Finishing university and starting a new phase in your life is an exciting time when you leave behind the wild days of your student life and embark on a career. This also is the time when reality hits you and you realize that you have a hefty student loan to repay. It can be disconcerting to look at the amount, and you may feel the rest of your working life will be spent repaying the loan. Although depending on the interest rate, paying your loan off early may not always be the best financial decision. For instance, paying off low interest student loans while running up high interest credit card debt would be counter productive.
But, if you have determined it is in your best interest to do it, here are some tips that will help you become debt-free:
Negotiate a Lower Interest Rate
Many student loan providers offer a lower rate of interest to students who opt for direct deposit. The logic behind the discount is simple – the chances of you making payments on time and on a continual basis increases. While the discount may seem insignificant to begin with, it can save you a quite a bit in terms of interest over the life of the loan.
For instance I plugged in some sample numbers into the FinAid Comparison Calculator. If you have a $40,000 loan and you pay it over 10 years you can see from the table below that reducing your interest rate by only 1/4% from 5.25% to 5% saves you $588.38 over the life of the loan. This may not sound like much but in other words it knocks off more than one and one-third payments. On the other hand, if your interest payment were to increase to 6% it would cost you an extra $1790.03 over the life of the loan so paying attention to the rate you pay can make a big difference. Remember even 1/4% can make a difference.
|Loan Interest Rate:||5.25%||5.00%||6.00%|
|Loan Term:||10 years||10 years||10 years|
|Monthly Loan Payment:||$429.17||$424.26||$444.08|
|Number of Payments:||120||120||120|
|Total Interest Paid:||$11,499.90||$10,911.52||$13,289.93|
Consolidating all your students loans into one loan is another option. This makes it easier because you only have to pay one bill each month, thus making it harder to forget one. During the consolidation process they average your interest rates so consolidation doesn’t help reduce the interest rate, but it does make it more convenient and by helping you avoid missed payments it can help you avoid late fees and penalties which might cause your interest rates to be increased.
Make Bigger Monthly Payments
You will be able to become debt-free quicker if you make bigger payments every month. If money is a problem, doing whatever you have to, to pay off the loan can save you a bundle in the long run. For instance, simply giving up going to the movies, eating out and theatre on Friday nights with friends and setting the money aside will help you clear your loan faster.
Let’s look at that loan comparison again. This time we will look at what happens if we try to pay the loan off sooner. By paying just $36.36 more a month you cut a whole year off your payments. But you can easily spend $50 on a Friday night so by cutting out less than one Friday night a month you can get out of debt a year sooner. And by putting just $82 more a month toward your loan you can cut off two full years of payments! That would save you $2,427.43 in interest.
|Loan Interest Rate:||5.25%||5.25%||5.25%|
|Loan Term:||10 years||9 years||8 years|
|Monthly Loan Payment:||$429.17||$465.53||$511.17|
|Number of Payments:||120||108||96|
|Total Interest Paid:||$11,499.90||$10,277.27||$9,072.47|
- Choosing an Online College
- College Savings Accounts
- Ways Your Kid Can Help Pay for Their College Education
- Dealing with Student Loan Debt and Bankruptcy
- Student Loans – Support for Teen Education
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Image courtesy of Stuart Miles / FreeDigitalPhotos.net