7 Ways to Strategically pay off Student Loans

It’s always important to begin with the end in mind, but student loans often get in the way. High monthly payments that can usually last for decades can make major milestones like buying a home, starting a family, or saving for the future feel a little less possible to attain. However, the great news is that there are many creative ways to restructure this debt to lighten the load and pay off loans more efficiently.

1. Making Extra Payments

Paying more than the minimum on your student loans can significantly reduce the time it takes to pay them off and save you money on interest. Even small extra payments, when made consistently, can make a big difference over the life of the loan.

Pros:

• Reduces the principal balance faster, leading to less interest paid over time.
• Can help you pay off your loans ahead of schedule.
• Provides flexibility—you can make extra payments whenever you have additional funds.

Cons:

• Requires discipline and extra financial resources.
• Some loan servicers may apply extra payments to future payments instead of the principal, so it’s important to specify that the extra payment should be applied to the principal.

2. Refinancing

Refinancing involves taking out a new loan with a private lender to pay off your existing student loans. The new loan typically comes with a lower interest rate, especially if you have a good credit score and stable income. This can save you money on interest and help you pay off your loans faster.

Pros:

• Potentially lower interest rates can save you money over the life of the loan.
• Can result in a lower monthly payment or a shorter repayment term.
• Consolidates multiple loans into one, simplifying repayment.

Cons:

• Refinancing federal loans with a private lender means losing access to federal benefits, such as income-driven repayment plans and loan forgiveness programs.
• Requires good credit and stable income to qualify for the best rates.
• The repayment terms of private loans are generally less flexible than federal loans.

3. Avoid Income-Driven Repayment Plans (Unless Necessary)

Using income-driven repayment plans can lower your monthly payments, but they extend your loan term, which means you’ll pay more in interest over time. If you can afford your current higher monthly payments, stick to the standard 10-year repayment plan or shorter to pay off loans faster.

4. The Avalanche Method

The avalanche method involves paying off the student loan with the highest interest rate first while making minimum payments on the others. Once the highest-interest loan is paid off, you move on to the loan with the next highest interest rate. This method is designed to minimize the amount of interest paid over time.

Pros:

• Saves money on interest by targeting the highest-interest loans first.
• Reduces the overall cost of your student loans.
• More efficient in terms of saving money compared to the snowball method.

Cons:

• Progress can feel slower, especially if the highest-interest loans have larger balances.
• May not provide the same psychological motivation as the snowball method.

5. Employer Assistance Programs

Some employers offer student loan repayment assistance as a benefit to their employees. These programs vary widely but can provide a significant boost to your repayment efforts. Employer contributions can help you pay off your loans faster and reduce the financial burden.

Pros:

• Can significantly reduce your loan balance.
• Often provided as a benefit, with no cost to you.
• May come with other financial wellness programs, such as matching retirement contributions.

Cons:

• Employer contributions may be considered taxable income.
• Not all employers offer this benefit.
• May require a commitment to stay with the employer for a certain period.

6. Public Service Loan Forgiveness (PSLF)

For those working in qualifying public service jobs, the Public Service Loan Forgiveness (PSLF) program can be an effective way to pay off student loans. After making 120 qualifying payments under a qualifying repayment plan while working for a qualifying employer, the remaining loan balance is forgiven.

Pros:

• Provides a path to loan forgiveness after 10 years of qualifying payments.
• No tax liability on the forgiven balance.
• Encourages careers in public service.

Cons:

• Requires careful tracking of qualifying payments and employers.
• The program’s complexity and changing rules can be challenging to navigate.
• Forgiveness is only available for Direct Loans.

7. Avoid Deferment and Forbearance

Deferment and forbearance are options that allow borrowers to temporarily pause their student loan payments due to financial hardship or other qualifying circumstances. While these options can provide immediate relief and prevent default, interest often continues to accrue during these periods, which can increase the total amount owed and prolong the repayment term.

Very Important Note:

Many people believe paying off student debt as fast as possible is always the smartest financial decision. This is actually incorrect. Paying debt down faster often ties up your extra funds that could’ve been invested elsewhere, potentially yielding higher returns.

A quick way to find out when it makes sense to invest your extra dollars or use it to pay down debt faster is to start with the average interest rate on your student loans. If the returns you could make on the investment is above your student loan interest rate, then it actually makes more sense to invest your extra cash. The opposite is true too, if the returns are below the interest rate, then you should use the cash to pay off the debt faster. It’s always important to also think about the risk associated with the investment into the equation as well, which is why a guided conversation with a member of our team may be helpful. You can do so here.

Conclusion

There are many different strategies on how to restructure student loan debt effectively, but it all comes down to what you are currently looking to achieve. Even if it makes more financial sense to invest your extra dollars instead of paying off debt faster, you still may choose the option of paying off the loans because you value being debt-free over growing your money the fastest possible. Like most financial planning concepts, begin with what you value most and what you’re trying to achieve, then try to find a strategy that tailors to you.