Savanna Hoffman
Paying student loans daily may help with faster repayment, but it is not the only way to get ahead of your debt. Student loan interest accrues daily, and borrowers can expect to pay more than they originally borrowed. Making extra payments can get you out of debt faster and save you money on interest, but your extra payment will first go to any late fees and accrued interest before hitting your principal. There are other ways to speed up repayment, such as refinancing student loans, which replaces multiple federal or private student loans with a single private loan, ideally at a lower interest rate.
| Characteristics | Values |
|---|---|
| Interest accrual | Daily |
| Interest payment | Paid by the borrower unless subsidized by the government |
| Early repayment penalty | None |
| Extra payments | Applied to the next month's payment |
| Payment allocation | Late fees and accrued interest first, then principal |
| Payment methods | Auto-debit, online, app, phone, mail, third-party bill-pay services |
| Repayment plans | Federal rehabilitation and consolidation |
| Private lenders | Negotiation possible |
| Loan forgiveness | Available for federal loans |
| Loan refinancing | Possible to replace multiple loans with a single private loan at a lower interest rate |
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Making extra payments
To make extra payments, you could consider increasing your income. You could ask your employer if they offer a student loan repayment program as an employee benefit. You could also start a side hustle to increase your income. For example, you could sell items, rent out your spare room, or use your skills to freelance or consult.
Another option is to refinance your student loans. Refinancing involves replacing multiple federal or private student loans with a single private loan, ideally at a lower interest rate. You can choose a new loan term that is shorter than your current loans, which will help you pay off the debt faster and save money on interest. However, opting for a shorter term will likely increase your monthly payments.
If you cannot refinance your loans, you can still make extra payments towards the principal to speed up your debt-free date. Just be aware that your loan servicer may use your extra payment to advance your due date, so be sure to tell them to apply the extra payment to your highest-interest loan first. Making your payments on time and avoiding extending your repayment term will also help you pay off your loans faster.
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Refinancing
Student loan refinancing could be a smart way to simplify your debt and reduce the amount you pay over time. When you refinance, you replace one or more existing student loans with a new loan, ideally with a lower interest rate. Refinancing allows you to customise your repayment plan, either with lower monthly payments or a faster payoff.
There are several benefits to refinancing student loans. Firstly, it can help you secure a lower interest rate, potentially saving you thousands of dollars. If your credit score and income have improved since you first borrowed, you may qualify for a lower rate. Secondly, refinancing allows you to combine multiple loans into one, making repayment easier to manage and helping you stay organised. Thirdly, refinancing can help you release a cosigner from responsibility for your loan if your credit has improved. Finally, if you are struggling with your current repayment plan, refinancing can provide you with a fresh start by extending your loan term and lowering your monthly payments, freeing up money in your budget.
However, there are some important considerations to keep in mind. Refinancing federal loans into private loans will cause you to lose access to federal repayment programs and protections, such as income-driven repayment plans, forbearance, deferment, and forgiveness programs. Therefore, refinancing may not be the best choice for everyone, and it is important to carefully evaluate your options before making a decision.
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Loan forgiveness
Interest accrues daily on most student loans, so paying them off daily will not help with faster repayment. However, making extra payments can help you get out of debt faster and save money on interest.
The US Department of Education offers multiple options for loan forgiveness, cancellation, and discharge for federal student loans. The Public Service Loan Forgiveness (PSLF) Program forgives qualifying federal student loans after 120 qualifying payments (10 years) while working for a qualifying public service employer. Qualifying employers include government (federal, state, local, tribal, or US military) or certain non-profit organizations.
Most federal student loans are eligible for at least one income-driven repayment (IDR) plan. IDR plans cap monthly payments based on income and family size. Depending on the plan, the remaining balance on loans may be forgiven after 20 or 25 years of repayment. This includes any months with time in repayment status, some deferment and forbearance periods, and months spent in economic hardship or military deferment after 2013.
Borrowers with ED-held loans that have accumulated at least 20 or 25 years of repayment will see automatic forgiveness, even if not currently on an IDR plan. Borrowers with FFELP loans held by commercial lenders or Perkins loans not held by ED can benefit if they consolidate into Direct Loans by June 30, 2024.
It's important to note that only federal Direct Loans can be forgiven through PSLF, and no fees are required to receive credit toward forgiveness.
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Interest accrual
The interest rate on a student loan is the cost of borrowing money, and it is typically expressed as a percentage of the loan amount, or principal. There are two types of interest rates: fixed and variable. Fixed interest rates remain constant throughout the loan period, while variable interest rates fluctuate with the financial markets and may end up costing more over time.
To minimise the impact of interest accrual, it is advisable to make regular, timely payments. Many loan services offer a discount of 0.25% on interest rates for those who set up direct debit or autopay. Additionally, making extra payments towards the principal can help reduce the overall interest paid and speed up the repayment process.
However, it is important to be aware that student loan servicers may use extra payments to advance your due date, applying the additional amount to the next month's payment. Therefore, ensuring that any extra payments are applied to the highest interest rate loans first can maximise the benefit of early or extra payments.
Refinancing student loans is another strategy to manage interest accrual. By replacing multiple federal or private student loans with a single private loan at a lower interest rate, you can reduce the total interest paid over time. Opting for a shorter loan term can also help accelerate repayment and minimise interest costs.
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Payment allocation
Paying off student loans can be a daunting task, but there are strategies to help you manage and even speed up repayment. Firstly, understand that interest accrues daily on most student loans, starting from the day the loans are disbursed. This means that making payments towards your loan daily could help reduce the total interest you pay over time.
When making extra payments, it's important to understand payment allocation. Extra funds sent each month are typically applied first to any outstanding interest, with the remaining amount going directly towards the principal loan amount. This can help you reduce your total interest charges and pay off your loan more quickly. However, student loan servicers may sometimes use your extra payment to advance your due date, applying it to the next month's payment. To avoid this, inform your servicer that you would like extra payments applied to your highest-interest loan first.
Additionally, consider setting up direct debit or autopay, which can provide a discount on your interest rate, and explore refinancing options to secure a lower interest rate and shorter repayment term. These strategies can help you save money and speed up repayment.
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Frequently asked questions
Interest accrues daily on student loans, so paying them off daily will help you pay them off faster. However, student loan servicers may use your extra payment to advance your due date, so ensure that you specify that any extra payment is to be applied to your highest interest rate loan(s) first.
You must specify to your loan servicer that any extra payments are to be applied to your highest interest rate loan(s) first.
You can refinance your student loan to a private loan with a lower interest rate and a shorter repayment term. You can also make bi-weekly payments, use autopay, or start repayment while you are still in college.
