Smart Ways to Pay off Student Loans
- 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.
- 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.
- 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.
- 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.
