Paying off your student loans early can be a great way to save money. However, it comes with some potential risks.
For one, it could draw your focus away from other financial goals like retirement and investing.
It can also cause you to miss out on stock market gains, which can add up over time.
1. Make Extra Payments
Paying off your student loans early is a good way to save money, eliminate debt faster and increase your chances of qualifying for a mortgage. However, it is important to understand how extra payments are typically applied to your student loans before you decide to make them.
If you’re a federal student loan borrower, it’s important to note that there is no limit on how many extra payments you can make each year. It’s just important that you make sure your lender applies those extra payments to the principal balance of your loan so that they are applied to a lower interest rate than your current interest rate and help to pay down the overall balance of the debt sooner.
It can also be helpful to make an extra payment each time you receive a windfall of cash, such as a tax refund or bonus at work. It’s often better to pay your student loans with extra funds than to use them to pay off other higher-interest debts, such as credit cards.
Another option is to set up automatic payments on all your loans, which can be helpful if you have several student loans. If you do this, be sure to check with your lender to find out if they offer an interest rate reduction program for autopay customers, which can help to reduce the interest that accumulates over time.
Even if you don’t have the resources to make an extra payment each month, it can be beneficial to take a hard look at your budget and see where you can cut expenses or put more money towards paying off student loans. A student loan calculator can help you calculate how much additional money you could add to your monthly payments and how quickly you would be able to get rid of your debt.
Taking a hard look at your budget will help you to prioritize your financial goals and determine what is most important for you to spend your money on. It will also allow you to make more informed decisions about where you want to allocate your extra money, such as paying off student loans or saving for other goals.
2. Switch to a Bi-Weekly Payment Schedule
Switching to a bi-weekly payment schedule is one of the most effective ways to pay off student loans early. It cuts your interest rate in half, shortens your repayment period, and saves you thousands of dollars over the life of your loan.
The key to making this strategy work is to be careful about how your lender applies extra payments. Some lenders automatically apply these funds to future payments, which could lead to an extra payment or two being applied to your principal instead of your interest.
Another option is to contact your lender and ask for instructions on how the additional payment should be applied. Some will have you pick the account in which your extra payment will be applied, while others may offer a variety of options.
In some cases, you can even make extra payments through your lender’s AutoPay. Many lenders offer a discount of 0.25% for setting this up, which can save you thousands in interest charges over the life of your loan.
If you have a large amount of debt, paying off your loans early can be especially meaningful. Not only does it save you money in the long run, but it also provides a sense of freedom and independence that can motivate you to continue working toward other financial goals and obligations.
Taking a hard look at your budget and seeing where you can cut back is a crucial first step in paying off your student loans. Once you know how much you can cut from your monthly expenses, you can decide whether to pay off your loans early or not.
A big part of your budget should be set aside for saving, too. This can include an emergency fund that will cover three to six months’ worth of expenses in case of an unexpected emergency or job loss. It can also be used to help you tackle other financial goals, such as buying a car or building a retirement fund.
Paying off your student loans is also an excellent way to save money on your taxes. For most people, up to $2,500 of student loan interest is tax deductible, which can significantly reduce your Adjusted Gross Income (AGI) and lower your tax bill.
3. Make One Extra Payment a Year
Paying off student loans early is a great way to save hundreds of dollars in interest. However, it’s important to be sure that you’re making the right decision for your situation.
First, make a list of your student loans and calculate the interest rates on each. This will help you determine which loans are the highest-cost ones to tackle first, and then how much extra money can be applied toward them each month.
Next, take a hard look at your budget and see what you can cut to afford more money each month. This could include hiring someone to do some of your work, selling a few unused items on eBay or at a garage sale, or even cutting back on your entertainment expenses.
One strategy that’s been shown to be incredibly effective at paying off student loans is making one extra payment each year. While you’re not required to pay more than the minimum monthly payment on each loan, if you can, making an extra payment will allow you to pay off your student loans much faster.
It’s also important to make this extra payment “principal-only.” That means that you must specify that it should go toward reducing your principal balance, not just the interest. If you do not specify this, your loan servicer may put the extra amount on next month’s payment instead of your current balance.
Taking these tips into consideration and applying them to your situation will give you a better chance at paying off your student loans sooner and saving thousands of dollars in interest in the process. The good news is that these strategies can be used with almost any type of student loan.
Getting out of debt as quickly as possible will help you achieve other financial goals faster and improve your debt-to-income ratio, which can boost your credit score and qualify you for other funding. Whether you’re trying to reach retirement, buy a home or start a business, taking control of your student loans will put you on the path to success.
4. Take a Hard Look at Your Budget
If you’re trying to determine if paying off student loans early is the right move for your financial situation, it’s best to take a hard look at your budget. It’s important to start by identifying your fixed expenses–those that don’t change from month to month, such as rent, utilities and car payments–and then figure out how much you have left over each month for spending on non-fixed expenses.
Once you have a better understanding of your finances, it’s time to start making some tough decisions. You may need to cut back on some of your favorite indulgences or even cancel a gym membership you don’t use, for instance.
A good way to begin this process is by estimating your monthly expenses, using credit card statements and bank account statements to record your expenditures. Next, list your financial goals, and decide if you’re able to achieve them with the amount of money you have coming in each month.
You also want to take a close look at your savings and emergency fund. Do you have enough in an emergency fund to cover three to six months’ worth of your expenses? If not, consider investing the cash in a high-yield savings account to help build up a cushion.
Having an emergency fund is a great way to protect yourself against unexpected bills or other financial disasters, such as job loss. It’s also a good idea to have a decent retirement savings plan in place so you can put extra cash toward your retirement as opposed to paying off student loans, which often come with higher interest rates than other debts.
However, if you have extra cash on hand, putting that away towards your student loans can be a wise move. It will pay off your loan faster, reduce your interest and make the repayment process easier.
You might also be able to put your extra funds towards the principal of a current loan, such as a mortgage, so it can pay off faster. If you’re unsure, check out the terms of your loans to find out more about your interest rate and whether it makes sense to pay off those debts first or second before your student loans.