4 Tricks to Paying Your Student Loans off Even Faster

4 Tricks to Paying Your Student Loans off Even Faster

No one likes having student loan debt.

It’s hard starting your professional career off knowing that those first dollars you earn are going towards paying for the past instead of building the future.

And it’s even harder when it’s been 5, 10, or even 15-20 years and you still have a balance and a monthly payment.

I know you want to get rid of these things as soon as possible. And to be honest, doing so starts with the basics:

But there are a few ways you can go above and beyond the basics and potentially cut years off your repayment period.

In this post I’ll show you four tricks that can help you pay your student loans off even faster and save you a lot of money in the process.

#1: Maximize your extra payments

Here’s a tip that could potentially save you thousands of dollars and knock years off your student loan repayment schedule.

The best way to pay your student loans off as quickly as possible is to pay more than the minimum each month. The more you pay, the sooner they’ll be gone.

BUT in order to get the maximum possible benefit from these extra payments, you need to take a couple of extra steps.

See, the default for many student loan servicers is to simply hold onto the extra money you send and apply it towards future payments. And that doesn’t actually help you pay your loans off any faster.

What you want them to do instead is:

  1. Immediately apply those extra payments towards your loan principal so that your debt balance actually decreases.
  2. Apply it to the loan with the highest interest rate so that you get the best return on your investment.
  3. Repeat steps 1 and 2 every time you make an extra payment without you having to remind them.

That will make sure that every extra payment you make provides the maximum possible benefit. But since your loan servicer likely won’t do this for you automatically, you’ll have to do a little legwork.

First, you’ll want to send them a letter specifying exactly what you want them to do.

Yes, it has to be a letter, which I know is a pain in the neck. But to make that as easy as possible, I’ve created two things for you:

  1. A template letter that you can send pretty much exactly as is.
  2. A list of contact information for common loan servicers so that you know exactly where to send the letter.

Click here to get the template letter and loan servicer contact information.

Second, you’ll want to check to see whether they’re actually following your instructions. This is as simple as logging into your online account after your next payment and making sure it was applied correctly. If not, you’ll want to call your servicer and straighten things out.

Taking these steps could knock months or even years off your debt repayment schedule and potentially save you thousands of dollars.

#2: Pay more taxes to save on student loans

Married couples with student loan debt face a tough call: is it better to save money on taxes or to save money on student loans?

Here’s the deal…

Married couples can file taxes in one of two ways: jointly or separately. And while every situation is different, filing jointly often leads to a lower tax bill, especially if you have kids.

But when it comes to student loans, you may be able to qualify for a better income-driven repayment plan if you file separately. And that could potentially save you a lot of money.

See, part of the eligibility criteria for income-drive repayment is (obviously) your income. The lower your income, the lower your required monthly payment AND the more likely it is that some of your debt will be forgiven.

If you file jointly, both your income and your spouse’s income is counted, meaning it’s less likely that you’ll qualify for one of those repayment plans.

But if you file separately, your spouse’s income won’t count and you may have a better chance.

What this means is that you have the opportunity to decide which route will save you the most money:

  • File jointly – Do this when your tax savings will outweigh your student loan savings.
  • File separately – Do this when your student loans savings will outweigh your tax savings.

It’s not always an easy thing to figure out since you need to weigh both the short-term savings and the long-term savings.

For example, you may find that filing separately lowers your student loan payment by more than it increases your tax bill.

That sounds good on the surface, but you also need to consider that paying less towards yours student loans each month may mean that you end up paying much more interest over the life of the loan. So that short-term savings may be outweighed by the long-term cost.

On the other hand, people with big student loan balances may find that they’re eligible for forgiveness down the line. If that’s the case, minimizing your payments could lead to big long-term savings in the form of more debt being forgiven.

Every situation is different, so you’ll have to run the numbers yourself to figure out what’s best for you. You can use TurboTax’s TaxCaster to run the numbers on the tax side, and the StudentLoans.gov repayment estimator to run the numbers on the student loan side.

In general though, filing separately is mostly likely to be beneficial under the following conditions:

  1. Your student loan balance is high compared to your income.
  2. Your spouse’s student loan balance is low compared to his or her income.
  3. You are eligible for public service loan forgiveness, because the benefits of forgiveness are so great.

#3: Consolidate high-interest loans separately from low-interest loans

I mentioned this in a previous post on consolidating your student loans, but it’s something that’s often overlooked and it can make a big difference, so it’s worth mentioning again here.

Let’s say that you have the following federal student loans:

  1. $30,000 balance with a 4% interest rate
  2. $50,000 balance with an 8% interest rate

And let’s also say that neither of them currently qualify for any of the best income-driven repayment plans, but you have the opportunity to make them eligible through consolidation.

Option #1 would be to consolidate them together, in which case you would end up with one $80,000 loan with a 6.5% interest rate.

Option #2 would be to consolidate them separately, which would leave each one with exactly the same balance and interest rate. The only difference would be the type of loan.

