10 Tips for Paying Off Student Loans
Whether you are a recent high school graduate continuing your education journey or an adult returning to school, if you have decided to enroll in college, there are a few things to consider. Although many believe the most challenging and crucial step of higher education is choosing a field of study and a good college that offers proper programs in that field, you should not forget that all those decisions will not matter if you do not have a plan on how to fund your education. It is common that in such cases, students rely on student loans to pay for at least a portion of their education.
Student loans refer to amounts of money that students borrow from the government, banks, credit unions, or some other financial institution and are paid back with interest. Once you graduate or leave school, you are expected to repay such loans. To know more about this process, continue reading as we offer you advice for student loans as well as numerous tips for paying off student loans.
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What Are the Benefits of Paying Off Your Student Loans Early?
Many students graduate with student loan debt and carry it throughout their adulthood. Statistics show that the total student loan debt is $1.75 trillion, with an average of $28,950 owed per borrower. While student loans tend to have lower interest rates and can be paid off slowly, there are benefits to paying off your student loans as soon as possible.
Saving money on total interest
One of the main advantages of early student debt payment is the ability to save money on interest. Paying your student loans earlier gives the debt less time to accumulate interest, meaning you'll end up paying less in the long run.
Saving money in interest charges increases the amount of money you use on principal debt as opposed to the built-up interest, therefore lowering the total cost of your loan.
Lower debt-to-income ratio
Another benefit of paying off your student loans early is that it will improve your debt-to-income ratio. The DTI ratio refers to the monthly debt payments compared to how much you earn. For example, if you made 30,000 per year and had $500 monthly debt payments, your DTI would be 20%, which is pretty good as lenders typically seek 36% or lower ratios.
If you ever plan on applying for new credit, let's say to buy a house or a car, in that case, a lower debt-to-income ratio is essential. Lenders will usually consider a lower DTI ratio as a sign that you are able to take on and manage new debt. A low DTI ratio would pave the way for you to get approved for loans while also increasing your chances of getting a lower rate of interest on your loan.
Reduced stress
A survey found that 1 in 14 respondents experienced suicidal thoughts due to unpaid student loan debt. The possibility of this debt affecting your mental health is one of the main reasons you should prioritize paying it off early. Saying goodbye to those monthly payments can benefit your financial and personal life. Besides reducing your financial stress and giving you peace of mind, you will have an increased cash flow that you can use on whatever you want.
Focusing on other financial goals
A student loan debt can make you put off other goals such as buying a home, starting a business, taking a vacation, etc. But, with your debt paid off, you can finally focus on other financial goals. Using the money you put aside to pay your student loans for other purposes enables you to finally start investing in your future.
10 Tips for Paying Off Student Loans
Repaying student loans is a legal obligation. Therefore, it is something you should take seriously and not put aside. If you do not pay these debts, you will damage your credit rating, risk losing your professional license, suffer wage garnishment, and many other consequences. To avoid such circumstances, you must be well-informed and prepared to pay these debts. Below we’ll go through 10 student loan repayment tips that will help you throughout this journey.
Make larger payments
If possible, when you can afford it, we would advise you to make larger payments for your student loans. Although it is perfectly acceptable to pay the agreed sum each month, it would be helpful if you managed to save more money and pay more per month, so the payback period is shortened.
For example, if you have borrowed around $50,000 on student loans, with a 6% interest rate and a 15-year-payback period, you would have to pay $422 each month. However, if you were to pay $1,000 each month, you would repay your loans in less than five years.
However, remember that as tempting as it might be to be done with loans as soon as possible, you would do more damage than good to yourself if you attempt to pay larger sums when you are not financially stable. It is better to deal with student loans for a more extended period rather than accumulate more debt trying to pay these loans.
Pay right away
Another way to pay off student loans early is to do so right away in total. If you can afford to pay them off immediately without sacrificing other crucial financial goals or going into more debt, you definitely should.
Take your time and be smart about how you approach debts. If you have managed to save enough during college or started a good job right after it and received a front payment that can cover your student loans, you probably should use them to pay off the debts you have. Still, student loan payments have lower fixed interest rates than credit cards or most personal loans, so only pay them immediately if you have the money to do so. We would not advise you to try and pay them ahead of schedule otherwise.
Set up an automatic transfer college fund
Another bright tip when repaying your student loans is to set up an automatic transfer college fund with separate savings that go directly toward paying off your loans. Directly transferring money into this account dedicated to automatically repaying your loans is an effective way to ensure you will not spend that money on other less important things, such as shopping or ordering takeout.
