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Paying off student loans can feel like an unending struggle, and for many, it's a financial abyss that seems impossible to escape. While Congress remains largely indifferent to the mounting $1.6 trillion debt that keeps growing, with no immediate hope of relief, there are small actions you can take to reduce your loan burden.
These steps may not solve all your financial problems, but they will help you gain control over your loan payments.
Tackle One Loan at a Time
To successfully manage your student loan debt, it’s crucial to have a strategy. Start by listing all of your debts, both public and private, along with their interest rates. From there, decide if you want to follow the snowball method, which focuses on paying off the smallest debts first, or the avalanche method, which prioritizes the loan with the highest interest rate. While paying off the highest-interest loan is the most efficient approach for saving money, some prefer the snowball method, starting with the smallest loan and gradually moving to larger ones.
Set Up Automatic Payments
Setting up auto payments ensures your payments are always on time, preventing late fees and penalties. In some cases, this can also lead to a 0.25 to 0.50 percent reduction in your interest rate, depending on your lender.
Pay a Little More Than the Minimum
While it’s essential to meet the minimum monthly payment to avoid default, paying a bit more—just $10 or $20 extra—can significantly shorten the time it takes to pay off your loan. If you can’t increase your payments immediately, stick to the minimum until you're ready, then gradually raise the amount paid toward the loan you’re focusing on first.
Ask for the Extra Payment to Be Applied to Your Principal
If you pay more than the minimum and have no other fees, you can ask that the extra amount be applied to the principal instead of the interest. This approach helps in two ways: it reduces your overall balance and also lowers the amount of interest you'll pay moving forward.
Servicers can be tricky, so it’s essential to stay vigilant and ensure your payments are being applied as you intend. Make sure to specify that the extra payment goes toward the loan you’re focusing on; otherwise, the servicer may distribute it across your loans, which won’t make a noticeable difference in your balance.
Here’s an example of a message you might want to send to your lender, courtesy of the Consumer Financial Protection Bureau:
I am writing to provide instructions on how to apply payments when I send an amount greater than the minimum due. Please apply payments as follows:
Once the minimum payment is applied to each loan, any extra amount should be directed toward the loan with the highest interest rate.
If there are multiple loans with the same interest rate, please allocate the extra payment toward the loan with the smallest outstanding principal balance.
If any additional amount above the minimum payment pays off a specific loan, please direct any remaining payment to the loan with the next highest interest rate.
In the event that I refinance my loans to a lower rate with another lender, or if a third party makes payments on my behalf, please follow the instructions outlined above for payment allocation.
Kindly retain these instructions and apply them to any future overpayments. Please confirm that these payments will be processed as specified, or provide an explanation if you are unable to follow these instructions.
Thank you for your cooperation.
And be sure to keep a copy of the letter for your records.
Make an Additional Payment
If you can, try to make an extra payment once or twice a year. It can make a significant difference in the long run. Ideally, make this payment as soon as possible after your regular payment, so less interest has accumulated, and more of your extra payment can be applied to the principal. When making the extra payment, confirm that it’s not advancing next month's payment (you’ll want to verify that it’s applied immediately to your loan).
If you’re unable to make this payment online, you may need to contact your servicer. While this can be a hassle, it’s worth the effort if it helps save you money. Think about it: Have you ever made a call to contest poor service or a small fee on a credit card or cable bill? This effort will save you more than that. Be sure to check your next statement to verify everything was applied properly.
Here’s an example using the student loan lump sum calculator: Let’s say you have $39,400 in student loan debt (the average in 2017), a 6% interest rate, and monthly payments of $437. If you made an extra one-time payment of $1,000 (perhaps from a tax refund), you’d reduce your total debt by $694. While it's not a huge amount, every little bit helps.
However, if you’re on track for loan forgiveness, it might not make sense to pay off more. Keep in mind, though, that you’ll still be responsible for paying taxes on the forgiven amount of your loans.
Look for a Repayment Assistance Program
Depending on your job or where you live, you might qualify for a repayment assistance program to help with your student loans. Student Loan Hero offers a tool that lists over 120 programs and can help you determine if you’re eligible.
Consider Making Biweekly Payments
Biweekly payments divide your monthly payment into two, but it also allows you to automatically make an extra full payment each year. As Shannon Insler writes for Student Loan Hero, “In my case, paying bi-weekly will shorten my repayment time by about a year and a half – and save me around $2,000 in interest.”
Take Advantage of the Student Loan Interest Deduction
After some back-and-forth, the student loan interest deduction will remain for the foreseeable future. This means you can claim a deduction of up to $2,500 for your student loan interest, potentially saving you a few hundred dollars when it’s time to file your taxes.
