step back and think about how you will juggle all of these financial priorities.

“You potentially have multiple choices of things you can do when you have a little extra cash,” Young said. “The risk-free one is paying off debts of different types. There’s also putting more into retirement or putting it into a health savings account. There are a number of things you can do, but there’s something good about paying off your debt sooner.

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About the Author

Kimberly Lankford has been a financial journalist for over 20 years. As an “Ask Kim” columnist for Kiplinger’s Personal Finance magazine, she received hundreds of questions from readers each month about insurance, taxes, retirement planning and other personal finance issues. His financial articles have also appeared in The Washington Post, US News & World Report, AARP Magazine, Boston Globe, PBS Next Avenue, Bloomberg Wealth Manager, and Military Officer Magazine, and his syndicated columns have appeared regularly in the Chicago Tribune, Denver. Post, Baltimore Sun and other newspapers.