5 Ways To Pay Back Your Student Loans
5 Ways To Pay Back Your Student Loans More Effectively
Student loans loom large in everyone’s minds once they graduate, and for good reason: the average debt load could have bought a new car. The interest rates on student loans are also pretty steep, making them difficult to handle for people who are just starting out on their career. In this article, we will go over five ways to get ahead on your student loans.
- Income-Based Repayment
Income-based repayment, or IBR, is a federal program that allows students to reduce their loan payments to a small percentage of their disposable income. You have to be making an income below a certain amount to qualify.
If you do, though, your loan payments will become much smaller. On top of that, after 20 years of payments, the rest of your loan balance will be forgiven. If you are working in certain jobs, like nursing, teaching, and public service, your loans are forgiven after 10 years of payments. Not a bad deal if you qualify!
[bctt tweet=”Here are 5 ways to pay back your student loans more effectively. Read here…” username=”HBSMoneyTips”]
If you have several different loans, it might be mentally easier to tackle them by consolidating them all into one loan. Generally, this one loan will have an interest rate that is the average of all the loans that went into it. You might lose any special properties that the loans had, like forbearances, but it might be worth it to get the peace of mind from only needing to worry about one monthly bill. This won’t lower your debt load, but it might make them easier to handle emotionally. It will just be one bill arriving each month rather than several, and they will all be handled by one lender.
- The Snowball Technique
The debt snowball is a method of paying back loans from smallest to largest. Pick out the loan with the smallest balance. Put the minimum payment towards all the other loans, and focus on the small one. You will pay it off relatively quickly, and the emotional benefit of getting a loan out of the way will be a relief. It really helps to have a focus and a specific goal. This is not the fastest way to pay back loans, but you will feel better when you know you are getting rid of them one at a time. By focusing on the smallest one, you are targeting the one you can eliminate the fastest.
- The Fast Approach
If you want to pay your loans off in the fastest way possible and minimize the interest you pay, then you should pay the loans off starting at the one with the highest interest rate. This approach will give you the most efficient payment plan. Although you might not pay off each individual loan as early as under Tip 3, you will pay off the overall total debt the fastest. If you have the discipline for it, then this is the best approach from a financial standpoint.
- Pay As Much As Possible
Unless you are using IBR and plan to let most of the balance be forgiven after 20 years, it is a good idea to just pay off the loans as early as possible. While the loans are on your balance sheet, they lower your credit score and act like a drain on your monthly income. You are better off cutting back on your spending now in order to free up your money in the future. That way, you reduce the interest that you need to pay and get the loan taken care of early on. Just paying the minimums, or a little over the minimums, means that it will usually take 10 to 20 years to be done with them. With some extra work, you can be done much earlier, which saves you time and money.
These tips should give you an idea about the best route to take with your student loans. In general, the faster you can pay them off, the better off you will be. Student loans have high, fixed interest rates, so it is hard to find a better way to spend your money as long as you have a debt load. Even if you would rather take the snowball route or consolidate, make sure that you have at least some strategy to deal with student loans. Having them on the books makes it harder for you to get a car loan, credit card, or mortgage.
Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, a leading supplier of personal and business checks.
- 5 Ways To Pay Back Your Student Loans - March 6, 2015