The odd thing about student loans is that Financial Freedom creeps up on you. There are no fireworks and no dramatic moment—just a day where you login to check your loan balance to find ZERO, and that’s the goal of your loans! Yes, you can absolutely achieve this goal—even though it seems hard to believe how far you have left to go to reach that goal. Most people believe they’re making progress by making monthly payments; however, in many cases, most of those monthly payments are going to pay the interest first, and then a small portion is applied toward the principal, leaving behind a large portion that remains unpaid until later down the line (after you make more payments).
This is why the minimum payment is a trap!
While minimum payments are predictable and allow you to feel good about yourself, there is a cost to comfort: namely, that the payments you’re making are actually going to pay off the principal too slowly (and in turn, your loan balance will continue to remain at a very high level). Therefore, the minimum payment you are paying is keeping you locked into a situation where it will take a lot longer to pay down the loan than if you had paid the actual total amount owed on your loan from the beginning.
If you’re making interest payments on your loans, and you qualify for a lower interest rate on your loan, then refinancing your loan can be a game-changer! This isn’t about being fancy, this is about stopping overpaying for something you can get for less than what you’re currently paying for! By getting a lower interest rate on your loan, you will now have more of your money going toward the loan principal instead of disappearing into fees!
Despite what some people may tell you, there’s a time and place for refinancing. When it comes to loans with 0% interest rates, don’t touch them. Federal-backed student loans have unique benefits that make them challenging to refinance, but if you have a private loan without any additional benefits, they’re great candidates for refinancing. When you make a payment that is greater than the minimum payment, it may seem boring; however, it is an extremely effective strategy because that additional payment is applied directly against the loan’s principal balance. Lowering the severity of the loan, also lowers the loan’s cost (less interest) in future months, thus creating more potential to pay down the loan faster with subsequent payments. This momentum can be harnessed so that even if your added payments are small (twenty dollars a month or fifty dollars a month), you can eliminate several years from the repayment term; thereby effectively generating an equivalent amount of increased earnings.
If you have multiple loans, it may feel productive and satisfying to throw a little extra money around each of your loans, but that strategy is not very efficient. By utilizing the “debt avalanche” method, you’ll quickly find yourself saving money on each of your student loans. The method begins with lining your loans up in order of their interest rates. In this way, you will focus your efforts on relieving the student loan debt with the highest interest rate. Eliminating this loan will save you the most money (per dollar) in the long run; therefore, you want to spend as much of your financial resources as you can to eliminate this debt as quickly as possible. Once you’ve paid off this loan, don’t use the money you freed up to live better. Rather, roll the money into paying down your next loan, and repeat this process.
On social media, you probably don’t see a lot of people boasting about paying off their student loans quickly. It’s more about showing the consistencies and restraints of making the same smart decisions repeatedly and avoiding all distractions.
When most people begin paying off their student loans, they feel overwhelmed. The unpaid balance is a lot of money, the time frame to pay it off seems infinite, and what they read on the internet seems to contradict itself. This feeling is typical. What is essential is developing a plan and following through with that plan long enough for the mathematics to work in your favor.
Here’s the straightforward truth: it isn’t possible to “hack” your way out of student loan debt. You simply have to manage your interest, make intentional payments, and be patient.
Here are a few things you can do to lower your interest rate and help pay off your loans faster:
- Always try to pay a lower rate.
- Always try to pay more than the minimum amount each month.
- Concentrate your efforts and not dilute them across multiple debts.
As you continue these actions, you will eventually start seeing your outstanding principal balance decrease at a higher rate than you originally anticipated. One day, without notice, your balance will be at zero. You won’t receive applause, but you will feel relieved; you can spend that money on anything you desire, not just what you already owe.
