Discover the Best Student Loan Payoff Plan for You
Student loan debt is a hard reality for more than half of near and recent graduates, according to a Cengage study. While most remain optimistic that it will only take 6 years to pay off their student loans, the more sobering reality is that the average graduate takes 20 years to pay off their student loan debt.
It’s no secret that student loan debt can put a damper on plans like traveling, buying a house or choosing to have children. This is why some graduates may choose to pay off their student loans early. It’s also true that for many Americans, a long-term student loan debt payoff plan can include loan forgiveness. So the real question is when and how should you pay off your student loan debt?
In this article, we explain what to do before paying off student debt and easy to follow steps that will help you get there.
What to Prioritize Before Paying Off Student Loans
Before you jump into paying off your student loans, you need to complete an overall financial health check-up. This includes the following steps:
1. Build Up An Emergency Fund
Before you start tackling debt payoff of any kind, you need to have an emergency fund. The general advice is to have enough saved up to cover at least three months of expenses. However, in light of recent events with the global pandemic, many individuals have reevaluated this goal and upped the amount in savings. We encourage you to set your own number you’re comfortable with.
The reason an emergency fund should be a priority over debt payoff is that it offers much-needed protection from taking on even more debt. Instead of putting a medical bill or a new tire on your credit card, you have cash on hand to pay for it. Put simply, an emergency fund keeps you from accumulating debt, which is essential when you’re working to pay it off.
2. Set Up Your Investment Accounts
This piece of advice may seem a bit counter-intuitive as investing regularly would direct money away from the student debt you’re trying to pay off. However, this is based on the idea that returns on your investments over the long term will be higher than if you directed that money towards debt. Not only this, but time in the market is the key to building a healthy retirement fund in time for your actual retirement date.
If your company offers a 401(k), be sure you’re contributing enough to get the company match (if they offer one). If your company does not have a 401(k) plan or retirement contribution plan, consider opening an Individual Retirement Account (IRA) and automating monthly contributions.
3. Review of Student Loan Forgiveness Plans You May Be Eligible For
There is a possibility that you may not need to pay off your student loans all by yourself. There are several student loan forgiveness programs available to those with federal student loans as long as they meet certain eligibility requirements.
Take the time to review your student loans before creating your debt pay off plan. You can look at all of your federal student loans in one place by logging into your Federal Student Aid account with your FSA ID. If you have private student loans, they will not be displayed in this portal as they are managed by private lenders. To see if you have any private student loans, you can order a copy of your annual credit report. This will have the lender and loan servicer information for your use.
4. Pay Off High-Interest Debt
Even if you’re not eligible for forgiveness, there is still one more thing to do before paying off student loan debt – pay off your other debts.
Student loans, especially federal student loans, tend to have lower interest rates. This means you’re charged just a little bit less for borrowing that money than other forms of debt like credit cards. To save the most money, you want to pay off your highest-interest debt first. This will likely be credit card debt.
An Essential Step You Shouldn’t Forget
Don’t forget that while you work on this list, you should always be paying the minimum amount on your student loans. This will keep your account in good standing and reflect well on your credit report.
5 Options You Might Consider to Pay Off Your Student Loans
When it’s time to finally tackle your student loan debt, you might consider some of these strategies below.
1. Review Employer Student Loan Repayment Programs
Companies are increasingly offering student loan repayment programs as an incentive to work with them. This employee benefit might aid in a portion of the student loan debt pay-off process.
However, it’s important to note that many employer student loan repayment programs will not stack with federal student loan forgiveness programs. You will want to review all of your options to see which one might be a better fit for you.
2. Make Extra Payments
An easy way to speed up your student loan debt payoff plan is to make extra payments when you can. If you receive a bonus or have a side hustle, consider directing this extra income towards your student loans.
3. Refinance Your Student Loans
Refinancing your student loans is a good option to consider if you are aggressively paying back your student loans and can qualify for a lower interest rate. When you refinance, your old loans are paid off by the new lender and you’re issued a new private student loan, ideally with a lower interest rate so you save money.
Note that refinancing your federal student loans means you give up all forgiveness options and federal student loan protections like forbearance and income-based repayment plans. You should be sure you have a stable job and are comfortable giving up these borrower protections when refinancing federal student loans.
4. Enroll in Autopay
For most student loan servicers, when you enroll in autopay you can receive a small deduction in your interest rate. This is a simple switch, and every bit counts when you’re on the path to becoming debt-free.
5. Pay Off Capitalized Interest
Interest accrues (collects) on your student loans. Depending on the type of student loan you have, interest may collect while you’re in school, during periods of forbearance. and even in your grace period. If that interest goes unpaid, it capitalizes and is added to the principal balance of your loan. This increases the amount of debt you owe, and is essentially compounded interest (paying interest on interest).
To avoid this and speed up your debt pay-off plan, you can pay any unpaid interest before it capitalizes.
Create Your Path for Paying Off Student Loan Debt
Paying off student loan debt takes dedication and persistence, but with the right plan and few of the strategies above, it is attainable. We probably don’t need to tell you this, but paying off student loan debt will positively impact your credit scores and more importantly pave the way for less financial worry and more financial freedom.