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What is “Efficient” Student Loan Repayment?

The idea behind efficient student loan repayment is to spend as little money as possible when you pay off your student debt.

Written By: Michael P. Lux, Esq.

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Many borrowers mistakenly assume that efficient student loan repayment is the same as paying off your loans as quickly as possible.

This assumption has some truth because making large payments to eliminate debt quickly is an excellent strategy to minimize spending on interest. The faster you erase your debt, the less you spend on interest.

However, there are many other cost-effective tactics available to knock out student loans.

Ultimately, efficient student loan repayment is about finding ways to eliminate debt without spending a fortune on interest or late fees. Borrowers don’t need a huge income to knock out their student loans efficiently. They need a smart strategy.

Fortunately, there are many methods available to address student debt cost-effectively.

Focusing on One Student Loan is Most Efficient

Many borrowers think that if paying a little extra each month is good, they should pay extra on all of their student loans.

While their effort is commendable, their plan is flawed.

The best way to utilize an “extra” payment is to attack one student loan and pay the minimum on all others. If interest is the enemy, the loan with the highest interest rate is the biggest threat. Thus, extra payments are most efficient when they are used to pay down the loan with the largest interest rate.

A little bit of math shows that an inefficient extra payment strategy can become a $1,000 mistake.

Sherpa Thought: The best loan to attack isn’t always the one with the lowest interest rate.

Some financial experts like Dave Ramsey argue that you should go after the loan with the lowest balance first. I don’t necessarily agree with his argument, but it does have some merit.

Borrowers may wish to consider several different factors when deciding which loan to pay off first. From an efficiency standpoint, the most critical detail is that you attack one loan at a time.

Is Student Loan Forgiveness an Efficient Way to Eliminate Student Loans?

At first glance, chasing forgiveness sounds like a highly effective way to knock out debt.

In some cases, student loan forgiveness is by far the most cost-effective way to eliminate student loans. However, chasing loan forgiveness could end up being a more expensive and less efficient route.

The risk in pursuing student loan forgiveness is that making minimum payments for an extended period may end up costing more than quickly paying off the loan.

If you are overwhelmed by unaffordable student debt, maximizing loan forgiveness is probably the most efficient option. If you could quickly pay off your student loans but delay because they might get forgiven someday, it is perhaps more expensive to chase forgiveness. For the people who fall in the middle, some math is necessary to figure out which option is better.

Student Loan Forgiveness Math: If you are hoping that Biden forgives some student loan debt for all borrowers, the money that you spend on interest each month is the cost of that bet.

If you are paying the minimum to get forgiveness under PSLF or an IDR plan, this example shows how to compare the two strategies.

Avoiding Lifestyle Inflation

One of the best ways to eliminate student debt is to avoid falling into the traps of lifestyle inflation.

Lifestyle inflation happens when you get a raise at work, so you think you can afford a new car or a bigger house. Instead, you should treat increased income as an opportunity to make larger student loan payments.

If you sign a larger lease or accept a new car payment, it is difficult to erase the new or increased monthly payment. By comparison, avoiding lifestyle creep is much easier. You can enjoy your increased salary once your student debt is under control.

Automatic Student Loan Payments

Signing up for recurring auto-debits for your student loans is an easy way to increase your debt elimination efficiency.

Most lenders and loan servicers offer a .25% monthly interest rate reduction for automated payment enrollment. It isn’t a huge break, but it is something, and it means less towards interest and more towards principal each month.

A Warning About Automated Payments: Sometimes, auto-debits can cause issues for borrowers.

If you sign up for auto-debits, keep a close eye on the withdrawals to watch for errors.

Repayment Plan Selection

If you have only one student loan, opting for the repayment plan with the highest monthly payment is technically the most efficient route. The reasoning is simple: paying more each month eliminates the debt quicker and reduces interest spending.

However, most borrowers have more than one student loan. For these borrowers, the most efficient repayment plan is the one with the lowest monthly payment.

Picking the plan with the lowest monthly bill means you have more funds available to knock out your highest interest debt.

For federal borrowers, the standard repayment plan is the 10-year repayment plan. This option usually has the highest monthly payments. Tools like the Department of Education’s Loan Simulator can help borrowers identify the plan with the lowest monthly bill.

Student Loan Refinancing: The Efficiency Shortcut

If interest is the big obstacle to efficient student loan repayment, refinancing is an excellent shortcut for many borrowers.

By refinancing, a borrower erases their old loans and replaces them with a new loan from a new lender. Borrowers often use a refinance to get lower monthly payments or reduce interest rates.

Those with federal loans should carefully consider the pros and cons of refinancing federal debt with a private loan. Refinancing federal loans means giving up federal perks like loan forgiveness and income-driven repayments.

Refinancing high-interest private loans is a much easier decision as there are considerably fewer risks.

Borrowers looking for the lowest possible interest rate should seek out a 5-year variable rate loan. The following lenders currently advertise the best rates in this category.

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review

Borrowers who want the lowest monthly payment should investigate 20-year fixed-rate loans. These loans typically have slightly higher interest rates, but by extending repayment, the monthly bill is reduced. The following lenders currently have the best 20-year rates:

RankLenderLowest RateSherpa Review
1Splash Financial6.08%*Splash Financial Review
2Laurel Road6.55%Laurel Road Review
3ELFI6.64%ELFI Review
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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