Money Smarts Blog

If you’re like most recent college grads, you’re probably dreading the day your student loans go into repayment. We’ve all heard (or lived) the horror stories of grads with $1500/month minimum payments, living in their parents basement until they’re 45 because there’s no money left over.

While those scenarios do exist and are all too real for some people, you don’t have to live under that cloud of student debt forever. With some planning and diligence, you could pay off your debt faster than you think.

Understand your loans.

The terms of your loan could affect your payment schedule. If you have loans with a fixed rate, you’ll likely have a fixed payment. But, your payment could change drastically if you borrowed with an adjustable rate. Knowing if and how your payments will change in advance allows you to create a flexible budget and prepare yourself for rising minimum payments.

Make payments while you’re in school.

This advice is a little late for recent grads, but making interest-only payments while you’re in school can have a huge impact on your post-grad balance. Private and federally unsubsidized loans begin accruing interest when the loan is dispersed. As your loans enter repayment, that interest will most likely be capitalized—meaning it’s added to the principal balance of the loan, and your interest rate will then apply to the new balance. The more interest you pay off while you’re in school means you’ll pay less overall in the future.

Pay more than the minimum.

It may seem obvious, but making extra payments is the fastest way to pay off any loan. Make sure you won’t be penalized for pre-payment, then figure out what works with your budget. Some lenders will automatically apply any extra monies to the next month’s payment, allowing you to essentially pay a month early. So make sure your lender knows you want it anything extra to be applied to the principal and will continue to make monthly installments.

Consolidate—if it works for your situation.

Consolidation—rolling several smaller loans into one big loan with the same servicer, could make it easier to manage your payments. But, be careful combining federal and private loans. Consolidating federal loans with a private lender means you forfeit the buyer protections, like income-based repayment, that comes with them.

Though consolidation will usually leave you with a smaller monthly payment, it might also extend your repayment period. So even if you have a lower interest rate after consolidation, you could end up paying more overall when you factor in the extra time.

Enroll in automatic payments.

Enrolling in automatic payments allows your lender to receive payments without requiring you to log in or mail a check each month. Just make sure the correct funds are available in your account before your due date so you aren’t charged overdraft fees. You can still make one-time payments too. So it won’t prevent you from paying a little more when you find yourself with extra cash.

Even better than reducing some stress, some servicers will reduce your interest by a small amount as an incentive to enroll in automatic payments. Check with your lender to see if they offer an incentive—according to FinAid.org, the most common discount is a .25% interest rate reduction.

Everyone’s financial situation is a little different, but the key to paying off any debt is consistency. By making at least the minimum payment each month, you avoid late fees and penalties, putting you much further ahead than if you skip payments.