First, a warning: The entirety of this article will focus on paying off student loans as quickly as possible. This means little or no discussion on loan forgiveness, marital status, or retirement planning. Fast debt elimination is the only objective.
Robbing a bank or winning the lottery are methods that conceivably could get student loans paid off more quickly, but our focus will be based upon a more realistic approach to eliminate all student debt fast.
Step #1: Track Down All of Your Debt
This one is a fairly simple step, but it cannot be ignored.
During college, students often switch from one lender to another. Unfortunately, it can be relatively easy to lose track of a loan or two over the years.
Making matters even more difficult is the fact that lenders often sell loans to other companies. These transactions require no prior approval from the borrower and can happen without the borrower getting notice. Even if the lender keeps the loan, they may choose a different company to service the loan. The result of all this movement is that it isn’t always obvious how much a borrower owes or who gets the monthly check.
The good news is that it is reasonably easy to track down the debt before starting repayment.
Tracking down federal student loans is especially easy. Records of all federal student loans are stored at studentaid.gov, the site of the Department of Education. This database has records of the exact amount owed for various loans, the interest rate of each loan, and the servicer in charge of the loan. Finding these records isn’t easy, but this guide should help.
Finding who holds private loans can be a little bit more complicated. Fortunately, most borrowers can find all of their private student loans by simply pulling a copy of their credit report. From there, borrowers may have to reach out to the individual companies to determine repayment plan options and interest rates.
Step #2: Lock in the Lowest Interest Rate Possible
There are no less than 14 different ways to get lower interest rates on student loans.
Borrowers interested in aggressively paying off their student loans as fast as possible will usually benefit from student loan refinancing. The challenge with refinancing is finding a lender willing to offer a low-interest loan so that a borrower can pay off higher interest rate student loans.
The good news is that there are about 20 different companies offering refinancing services. Getting approved isn’t as tricky as it sounds either. College students often end up with high-interest loans because they have no job and no degree. A graduate with a job and a degree is much less of a credit risk and can usually qualify for lower interest rate loans.
Note: Refinancing is not an all-or-nothing proposition. If a refinance company offers to refinance at 4%, a borrower can choose to refinance their higher interest loans while the loans already below 4% remain unchanged.
There is also some strategy that goes into the loan selection. The lowest refinance interest rate loans are usually on the 5-year variable-rate loans. The problem with these loans is that the rates could go up. Borrowers who expect to take many years repaying their loans may be better off selecting a fixed-rate loan.
Finally, now is an excellent time for a reminder that this article focuses on paying off loans as quickly as possible. Refinancing private loans is an easy decision, but refinancing federal loans comes with risks that should not be ignored.
Step #3: Get the Minimum Payment Possible for Each Loan
When one thinks about quick debt elimination, making minimum payments seems like the opposite of the desired goal. However, making minimum payments is actually a key step in getting rid of student loans.
The idea here is that a borrower with a 3% loan and a 10% loan really wants to knock out the 10% loan as soon as possible. If you can get a lower payment on the 3% loan, it frees up cash to attack the 10% loan. Your monthly spending doesn’t change, but the debt gets eliminated faster.
Getting lower payments on federal student loans is fairly easy. The Department of Education’s Student Loan Simulator shows borrowers what their monthly payments would look like on various federal repayment plans. The borrower’s student loan servicer should provide instructions for enrollment in the desired repayment plan.
Lowering monthly payments on private student loans can be a bit more tricky. Private lenders tend to be far less flexible on repayment choices. Often, the best way to get lower monthly payments is to call the lender and ask for some alternatives.
Once the lowest interest rates possible have been secured, and the lowest possible monthly payments are selected…
Step #4: Attack One Loan at a Time
This is where aggressive repayment starts to pay off.
Many borrowers have a wide range of student loan interest rates. Some are quite reasonable. Others look more like credit card interest rates.
The more a borrower spends on interest, the more the lender profits and the longer it takes to pay off the debt. A borrower can reduce total spending on their student debt by attacking the student loan with the highest interest rate. Paying down student loans in this manner can save thousands — we’ve done the math.
Once a borrower pays off the entire highest interest rate student loan, he or she can attack the next loan. This process gets repeated until all student loans are paid off in full.
Step #5: Make Payments Quickly
This one might sound silly, but the final step of the process is to make payments as quickly as possible.
Student loans accrue interest daily. If money is sitting in your bank account, it is earning next to nothing in interest. Using that money to pay down a student loan lowers the student loan balance and decreases the daily interest it generates.
Admittedly, waiting a few days won’t make a huge difference unless you have a massive interest rate or large balance, but if the goal is to pay off the loans as fast as possible, making payments as soon as possible helps the cause.
A Few Warnings
Paying off student loans as fast as humanly possible does come with a few risks.
Borrowers who want to get aggressive about repayment are doing the smart thing. Still, it is essential to remember that there are options besides paying the minimum or paying it off as quickly as possible.
Other factors borrowers should consider:
- Student Loan Forgiveness Opportunities – There are about a dozen different ways student loans can be forgiven. Not everyone qualifies, and chasing forgiveness can sometimes cost more than just paying off the loan in full. However, it is vital to explore these options before making a plan. This is especially true for federal borrowers thinking about private refinancing. Once that loan is refinanced, many forgiveness options are permanently closed.
- Borrower Protections like Income-Driven Repayment – Like the federal forgiveness programs, private consolidation of federal loans means that there are no more income-driven repayment plans to enjoy. Most borrowers in aggressive repayment don’t require this assistance, but it is a nice protection to have in the event of a job loss.
- Opportunity Cost – Dedicating a large portion of your budget to paying off student loans can be a very responsible decision. However, it is crucial to think about the financial impacts of that decision. Aggressive repayment can make it harder to save up a deposit for a house. It can also make maximizing retirement savings a challenge. A more nuanced plan might consider all financial goals rather than just focusing on student loan elimination.
Many borrowers choose to attack their private loans before the federal loans because of the federal perks.
A Final Tip to Pay Off Student Loans as Quickly as Possible
Stick to it!
Skipping a single trip to Starbucks or paying an extra $20 on your next payment will not make student debt disappear overnight.
The key to success is sticking to the plan long-term. Even quick repayment of student loans is a marathon. Don’t make the mistake of stretching yourself too thin for a few months and then giving up.
- Make a decision on student loan forgiveness – Sometimes, it makes sense to chase after federal loan forgiveness. Other times it is a mistake. Learn how to make this important decision.
- Find some hidden shortcuts to debt elimination – Student loan “tips” almost always include adding a side hustle or living at home. These under-the-radar tips don’t get much attention, but they can make a huge difference.
- Follow refinance rates – Borrowers often refinance their loans more than once. This page tracks the best rates on the market so that borrowers can keep interest spending at a minimum.