Typically when we write about student loan repayment strategy, we cover a wide range of situations. When a borrower is thinking about a repayment plan, things like marital status, retirement planning, and whether or not they want to buy a house all can enter the equation. Today we will throw caution to the wind. With this article, we have one goal: paying off student loans as quickly as possible. The faster it gets debt eliminated the better.
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.
We will also skip over obvious tips like “earn more money” or “spend less money”. The idea here is to find the most efficient path to debt freedom.
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 fairly easy to lose track of a loan or two over the years. Making things 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 often happen without the borrower getting notice. Even if the lender keeps the loan, they may choose a different company to service the loan. The end 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 fairly easy to track down the debt prior to starting repayment.
Tracking down federal student loans is especially easy. Records of all federal student loans are stored in the National Student Loan Data System, which is maintained by 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 who holds the private loans can be a little bit more difficult, but the vast majority of 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 find out 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 who are 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 who is willing to offer a low interest rate 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 difficult as it sounds either. College students often end up with high interest rate 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 is usually able to qualify for lower interest rate loans. Lenders like SoFi and LendKey make their money by identifying borrowers who are likely to pay back their loans and offering those borrowers preferable interest rates.
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 loans at 5% and 8% while their loan at 3.2% remains 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 are 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 a great time for a reminder that this article is focusing on paying off loans as quickly as possible. Refinancing can be risky for reasons we will get to at the very end.
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. The more you have to spend on the 3% loan, the more the 10% loan can beat you up.
Getting lower payments on federal student loans is fairly easy. The Department of Education’s Student Loan Repayment Estimator will show borrowers what their monthly payments will be on the 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 the 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. By attacking the student loan with the highest interest rate, a borrower is able to reduce total spending on their student debt. Paying down student loans in this manner can save thousands — we’ve done the math.
Once the highest interest rate student loan has been paid off in full, the next loan can be attacked. 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 on a daily basis. If money is sitting in your bank account, it is earning next to nothing in interest. When that money is used to pay down a student loan, it lowers the student loan balance, and lowers the daily interest that particular student loan generates.
Admittedly, waiting a few days won’t make a huge difference unless you have a massive interest rate or massive balance, but if the goal is to pay off the loans as fast as possible, making payments as soon as possible will help 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 definitely doing the smart thing, but it is important to remember that there are options besides just paying the minimum or paying it off as quickly as possible.
Some other factors should be considered:
- 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 important to explore these options prior to making a plan. This is especially true for federal borrowers thinking about private refinancing. Once that loan is refinanced, many forgiveness options are permanently erased.
- Borrower Protections like Income-Driven Repayment – Similar to 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 important 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 take into account all financial goals rather than just focusing on student loan elimination.
A Final Tip
Stick to it!
Skipping a 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 to thing for a few months and then giving up.