Students

5 Student Loan Hacks

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They say the only certainties in life are death and taxes, but we may soon need to add student loans to that list.

For most of the 40 million Americans with student loan debt, repaying those loans is a certainty.  What’s not a certainty is how much they’ll end up spending when all is said and done. The principal (or original amount borrowed) may be set in stone, but there are ways to reduce the amount you spend on interest.

Most borrowers don’t think about interest when they sign on the dotted line, but at the end of the day it adds up to a substantial amount. For example, a borrower with $30,000 in loans (the average undergrad amount borrowed) at a 6.8% interest rate and 10-year term will pay $11,428 in interest over the life of the loan. Put another way, that’s a 38% markup on the original amount borrowed.

While there’s not much you can do about paying some interest, there are a few simple ways to reduce the amount you pay – and some will even make your life a little easier in the process. Here are five of our favorites.

1. Use Your Windfalls Wisely

A good rule of thumb is that the faster you pay off a loan, the less you’ll pay in interest. This means that every extra dollar you put toward your student loans translates to a lower interest bill. For a cash-strapped borrower, finding “extra dollars” may be easier said than done. But if you do get a windfall – say, a bonus at work or a tax refund – pledge to use it on your loans rather than letting it slip through your fingers.

2. Pay Bi-Weekly Instead of Monthly

If you can comfortably bump up your monthly payment amount, do it. Even a small addition can go a long way to reducing total interest. If you get paid bi-weekly, consider making two payments each month – one for your monthly minimum and one “bonus” payment of a nominal amount like $25 or $50. Sync these up with your paycheck so the money leaves your account before you have a chance to miss it.

3. Ask for Student Loan Payments as Gifts

With so many people grappling with student loans these days, it’s becoming more and more acceptable to ask for financial assistance instead of wedding or other special occasion gifts. If registering for cold hard cash feels too gauche, you can direct people to a service like the Tuition.io gifts platform, which allows them to gift up to $500 toward your loans using just your email address.

4. Set Up Automatic Payments

There are actually several good reasons to have your student loan payment automatically deducted from your bank account. For one thing, it saves you time. And many lenders offer an interest rate discount for utilizing their auto-pay program (usually 0.25%). Plus, it can help keep your credit in good shape, because forgetting to make a payment can do serious damage to your credit score.  The upshot? Setting up an automatic payment can save you time and money AND give you peace of mind.

5. Try to Refinance

One of the fastest, easiest ways to save money on student loan interest is to reduce your interest rate – and the only way to do that is to refinance your loans. Not only can refinancing help you save a lot of money on interest, but it can sometimes make your monthly payments lower or shorten the amount of time it takes to pay off the loans. Plus, refinancing multiple loans consolidates them into one loan, simplifying your monthly bill and payment.

[Editor’s note: As you pay down your student loan debt, you can see how it affects your credit score over time by monitoring your credit scores.  There are free services that allow you to track your credit scores, including through Credit.com, where you can also get an analysis of your credit and a plan to improve your scores for free.]

More on Student Loans:

Image: AndreyPopov

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  • beolson

    I wanted to post on this article because
    it may help others. I will admit it took me a while to figure out the
    strategy I am about to outline but starting it in the beginning will
    save you the most money.

    There are several options for repayment(Graduated, Standard, Extended
    Graduated, etc ..). I will argue that if you have several loans that
    have different interest rates you would be better off choosing the plan
    that has the lowest required payment.

    The reason this is the best plan is that it lowers your required
    payment to each of your loans as well as the total payment. The fact
    that you can pay less on the loans that have a lower rate and then pay
    more directly toward the principle of the higher interest loans allows
    you to pay off the higher interest rate loans first while still making
    the same total payment you would have if you used the Standard or
    Graduated payment plan option.

    Let me provide and example without going into the calculations of how much is saved.

    If you have 5 loans of $5000 each. Loan 1,2,3 are at 3%, Loan 4 is
    at 5%, and Loan 5 is at 6.5%. Lets just assume that if you picked the
    standard payment plan that your total payment due would be $500 per
    month for 10 years. Let’s also assume that if you picked the Extended
    Standard Plan your total payment due would be $300 per month for 20
    years(Please keep in mind I am making up these numbers as an example.
    They are not accurate but should work to prove my point). That would
    mean that you would have to pay approximately $100 per loan for the
    Standard Plan and approximately $60 per loan for the Extended Standard
    plan. Now comes the important part. If you pay the minimum on the
    Extended Plan for Loans 1,2,3,4 and pay the extra $200 toward Loan 5 at a
    rate of 6.5% then you can pay down the principle of the highest
    interest loan faster than if you simply paid the $100 for each of the 5
    loans. This means over the life of the loan you can save that amount.

    There are additional benefits to doing this as well. In the case you
    lose your job or can’t afford the full payment you can skip $200 of
    payment until you are able to start paying it again without the hassle
    of changing the payment plan or asking for forbearance. This gives you a
    bit more flexibility. Please not that skipping a lot of these payments
    defeats the purpose of my post. You will end up paying more if you
    skip to many.

    I know I didn’t do all of the math correctly but if you look at this
    logically you will see that my plan makes sense. Maybe someone with
    more time will post here with a valid example and show how much can be
    saved using this payment plan. I calculated it out for my loans(~50,000
    total) and figured it will save me at least $5,000 over the life of my
    loans. That’s pretty good considering the little amount of effort it
    actually takes.

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