Money Health

7 Smart Ways to Pay off Student Loans

7 Smart Ways to Pay off Student Loans
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Student loan debt is so common in the U.S. right now that Americans have significantly more of it than either credit card or auto loan debt. If you are one of the millions of people stressed and wondering how to pay off your student loans, we’re here to help you figure out where to start.

Repayment options can include anything from refinancing, to assistance programs, to creating your own DIY pay off plan. With a little bit of elbow grease and a smart approach, you could pay off your loans more quickly and move on to a brighter financial future. Check out our list of seven smart (and fast) ways to pay off student loans.

1. Make extra payments towards a specific loan

If you want to pay off your student loans more quickly, one of the best ways to do that is to make extra payments towards your loans. But just because you make extra payments, it doesn’t necessarily mean it will go towards paying down the principle on your loans. Your extra payment generally will be applied to any outstanding interest first, then to the principle.

Extra payments don’t always go towards a specific loan, either. For example, an extra payment made to multiple federal loans with the same interest rate may be spread across those loans, which may only marginally reduce each loan balance.

To get that extra payment working on one specific loan, you will need to take an extra step. Make a payment towards your loans like usual. Then, when you apply your extra payment, allocate it towards a specific loan. Login to your online portal to make a payment and select either custom or manual allocation and select the loan you want your extra payment to go towards. By applying your extra payment towards one loan instead of several loans, you may make quicker progress in knocking off your loans one by one.

2. Pay off student loans with the debt snowball method

When your loan balance seems frozen, you may be able to get it rolling it with the debt snowball method. This method works by paying off the loan with the smallest balance first.

First, make regular payments on all of your loans, then apply extra payments to the one with the smallest balance. Next, if you accumulate extra income, increase payments as much as you can on the smallest loan until it is paid off. Finally, snowball the extra payment amount you’d been putting toward the newly paid off loan to your next smallest student loan.

The snowball method rewards you with a quicker win, which can be motivating. Keep in mind this strategy ignores interest rate when you set payment priorities, because the goal is to pay off the smallest loan amount first. Also, remember that even if your student loans are in administrative forbearance under the CARES Act, you can still work the debt snowball to your advantage.

3. Use the debt avalanche method

While debt snowball method focuses on paying the smallest amounts first, the debt avalanche method focuses on paying off the highest interest rate loans first. Therefore, it usually works best if you have several student loans with variable or high interest rates. Here are the steps you can take to apply the debt avalanche to pay off your student loans:

  • List out all of your student loans and arrange them with the highest interest rate first.
  • Make regular payments to all of your student loans, but focus on eliminating the one with the highest interest rate by making extra payments toward this debt.
  • Once it’s paid off, you can tackle the loan with next highest interest rate.

The debt avalanche method can be a smart way to work on paying off your debt because it can reduce the amount of interest you pay. If have student loans with high interest rates, this might be a good method to pay off your student loan debt.

4. Pay off unsubsidized loans first

Federal loans for undergraduates come in two flavors: unsubsidized and subsidized. Subsidized loans are need-based and interest does not begin to accrue until after graduation. Unsubsidized loans are not need-based and interest accrues as soon as the loan is disbursed to you. So, for example, if you took an unsubsidized loan out your freshman year, interest will accrue on that loan throughout your time in college, including during deferment and grace periods.

Because the interest starts to build right away, one smart way to organize your student loan payoff journey is to start with any unsubsidized loans. When your loan status changes to repayment status (usually at the time you graduate), any interest that accrued on unsubsidized loans is capitalized. Capitalized interest means any unpaid interest will be added to your loan balance, thus increasing the amount you owe.

Let’s make this more concrete. If you took out a $10,000 unsubsidized loan with a 5% interest rate during your freshman year, you will owe more than $10,000 after you graduate. It will look like this:

Original Amount of Unsubsidized Loan Interest Rate Capitalized Interest After 4 Years New Outstanding Balance
$10,000 5% $2,000 $12,000

If you want to get ahead of ballooning student loan debt, a great approach when you are considering how to pay off your student loans is to deal with the unsubsidized loans first, then work on any subsidized loans you may have.

5. Refinance your student loans

Another smart option to pay off student loans is to refinance or consolidate them. Refinancing student loans means any existing private and federal student loans are rolled into a completely new loan, typically with a lower interest rate and new repayment terms.

Refinancing student loans could work well for those who:

  • Have a good credit score
  • Predictable, consistent income
  • Low debt-to-income ratio
  • Student loans with high interest rates

Keep in mind, you may only refinance your student loans once. In other words, you can’t refinance again and again and to try and lower your interest rate. If you choose to refinance, take a close look at how it changes your monthly payment and the loan terms. For example, make sure you can still make extra payments without penalty so you can accelerate your debt pay off.

6. Ask your employer about assistance programs

Did you know that there are employers who will help you pay off your student loans? Many employers offer student loan assistance by helping their employees pay off existing student loan debt.

For example, take the health insurance company Aetna. Aetna helps employees pay off their student loans by matching the employee payment. The company may pay up to $1,000 per year with a lifetime maximum of $5,000. Another company with this benefit is the accounting firm PricewaterhouseCoopers. They may pay up to $1,200 per year and up to a total of $10,000 through their student loan payback program.

Ask your HR team if your company has a student loan assistance program. It’s a great way to scoop up extra money to help you pay off student loans.

7. Make bi-weekly payments

The final smart way to accelerate your student loan payoff is to save on interest by breaking up your payment into bi-weekly installments. This method takes some work, but can be one of the fastest ways to pay off your student loans.

The bi-weekly payment process works well for anyone who receives a regular paycheck every other week. Instead of making 12 monthly payments, you’ll be making 26 payments, increasing the amount you put towards your loan balance.

Start by checking to see if your lender allows autopay for bi-weekly payments; it’s the easiest way to start making extra payments. If not, then make them manually and be sure to apply them to your current loan balance (not next month’s payment).

Finally, make your bi-weekly payments before each month’s due date to avoid late fees or penalties. It may be a bit more work to do bi-weekly payments, but the benefit is your student loans will be your priority as you focus on making those few crucial extra payments.

Manage student loan debt and more

Learning how to pay off student loans may be just one piece of your managing your debt load, but you don’t have to cope with it all alone. If you have unsecured debt, like credit cards or medical bills, you have several options to forge a better financial path. Get started by accessing the How to Manage Debt guide here.

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Justine Nelson is the founder of Debt Free Millennials, an online community to help millennials eliminate debt and live a debt free lifestyle. As a freelance writer and YouTuber, Justine enjoys creating upbeat and educational personal finance content. This Midwest millennial paid off $35k in student loan debt and now resides in San Diego with her husband.