As the 2016-2017 school year wraps up, about 4.5 million more students will have college degrees in the U.S.[1]. On average, graduates will have $37,172 in student loan debt, a number that’s up six percent from the graduating class of 2015[2].
Paying off this debt may seem like a monumental task, but do not worry! With quite a bit of student loan debt myself, I speak from experience when I tell you that paying off this debt is possible.
Below you will find three strategies for paying off your student debt.
- Pay Off Interest Early
When applying for a student loan, you will have the option to select a repayment plan. While these plans can vary in interest and re-payment years, you may have the option to pay accruing interest while you are in school.
| Pay Interest Early | Don’t Pay Interest Early | |
| Original Loan Balance | $20,000 | $20,000 |
| Interest Rate | 6.8% | 6.8% |
| Interest Paid While In School | $5,440 | $0 |
| Loan Balance When Entering Repayment | $20,000 | $26,020.46* |
| Years to Repay | 10 | 10 |
| Monthly Payment | $230.16** | $299.44*** |
| Interest Paid After Loan Enters Repayment | $7,619.31 | $9,913.08 |
| Total Interest Paid | $13,059.31 | $15,933.50 |
| Total Repayment amount | $33,059.31 | $35,933.54 |
*Assumes 4 years of annually compounded interest
**The monthly loan payment is 119 payments of $230.16 plus a final payment of $230.27
***The monthly loan payment is 119 payments of $299.44 plus a final payment of $300.18
If you choose not to pay your interest while in school, your $20,000 loan can easily turn into a $26,020.46 loan by the time you graduate. However, paying your interest early will result in a total savings of $2,874.23 and a monthly savings of $69.28. Of course, this would require some extra work on your part while you’re in school. Paying off interest may require some extra hours at a part time job, but the long-term rewards make those hours well spent.
- Make Sacrifices
This may be the hardest for current graduates because millennials live for instant gratification. Once you graduate and you are earning a steady salary, it may be easy to start buying nice purses (guilty!), shoes, suits, cars, etc. But if it’s not something you absolutely need, you may be better off putting that money towards your loans.
For example, a $5 coffee 5 days a week is about $108 a month – If you stop drinking Starbucks and make your coffee at home, you can pay an additional $108 a month on your student loan.
| Make No Sacrifices | Stop Drinking Starbucks | |
| Loan Balance | $20,000 | $20,000 |
| Interest Rate | 6.8% | 6.8% |
| Monthly Payment | $230.16* | $338.16** |
| Years to Repay | 10 | 6 |
| Total Interest Paid | $7,619.31 | $4,427.95 |
| Total Repayment Amount | $27,619.31 | $24,427.95 |
*The monthly loan payment is 119 payments of $230.16 plus a final payment of $230.27
**The monthly loan payment is 72 payments of $338.16 plus a final payment of $80.43
Contributing an additional $108 a month will reduce your total interest by $3,191.36 and allow you to pay-off your loans about 4 years early.
- Consider refinancing
When you originally applied for your loans, you may have been in a different financial situation then you are now. Lowering your interest rate through loan refinancing may be a great way to save money on your student loans.
Review the example below to see how lowering your interest rate can impact your loan.
| Loan Balance | $20,000 | $20,000 |
| Interest Rate | 6.8% | 5.8% |
| Years to Repay | 10 | 10 |
| Monthly Payment | $230.16* | $220.04** |
| Total Interest Paid | $7,619.31 | $6,404.41 |
| Total Repayment Amount | $27,619.31 | $26,404.41 |
*The monthly loan payment is 119 payments of $230.16 plus a final payment of $230.27
**The monthly loan payment is 119 payments of $220.04 plus a final payment of $219.65
As you can see, lowering your interest rate by just 1% can save you $1,214.90 over the life of your loan and about $10 a month in repayments.
While there are many options to pay off your student loans, you should consider your overall financial plan and what is realistic for you. There are many considerations you should take before taking these steps. Ask yourself these questions before making any decisions.
- Do I have any expenses I can cut from my budget to put more toward my student loans?
- Is my credit score strong enough to refinance my loans and get a better interest rate?
- Do I have the extra money while in college to pay off my interest early?
If you don’t know the answers to the questions above, consider speaking with your parents or a professional financial planner. With some proper budgeting and planning, paying off student loans is possible!
[1] https://nces.ed.gov/
[2] https://studentloanhero.com/student-loan-debt-statistics/
Tags: Budget, Debt, Education, Student loans