Education is priceless, but student loans can stay with you for a long time. Some repayment plans can last up to 20 years. It is easy to let student loan debt linger for a long time, but if you’re eager to break free from student loans sooner, you can start taking steps now to pay them off faster.
There are many benefits to doing this. Paying off student loans early can save you money on interest charges in the long run. Once done paying for your education loan debt, you can put your money towards buying a home, retirement, or other investments. Paying off a loan also reduces your debt compared to your income, making it easier to qualify for other loans.
Key Takeaways
The average student loan lasts for 20 years, but there are ways to shorten this timeline and get out of debt quicker
Making additional payments, setting up automatic payments, and considering refinancing are some effective strategies for paying off student loans faster
Sticking to a budget and considering part-time jobs or side hustles during college can help you raise extra funds to put toward your student loan
So, if you want to get started now, we have put together the five best ways to pay off your student loans faster.
Should you pay off your student loans early?
Settling student loans ahead of term may seem like a good way to free yourself from debt and increase your disposable income. But it should not be your top priority if you are carrying high-interest credit card debts. Hence, before you prioritise eliminating your student loans altogether, there are a few things to consider:
Pros of paying off student loans early
- Reduced interest payments over the life of the loan can save you a considerable amount of money.
- Greater financial freedom and flexibility once the loans are paid off. You can free up more money in your budget for other expenses or savings goals.
- Going loan-free can help lower your debt-to-income ratio and improve your credit score. This can make it easier to get approved for other types of credit with better interest rates.
Cons of paying off student loans early:
- If you pay off your education loan during the course of your studies, there could be a potential loss of tax benefits. For example, international students in the USA can get up to $2500 deductions on interest paid on private student loans from their taxable income.
- Paying off your education debt by taking on new debt, such as a personal loan or credit card, may not be the best strategy. It can inversely add to your overall debt load.
- Putting away all your money to settle your loan could land you in a financial bind in case of an emergency. It is wise to keep aside 3-6 months' worth of living expenses and only allot extra money towards loan repayment.
- By prioritising loan repayment aggressively, individuals may miss out on other investment opportunities that may have yielded higher returns. You could be planning for retirement, saving for a downpayment on your house, or building an emergency fund with that money.
If you have decided on settling off your education loan on priority, here are some practical steps to help you along the way:
1. Consider making payments during the grace period or while still in school
Although interest continues to build on your education loan while you are studying, you still have a unique opportunity to get ahead on your loan repayment.
Take advantage of the repayment grace period after graduation to make voluntary payments. This period typically lasts six months. By making interest-only payments during this time, you can avoid interest capitalization.
Begin making payments as soon as possible, even if they are small. Every little bit helps in reducing the principal balance and accruing less interest over time. As such, it won't shorten the repayment time directly but significantly reduces the total loan amount you need to tackle.
2. Make extra payments
As said earlier, even small, extra payments towards the principal balance can make a significant impact over time. It all comes down to budgeting and finding that extra money. While you are on the path to becoming debt-free quickly, here are some key strategies to consider:
- Pick up a side gig: Allowing international students to work part-time is a common practice at universities in destinations like the USA, Australia, and Canada. If you decide to work part-time while studying, the first thing you need to do is consult with your designated school official (DSO). They can check for your eligibility and even assist with finding jobs that fit your skillset.
- Use windfalls: Should you chance upon any extra cash in terms of a tax refund, bonus, or other unexpected lump sum, consider taking out a portion or the complete amount to put down against your education loan.
- Budgeting: take a peek at your budget and look for areas where you can cut back on expenditures like dining out, entertainment, or unnecessary purchases. You can also look for local buy-nothing groups to exchange goods with others without buying, selling, or bartering, which will reduce the need for new purchases.
3. Ask your employer about repayment assistance
Congratulations on completing your course and landing your dream job. Now it’s time to take control of your student loans. Many companies are recognising the value of their employees’ education and are taking initiatives to help them out. Like in the USA, employers can offer up to $5,250 annually in tax-free student loan repayment assistance to their employees through 2025.
Ask your HR department or supervisor about any repayment programmes or assistance options available. You might be surprised to find that your employer offers matching contributions, annual bonuses dedicated to loan repayment, or even refinancing partnerships with financial institutions.
But be sure to check out the eligibility criteria for applying for such programs. Some companies may require a certain tenure or performance level before you can access repayment assistance.
4. Refinance for a shorter repayment term
Refinancing is typically used to pay off existing loans, reduce monthly payments, or tap into home equity. By refinancing, you replace multiple student loans with a single private loan, ideally at a lower interest rate or reduced tenure. A shorter repayment term may increase your monthly payment. But it will help save money on interest.
The key benefits of refinancing to pay off student loans faster are:
- Securing a lower interest rate to reduce overall interest costs
- Choosing a shorter loan term to become debt-free sooner
- Potentially saving thousands of dollars in interest over the life of the loan
Going with the option of refinancing would require you to meet some eligibility criteria, depending on the lender. Mostly, it requires a stable income, which can be demonstrated through documents such as W-2s, tax returns, and pay stubs.
5. Leverage automatic payments
Direct debit or auto debit options work wonders to help you maintain consistency and prevent you from defaulting on payments. Missing a payment or paying less than your monthly repayment without making suitable arrangements can negatively impact your loan status and credit score.
Many education loan lenders allow you to set up automatic ACH (Automated Clearing House) withdrawal of your loan payments. You can even configure the payment settings as per the country you are paying from and that your payments are sent in the currency of your loan.
Students can even monitor the status of the payments, like payment pending, payment initiated, payment received, payment failed, or paid off. So leverage automatic payments to ensure your loan payments are made on time, helping you prevent late fees and penalties that can set back your repayment progress.
In a nutshell, when deciding whether to pay off student loans early, take your financial goals and priorities into consideration.
FAQs
1. Are there any prepayment penalties for student loans?
You won't get in trouble for paying off your student loans early for most lenders. This goes for both federal loans and private education loans. If you are taking out an international student loan from a bank, it is wise to check its terms and conditions for early repayment.
2. Can student loans be discharged in bankruptcy?
The provision to discharge student loans in bankruptcy can vary significantly from country to country, as bankruptcy laws and regulations differ globally. However, discharging student loans in bankruptcy in the USA requires the borrower to demonstrate “undue hardship,” which is a high legal standard that can be challenging to meet.
3. Can you opt for a lower monthly instalment instead of reduced tenure?
You can choose from various repayment plan options that can lower the monthly payment amount rather than going for a shorter term. The point is to find the best balance between the monthly instalment you can afford comfortably and how long you want to extend your education loan.
4. How long does it usually take to pay off student loans?
It all depends on your repayment plan and loan terms. For private student loans, repayment terms can vary. Depending on your income and budgeting strategies, paying off student loans can range anywhere from a few years to over 20 years.
5. In what ways can student loans impact my credit rating?
Making timely payments on your student loans can positively affect your credit rating by demonstrating responsible financial behaviour. However, missing payments or defaulting on student loans can harm your credit score, too. You can continue to positively build your credit score with Prodigy Finance, if you make the minimum payments on time.