Today, I’m excited to share a guest post from Andrew Rombach. Andrew & I have been exchanging emails about his journey and experience in paying off his student loans. Unfortunately, many Americans are riddled with student loan debt (as was I) and so I’m always interested in sharing different ways to tackle debt with my readers.
I think you’ll enjoy this post by Andrew as he explains several ways to pay off your student loans. I really like giving people options since it’s personal finance and Andrew does a great job laying them out.
It’s kind of like a choose your own adventure…
How to Pay Off Your Student Loans
Out of every ten new college graduates, six of them will graduate with student loan debt, amounting to a total of over 45 million borrowers collectively owing over $1.5 trillion. Yes, that’s right — over a trillion! The typical graduating borrower leaves with nearly $28,000 in average student loan debt.
That last statistic is uncanny to me because I graduated with a little more than $27,000, so I can count myself as one of the typical student debt-ridden college graduates.
Leaving school with that much student loan debt was overwhelming and more than a wake-up call. When you’re just starting your adult life, the last thing you need is an exceptional amount of debt to your name at such a pivotal time. You have to learn, and you better learn fast!
It’s been a little over three years since I graduated. Since tossing my grad cap, I’ve learned quite a bit about student loan debt and how to pay it back. The first thing I learned is there are plenty of ways to tackle student loans. Here are a few methods to consider if you’re in the midst of repayment.
Debt Avalanche Method
This method prioritizes student loans with the highest interest rates. In a nutshell, it requires you to make minimum monthly payments on all loans except for the highest interest rate loan. Devote any extra cash to make a larger payment on the leftover high-interest loan. It’s one of the faster and more efficient ways to pay down multiple debts self-sufficiently.
So, why is the debt avalanche approach effective? You save money by prioritizing high-interest debt (the costliest debt), and you speed up repayment in the process. Why? When you pay off larger portions of a principal balance with a high-interest rate, your most expensive debt won’t be able to accumulate as much interest. Larger payments plus reduced interest compounding equates to a faster and cheaper repayment.
It sounds great, but it’s not easy. You need high-income relative to your payments to pull this off in the first place. Furthermore, it takes organization and patience as you budget and manage your loan payments.
I’m a big fan of this method and have been using it for the last three years. I made sure that I devoted more cash to my high-interest loans each month (there were only 2 out of 7 that had much higher rates). I was lucky enough to pay them off in three years, and now I am left with just a few loans with roughly the same interest rate.
Federal Loan Consolidation
The government offers federal consolidation loans to federal student borrowers looking to combine their student loans. In short, you apply for a loan from the Direct Consolidation Loan program. If approved, you are left with one loan, one monthly payment, one interest rate, and a new repayment term.
The main benefit is getting a lower monthly payment. When consolidating, you have the option to extend your repayment term up to 30 years which will break out and reduce your payments. If you’re struggling to pay each month, this could be a relief solution.
Another benefit is simplicity. Many students have more than one student loan after college – myself included, all those loans can be hard to manage. By streamlining everything into one loan, you only have to remember one due date, one balance, and one payment.
The biggest limitation is the interest rate and long-term cost of the loan. Federal consolidation loans offer a weighted average interest rate. You don’t get a lower rate on your student debt, and this won’t save you money in the long-term. In fact, you will pay more in interest if you extend the repayment term.
A federal consolidation loan would have been helpful early on if I got into trouble. However, I was making payments comfortably and didn’t mind handling multiple loans.
[Deanna here – I consolidated my federal student loans. Initially, I did this for simplicity and to make my monthly payment manageable. However, once I got serious about paying off the loans I threw as much money at my Federal consolidation loan as I could every month.]
Student Loan Refinancing
Student loan refinancing is similar to federal consolidation, but it’s a product offered by private banks and lenders. Borrowers apply for a private refinance loan. If approved, they pay off their old federal and/or private student loans and then make payments on one loan with a new interest rate and repayment term.
The greatest benefit is getting a lower interest rate on student debt. Private banks and lenders underwrite refinance loans and offer new rates based on credit. If you’re creditworthy with high income, then you could save money with a new, low-interest rate.
If you go this route with federal loans, you will lose unique benefits such as loan forgiveness and income-driven repayment options. Another drawback is the application. You need a high income and great (or excellent) credit to qualify for a student loan refinance lower rate or get a lower rate. This is a barrier for many college graduates with unestablished credit.
This could be an option down the road for me, but I have all federal loans right now. I don’t want to lose my benefits, and I’m not hurting with my interest rates.
Debt Snowball Method
The debt snowball method is similar to the debt avalanche method, but there are some key differences. Instead of prioritizing high-interest debt, you prioritize low-balance debt. Set aside the student loan with the lowest balance and make minimum monthly payments on all other loans. Take any extra cash and devote it to a larger payment on the low-balance loan.
This won’t save as much money as the debt avalanche method. So, why choose this one over the debt avalanche method? It works if you want to stay motivated. It allows you to pay off certain loans sooner, rather than later. This can get you excited with your progress. Removing a loan payment from your budget is also a nice way to clean up your finances.
The biggest drawback is that you may pay more interest compared to its counterpart. It is debated whether this is faster than the debt avalanche method. It could be faster on a case-by-case basis, but it’s heavily dependent on your individual loan situation. If you have a very high-interest rate on a large balance, that debt could get very costly and take much longer to pay off later.
While I prefer the debt avalanche method, I still try out the snowball concept at times. In fact, I temporarily switched between the two intermittently over the last three years. When a loan got pretty low, I would prioritize it for a couple of months. It’s definitely a good feeling to get it out of the way!
[Deanna here again – I used the debt snowball method in paying off my debt. Although, my smallest balanced debts were high-interest credit cards so I also got the mathematical win. Today, I counsel women to do a combination of the debt avalanche & debt snowball.]
This strategy involves making half-payments every two weeks throughout the year, as opposed to one payment each month. If you stick to this plan, then you will have made 26 half-payments over the year. This amounts to 13 full payments, as opposed to the standard 12 payments made annually.
The bi-weekly payment method is a great way to devote just a little more cash out of your budget to your student loans. Furthermore, making payments every two weeks can also mitigate interest accumulation slightly by gaming the capitalization period.
While the benefits are obvious, the biggest downfall is that some lenders may not allow it, and this may not be doable if you’re a fan of auto payments. Furthermore, this is another budget-heavy and proactive repayment method. You need to stay on your game consistently or risk missing payments.
I really like the idea of bi-weekly payments. It seems like a great way to pay down student debt just a little bit faster than normal without totally breaking your wallet. While I didn’t try this one out, I definitely see the positives.
The Bottom Line
Student loan debt is a common problem for a typical college graduate – myself included. But like any other form of debt, there are several tips and tricks to both pay it down faster and save money in the process. I recommend considering every method. Take a look at your income, budget, and monthly payments. Think about how each method could help or hurt you. When you find your method, you can put yourself on track to a speedy student loan repayment!
Andrew Rombach is a Content Associate for Lendedu – a website that helps consumers with their finances. When he’s not working, you can find Andrew hiking or hanging with his cat Colby.
I really appreciate Andrew breaking down these different repayment options as well as sharing his personal experience. Finance is personal to everyone’s unique situation. Ultimately, the most important thing is choosing a plan that is right for you and sticking to it.
Alright, do you what method or combination of methods are you using to pay down your debt? Have you paid off your debt? If so, how did you do it?