It is vital to make sure you set up a separate account for these expenses. When having a joint account for your college fund and other costs, you can mistakenly spend the money on other things or even forget to make the agreed monthly payments for your student loans.
Use your tax deduction
Although it might seem like student loans become a nightmare once you are done with college and no one helps you, there are some things you can take advantage of to ease the burden of repayment. For example, the federal government offers loan interest deductions for taxes based on the annual interest paid. Based on this law, you can deduct up to $2,500 on taxes for both federal and private student loans.
According to The Internal Revenue Service for the United States federal government, you can qualify for such a tax refund if you:
Paid interest on a qualified student loan in that tax year;
Are legally obligated to pay interest on a qualified student loan;
Don't have your filing status as "married filing separately";
Are not claimed as dependents on someone else's return;
Have your Modified Adjusted Gross Income (MAGI) less than the specified amount set annually.
You can then use the money you did not have to spend on taxes to pay more of your student loans directly.
Start working while in college
Many students begin working part-time jobs while in college to help with the expenses of paying for it. Although you do not have to worry as much when you take student loans, it is still wise to begin saving money for repayment in the future. If you start working while in college, you can easily keep the debt in check, as your earnings will help you get a head start on paying off the student loans.
Understandably, you might have to work during college to cover other expenses and don’t have the luxury of saving most of your earnings toward creating a college fund. However, we would still advise you to set aside as much as possible from each salary for your future. Setting aside as little as $100 a month will be extremely helpful once you are done with college and have to worry about your loans.
Understand your cash flow and develop a budget
When dealing with any debt, you must manage your finances properly. This means that you have to carefully analyze your cash flow and spending habits so that you can begin to develop a budget. Make a note of the monthly cash that flows in and the amount you usually spend. Then, try to reduce some of your spending and develop a budget. This way, you can also create a savings goal and try to meet it each month by following the budget you have made.
You might have to make some necessary financial sacrifices in order to stick to your budget. However, it will all be worth it once you have saved money that you can then use to pay down your student loans.
Refinance
If you are not content with the current terms of your student loans, you might want to try refinancing. Through a refinance, you can renew and reorganize the financial terms of your loan, thus allowing you to gather various student loans into one new loan or lower the interest rate of your current agreement, provided you repay for a longer term.
Essentially, through refinancing, you pay off your existing student loans through a lender who offers you a new loan agreement. This step is only worth it if you can find a lender that agrees on a loan rate that will actually make a difference for you in the long run. Otherwise, it is best not to complicate your financial situation.
Apply for loan forgiveness
Another way the government helps you get rid of your federal student loans is through the possibility for them to be forgiven. This means that you do not have to pay some or even any of your student loans through loan forgiveness. However, you must fulfill some very specific requirements that can make you eligible for one of the different types of student loan forgiveness, such as public service loan forgiveness or teacher loan forgiveness. For more information on the requirements for each type of loan forgiveness, check the official Federal Student Aid site.
Remember that these requirements apply only to federal student loans. If you have private student loans, you must consult with that financial institution and see whether such a process is possible and how to apply for it.
Look into lowering the interest rate
Another tip for paying off student loans is to keep an eye out for any opportunity to lower the interest rate of your loans. Typically, lenders offer discounts on interest rates if you prove you are serious and set on paying off your loans. They provide small percentages of discount on loan rate interests if you fulfill specific criteria, such as making a certain amount of payment on time, setting up an automatic payment method regarding your loan, taking another loan from that same institution, etc.
We would advise you to contact your lenders and discuss with them if it's possible to earn some discount on your loan interest rates and how you can do so.
Ask if your employer offers repayment assistance
Thanks to the Consolidated Appropriations Act in Section 127 of the Internal Revenue Code, an extension to the CARES Act provisions, signed in 2020 as part of the state’s effort to help with the aftermath of the pandemic, employers can offer up to $5,250 annually through 2025 in student loan repayment without having to pay for the tax.
So it would be wise to see if your employers are part of this group or whether they offer other perks that will help you repay your student loans. You can consult the employee manual, speak with the HR department, or discuss the matter directly with your employer and find out what assistance is available for you.
Conclusion
There are indeed benefits to paying your student loans early. However, it is all a personal choice you must make in accordance with your financial situation. If possible, try and settle your debt as early as possible. But do not feel bad if you need more time to save up and pay it all. As long as you are working toward it and are consistent with your payments, you are doing a good job!