Paying Off Student Loans Early: Benefits And Tips

Paying off student loans early and eliminating expensive monthly payments once no longer in school can have a huge impact on your financial future.

Most college graduates not only receive a diploma, they also receive a bank statement that shows how much they owe in student loans. What was once the exception to the rule has become the rule, as virtually every college graduate carries some level of student loan debt from private lenders, the federal government or both. 

In fact, in 2018, total outstanding student loan debt surpassed $1.5 trillion. Additionally, according to student loan debt statistics, the average Class of 2017 graduate had more than $28,000 in student loan debt.

With so much student loan debt outstanding, many recent graduates are thinking about making extra student debt payments and coming up with a more effective repayment plan. With student loan debt hanging over their head, it’s harder to meet other financial objectives such as setting aside retirement savings and meeting other long-term goals.

On this page:

• How to Pay Off Student Loans Early
• How Long Does It Take Borrowers to Pay Off Student Loan Debt?
• Should I Pay Off My Student Loans Early?
• Benefits of Paying Off Student Loans Early

How to Pay Off Student Loans Early

If you want to pay off your student loans early and improve your finances, we’ve got several tips that can help you put more money toward demolishing your debt each month:

1. Review Your Spending and Make a Budget

It’s much easier to find extra money to put toward student loan debt when you have an idea of where you stand with your overall finances. Review your regular spending to look for places where you can cut back and apply the savings toward paying more than the minimum on your student debt.

Create a budget that includes extra student loan payments and stick to it. You might be surprised at how quickly you can reach your goals when you have a plan.

2. Refinance Your Student Loans

Interest rates are relatively low right now, but they’re on the rise, thanks in part to recent Federal Reserve hikes. When you refinance your student loans, you get a lower interest rate, allowing your extra payments to do more good. Plus, with a lower rate, you might be able to handle a shorter term.

Refinancing is done with private loans, though, so you need to weigh the pros and cons. If you want access to federal benefits like income-driven repayment and student loan forgiveness, refinancing might not be the best choice.

3. Make Payments Bi-Weekly

If you make a student loan payment every other week, you can accelerate your pay-off date without making a lot of effort. Bi-weekly payments amount to making an extra payment each year.

Doing this can reduce your repayment time by years. If necessary, set up an automatic payment with your student loan servicer to make things easier on yourself. Even if you can’t always make a bi-weekly loan payment, making more than a monthly loan payment whenever possible is a good idea. 

4. Find Out How Payments Are Applied

Make sure any extra payments go toward reducing the principal on your student loan. Contact your servicer to find out how they handle the application of your payments.

You don’t want them to just apply it to a future payment. When you specify that an extra payment should reduce the principal, it also reduces how much you pay in interest over time.

5. Start With High-Interest Student Loans

Take a look at your student loan interest rates. Put extra payments toward those high interest rate loans, since those loans cost the most. When you pay off higher-interest debt first, you save money and get to pay off your loans faster. It’s similar to paying off credit card debt in this aspect. 

6. Work for a Company That Offers Student Loan Repayment Benefits

Some companies actually offer to help pay off student loans when you work for them. According to the Society for Human Resources Management, about four percent of companies now have some sort of employee benefit related to paying off student loans.

Your employer might match your student loan payments, up to a certain amount, making it possible for you to pay down your balance earlier than expected.

It’s also possible to participate in programs like AmeriCorps and the Peace Corps to get some of your student loans paid off.

7. Use Student Loan Forgiveness

Depending on your profession and other factors, you might be eligible to receive federal student loan forgiveness. Programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness can help you get rid of some of your debt after a certain amount of time.

There are also state student loan forgiveness programs for teachers and health care professionals who work in underserved areas. Check to see if your state offers such a program that can help you tackle some of your student loan debt.

Military service can also result in student loan forgiveness in some cases.

8. Start a Side Gig

If you want more money to help with paying off student loans early, one way to do it is to make more money. A side gig can help you boost your income. Put that money toward repaying your student loan debt and you could reach financial freedom sooner.

How Long Does It Take Borrowers to Pay Off Student Loan Debt?

College debt has become a fact of life for many grads. According to a recent study from Citizens Financial Group, about 60 percent of millennials expect to be paying off their student loan debt into their 40s. Considering that, it’s no surprise the Federal Reserve reports that 6.8 million Americans in their 40s have an average student loan balance of $33,765.

Individual factors can influence how long it takes you to pay off your debt. Standard repayment on federal student loans is 10 years. However, you can consolidate your loans and get an extended repayment. When you do that, it might take as long as 20 or 30 years to pay off your student debt. Income-driven repayment can also extend how long it takes to pay off debt.

You can shorten how long it takes to pay off your debt by paying more money each month, and by looking for ways to reduce your interest rate, if it makes sense. Use a student loan payment calculator to figure out how long it will take you — and how much time and money you could save if you make extra payments.

Should I Pay Off My Student Loans Early?

In general, it makes sense to pay off your student loans early. For the most part, the sooner you’re out of debt, the better off your finances are. However, there might be times when it can make sense to delay making extra payments.

First of all, consider the interest rates on your student loans. Are they relatively low? Could you make more in interest by investing a portion of your money instead of putting it all toward reducing student loan debt? If you can get a rate below 5 percent, paying off your loans early might not have as much benefit as putting more money into your retirement.

Next, consider other areas of financial stability. Do you have an emergency fund? If you don’t have money set aside for unexpected financial problems, it might not make sense to put extra toward paying off your student loans. If you run into trouble, being able to tap into an emergency fund, rather than having to defer your loan payments, can be more beneficial in the long run.

Finally, whether you have federal loans or private student loans can make a difference. Federal loans come with additional protections, such as loan forgiveness or the ability to go on income-driven repayment if necessary.

However, if you can make a high salary now, and can make payments to quickly reduce your debt, those federal protections might not be necessary, so it can be better to just tackle your student loans and get them out of the way.

Carefully consider your individual situation and figure out what will work best for you, and then decide how quickly it makes sense to pay off your student debt.

The Benefits of Paying Off Your Student Loans Early

There are definite benefits to paying off your student loans as quickly as possible. Here are some of the ways that paying off student debt early can improve your finances and your life.

1. Save More Money

The longer you pay interest, the more it costs you. If you can pay off your student loans early, you could potentially save hundreds — or even thousands — of dollars over time. Imagine what that money could be doing on your behalf if you were able to invest it or use it to make a down payment on a house.

2. Lower Debt-to-Income Ratio

As you pay off your student loans, your debt-to-income ratio falls. This opens you up for more opportunities. If you want to buy a home in the future, your debt-to-income ratio matters. By getting rid of student loan debt, that’s one less financial obligation holding you back.

3. Peace of Mind

For many people, any debt hanging over them causes stress and worry. If you pay off your student loan debt quick, you can be debt-free sooner — and enjoy the peace of mind that comes with knowing you don’t have obligations.

Bottom Line

Student loan debt can feel like a weight dragging you down. Getting rid of it as early as possible can help you improve your finances, save money, and even enjoy life more. By following a few strategies, you can tackle your student loan debt and begin your journey to financial freedom.