Savanna Hoffman
There are several ways to save money when paying off student loans. Firstly, it is important to understand the type of loan and repayment plan. Federal loans offer income-driven repayment (IDR) plans, which adjust payments relative to income. IDR plans can extend the repayment timeline, but the remaining debt may be forgiven. Private loans can be refinanced to save on interest. Extra payments on the principal loan amount can also reduce interest payments over time. Autopay can be a useful tool to lower interest rates, but it may only provide minimal savings.
Cheapest Ways to Pay Off Student Loans
| Characteristics | Values |
|---|---|
| Make extra payments | Paying more than the minimum each month reduces interest and the total cost of the loan over time |
| Sign up for autopay | Lower your interest rate so that more of your money goes towards your principal balance |
| Income-driven repayment (IDR) plans | The federal government offers IDR plans, which can lower your monthly payment based on your income |
| Loan forgiveness programs | There are loan forgiveness and repayment programs for teachers, public servants, members of the armed forces, etc. |
| Student loan payoff calculator | Use a calculator to see how extra payments can help pay off your loan faster and save on interest |
| Tax-deferred retirement accounts | Contributing to a 401(k) or 403(b) decreases your adjusted gross income (AGI) and, in turn, your IDR payment |
| Refinancing private loans | Refinancing can help save on interest for private loans |
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What You'll Learn
Make extra payments
Making extra payments is one of the best ways to pay off your student loans faster. The faster you pay off your loans, the less interest you'll owe. Here are some strategies to help you make extra payments:
Pay More Than the Minimum Each Month
If you can afford it, paying more than the minimum monthly payment is a great way to reduce your loan principal and the overall interest you'll pay over time. Even a small extra amount each month can make a big difference in the long run.
Dedicate Your Tax Refund
Consider using your tax refund to make a lump-sum payment towards your student loan debt. You may have received a tax deduction for paying student loan interest, so using that refund to pay off some of the principal can be a smart move.
Sign Up for Autopay
Many federal and private student loan servicers offer a small interest rate discount if you enrol in autopay. This allows them to automatically deduct payments from your bank account. While the savings from this discount may be minimal, it can still help when combined with other strategies.
Use a Student Loan Payoff Calculator
Utilize a student loan payoff calculator to understand how extra payments can accelerate your repayment timeline. These calculators can also help you determine how much money you'll save in interest by making extra payments.
Remember, making extra payments is just one strategy for paying off your student loans faster. Combining it with other strategies, such as enrolling in autopay or choosing the right repayment plan, can further accelerate your progress towards becoming debt-free.
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Understand federal loan forgiveness
Federal student loan forgiveness is a helpful option for many borrowers, and there are several ways to go about it. Firstly, it's important to know that federal student loan borrowers have several options for repaying their debt, and these options change quite frequently. The U.S. Department of Education often introduces new rules and revisions to the plans, so it's important to stay updated.
One way to qualify for federal student loan forgiveness is through the Public Service Loan Forgiveness (PSLF) program. This program is designed for borrowers who work full-time for a government or not-for-profit organization. To benefit from PSLF, you need to repay your federal student loans under an Income-Driven Repayment (IDR) plan or a standard 10-year plan. IDR plans base your monthly payment on your income and family size, and the remaining balance may be forgiven after a certain number of payments over 20 or 25 years.
Another option for loan forgiveness is available for teachers. If you teach full-time for five consecutive academic years in certain elementary or secondary schools serving low-income families, you may be eligible for forgiveness of up to $17,500. Additionally, if you have a disability that severely limits your ability to work, you can apply for a Total and Permanent Disability (TPD) discharge, which means you won't have to repay your federal student loans.
It's worth noting that there are also special benefits for military service members with federal student loans, and the U.S. Department of Education offers help with Parent PLUS loans, which can be converted into Direct Consolidation loans.
While exploring federal loan forgiveness options, it's important to be cautious of scams. Official information about federal student loan forgiveness programs can be found on the studentaid.gov website.
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Avoid credit cards or home equity
While it may be tempting to pay off student loans with credit cards or home equity, it is generally not advisable to do so. Here are several reasons why you should avoid using credit cards or home equity to pay off your student loans:
Interest Rates and Costs
Credit cards typically carry much higher interest rates than student loans, which means you will end up paying significantly more in interest over time. This defeats the purpose of trying to save money by opting for a cheaper repayment method.
Loss of Flexible Repayment Options
Federal student loans offer flexible repayment options and borrower protections, which you would lose if you refinance using credit cards or home equity. For example, student loans allow you to make early payments without penalty, but home equity loans may not offer the same flexibility.