Which option is better?

The answer is generally Option #2, and the reason is that it preserves your ability to direct your extra payments towards the loan with the higher interest rate. Which means you that have the opportunity to pay your debt off quicker and more efficiently.

Remember, paying off your high interest debt first represents a better return on investment than paying off lower interest debt.

In this case, by keeping them separate, you would be able to direct your extra payments towards an 8% loan instead of a 6.5% loan. Which means that every extra dollar paid would provide an extra 1.5% return.

Pretty good, right?

That extra return can make a big difference over time. So when you’re consolidating your student loans, just remember to keep loans with high interest rates separate from loans with low interest rates.

And yes, you can consolidate a single student loan all by itself. You don’t need to combine multiple loans, so keeping them separate should be pretty easy.

#4: Check for discharge and cancellation opportunities

These situations are rare, but if you’re eligible they can be hugely valuable.

In certain cases, you can have your entire student loan balance discharged or canceled. There are too many details to go into much depth in this post, but this article does a good job of summing up some of the most common situations in which you might be eligible.

And here are some questions you can ask yourself to get a quick sense for whether you might qualify:

  • Are you a veteran?
  • Are you disabled?
  • Did you experience problems with the school(s) you attended, such as the school closing when you attended or not having a GED or high school diploma when you enrolled?
  • Did you withdraw from school prior to completion?
  • Is there any reason to believe that these loans are not yours or that you did not sign for them?

Again, start with this article for more detail, and if you think you might qualify you can call your loan servicer to talk it over.

Get to debt-free sooner!

Remember, paying off your student loans quickly and efficiently starts with the basics:

But in many cases you can use one or more of the tricks above to pay your student loans off even faster and save yourself a lot of money in the process.

What have you done to pay your student loans off faster? Have you used any of the tricks above? Have you used any other strategies you’d like to share? Let’s talk about it in the comments.

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6 Comments... Read them below or add one of your own
  • Benjamin Lee October 27, 2015

    One tactic that I have employed with some success is utilizing a loan program through my employer sponsored 403(b). I was able to borrow 50% of the value of my 403(b) with a 5 year repayment term at 4.5%. Because my student loans were at the minimum federal unsubsidized rate of 6.55%, that was enough to be interesting. But the real benefit here is that BOTH the principal AND interest are paid directly back into my 403(b) account. So I’m effectively loaning myself money to pay down the principal of my student loan. The downside is that I lose any growth on that money that I have removed from my account while its in repayment, but I think the savings outweigh this potential loss. And if the market drops, then I will have protected that money from the loss anyway. It could potentially be win-win. Thoughts?

  • Karina October 27, 2015

    Thanks for the post. My loans are now serviced by Navient (by way of Citi then SallieMae). In the spring, I decided to stop paying extra (I am lucky to have a low interest rate (3.375–I’m 9 years in to the 20 yr plan though!) and to invest what I had been overpaying on both our mtg and my student loans instead. Navient told me by phone they apply extra payments to outstanding interest accrued at the time the payment is received. Then the next autopay covers more principal because some interest has been paid. Have you run into this issue with Navient or other servicers? Do you think the letter with explicit instruction to apply to principal would change anything? Or is the issue that I autopay? I started that for the 1/4% reduction. Thanks!

    • Matt Becker October 27, 2015

      Good question Karina. My understanding is that extra payments will always be directed towards accrued interest before being applied to principal. So in order for your extra payment to reduce your principal, it would need to be greater than the amount of interest you owe. That should be true no matter who your servicer is. The letter I’m talking about here would take effect once you are doing that.

  • Lauren June 8, 2017

    Hi Matt, If i have both federal stafford loans as well as signature student loans, which is best to pay off first? The stafford loans have higher interest at 6.8% but, the private signature loans, I seem to have more interest each payment despite it being 5% rate as they are a larger sum. Also, since it isnt a fixed rate, is it best to pay the signature off first with my bonus?
    Thanks

    • Matt Becker June 12, 2017

      I’m sorry for the slow response Lauren. There are a lot of variables here so there’s no way for me to definitively say which route is better. In general, paying off loans with higher interest rates is the quickest and most cost-effective way to get to debt-free, but there’s more to consider when it comes to student loans. For example, how stable is your income? If there’s a chance of it decreasing in the future, the income-driven repayment plans offered by your federal student loans may be especially helpful. They also offer deferment options if you run into financial trouble, and you may also qualify for some kind of loan forgiveness. Plus, you mention that your private loans aren’t fixed rate. Depending on when the interest rate can change and how much it might change by, it may make sense to pay them off quicker.

      I know that this isn’t the answer you’re looking for, but the honest answer is that it really depends on the specifics of both your loans and your overall financial situation. If you’d like, this is something we could discuss in detail in a Jump Start Session, which is a 1-hour, name-your-own-price financial planning session. That way we could dig into the details and come up with a plan of attack.

I’d love to hear from you, please leave a comment