3 Ways to Make Your Student Loans Disappear Faster and Cheaper
Most student loans offer options to slow down repayment or even take a few months off. However, often these programs come with a trade off. Lower or zero payments right now usually produce a longer period of repayment and higher total loan costs.
If you’d like to shrink your student loan balance faster rather than slower, here are three things to know.
1. Understand the basics.
Interest is calculated on your outstanding loan principal — that is, the amount you borrowed plus any interest that built up during school. At a high level, a portion of your regular monthly payment covers interest that’s accrued each day since last month’s payment, and the rest reduces your principal balance. Once you make a payment, interest now accrues on a new, smaller principal balance. Next month less of your payment is needed to cover the interest and more applies to principal. Keep it up each month, and gradually your loan is paid off!
2. Calculate daily interest charges to set an extra payment goal.
A bachelor’s degree recipient who graduates with $26,900 in student loans at 4.29 percent can expect to accrue a little more than $3 per day in interest costs initially. Consider ways to shave off an equivalent amount per day in your budget. If you can free up an extra $90 per month for your student loan, you’ll cut your interest costs from an estimated $6,229 to $4,363 — for a total savings of about $1,900. Even better, the length of time to pay off a loan of this size just went from 10 years to seven. If you can’t do that much regularly, pay extra whenever you can.
3. Shave off even more by putting your payments on autopilot.
Most student loans allow you to reduce your interest rate by .25 percentage points just by enrolling in your servicer’s automatic payment program. The typical bachelor’s degree recipient above can save about $260. (Enough to start your emergency savings account or buy a flight home for the holidays!) Perhaps more importantly, you have peace of mind that you won’t miss a payment.
With an estimated salary of, say, $50,000 — the mean average for Class of 2015 graduates — repaying student loans at these terms equates to a debt-to-income ratio of less than 9 percent. A general rule of thumb is that your total monthly debt payments (including payments for student loans, credit cards, car, and housing, whether renting or buying) should be no more than 36 to 40 percent of your monthly gross income.
Navient offers a simple loan repayment calculator that models different scenarios, estimates daily and total interest costs, and calculates debt-to-income ratio.
Experiment with what works for your budget, stay on top of deadlines, read communications from your servicer, and plan on a yearly student loan checkup.
Patricia Nash Christel is a spokeswoman for Navient, a student loan servicer helping more than 12 million customers successfully repay their student loans.