Risk of Losing Your Home
Using home equity to pay off student loans means putting your home on the line as collateral. If you encounter financial difficulties and struggle to make mortgage payments, you could ultimately lose your house. This is a significant risk to consider, as it could leave you without a place to live.
Tax Implications
Student loans often come with tax deductions, whereas using home equity loans or lines of credit may have different tax implications. You may forfeit the tax benefits associated with student loans, and the interest on a home equity loan is typically only tax-deductible if used for home improvements.
Credit Card Debt
Credit cards can be a risky way to manage any type of debt due to their high interest rates. If you use a credit card to pay off your student loans, you may find yourself trapped in a cycle of debt, especially if you're unable to keep up with the high-interest payments.
In summary, while credit cards and home equity may seem like appealing options to pay off student loans, they come with significant risks and drawbacks. It is essential to carefully consider your financial situation and explore other repayment strategies, such as income-driven repayment plans or federal loan forgiveness programs, before resorting to credit cards or home equity.
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Use auto-pay for interest discounts
One of the most effective ways to save money when paying off student loans is to use auto-pay for interest discounts. Federal student loan servicers typically offer a quarter-point interest rate discount if you opt for automatic payments deducted from your bank account. This small discount can still help you save money, especially when combined with other strategies. For instance, a $10,000 loan with a 10-year repayment plan and a 4.50% interest rate would save you about $144 overall if you reduced the interest rate to 4.25%.
To take advantage of this, you can contact your servicer to enroll in auto-pay or inquire about any available autopay discounts. Many private lenders also offer auto-pay deductions, so it is worth exploring this option with your private loan lender.
Additionally, you can consider making extra payments whenever possible. Paying more than the minimum each month will reduce the interest you owe over time and help you become debt-free faster. If you are unable to make extra payments, sticking to the standard repayment plan for federal loans is the next best option. This plan splits your total debt (plus interest) into 120 monthly installments over 10 years, ensuring a quicker route to becoming debt-free compared to income-driven repayment (IDR) plans.
While auto-pay discounts may provide minimal upfront savings, they can add up to significant amounts over the long term, especially when combined with extra payments. Remember to carefully review the terms and conditions of your loan and consult with your loan servicer to determine the best strategy for your specific situation.
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Explore income-driven repayment plans
If you're struggling with federal student loan payments, an income-driven repayment (IDR) plan can help you reduce the cost. Under an IDR plan, your monthly payments are based on your income and family size. The U.S. Department of Education's Loan Simulator can help you estimate whether you would benefit from an IDR plan.
To apply for an IDR plan, you must first log in to your StudentAid.gov account. The application is free, and you can submit an IDR Plan Request online. If you have older federal loans, you may need to contact your loan servicer directly to enrol.
There are several types of IDR plans, including the Income-Contingent Repayment (ICR) plan, which is the only income-driven repayment option for Parent PLUS loan borrowers. To qualify for the ICR plan, parent borrowers must consolidate their Direct PLUS loans or Federal PLUS loans into a Direct Consolidation Loan. The Pay As You Earn (PAYE) plan is another IDR option available to some borrowers with newer federal loans. PAYE caps monthly loan payments at 10% of your discretionary income, and any remaining loan balance is forgiven after 20 years of monthly payments.
The Saving on a Valuable Education (SAVE) Plan is the newest IDR plan available for all Direct Loans. It replaced the Revised Pay As You Earn (REPAYE) Plan in 2023, and borrowers on the REPAYE Plan automatically benefit from the new SAVE Plan. The SAVE Plan lowers payments compared to other IDR plans because payments are based on a smaller portion of your income. Additionally, the SAVE Plan qualifies for Public Service Loan Forgiveness, and the government covers any remaining interest that accrued in a month if your full monthly payment does not cover it.
It's important to note that loans made for parents (Plus or FFEL loans) are never eligible for IDR plans, even if consolidated. However, parent borrowers with these loans can consolidate them into a Direct Consolidation Loan to become eligible for the ICR Plan.
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Frequently asked questions
The cheapest way to pay off student loans is to pay more than the minimum each month. The faster you pay off your loans, the less interest you will owe.
You can make extra payments, refinance to save on interest on private loans, or use a student loan payoff calculator to see how extra payments can help you save on interest.
Signing up for autopay can help lower your student loan interest rate so that more of your money goes toward your principal balance.
Federal student loan servicers offer an income-driven repayment (IDR) plan, which can lower your monthly payment based on your income.
Do not use credit cards or home equity to pay off student loans. Credit cards will cost you more in interest, and refinancing your loans using home equity means you could lose your house if you run into trouble paying your mortgage.
