5 Ways to Pay Off College Student Loans Faster

U.S. student loan debt has hit a high of $1.7 trillion. The average federal student loan debt balance is $37,088, according to the Education Initiative Data.

Student loan indebtedness has an adverse impact on the major life decisions typically made by young adults. According to a 2019 SoFI survey of more than 1,000 millennials, ages 22-35, 61 percent have put off buying a home, 39 percent have delayed moving to another city, and 35 percent have put their plans of having a child on hold, in order to focus on paying off their loans.

The Federal Reserve Board has also found a link between student loan debt and the decline in homeownership among young adults, ages 24-32, from 2005 to 2014 — 45 percent in 2005 vs. 36 percent in 2014. In a report issued January 2019, the Fed estimated that “roughly 20 percent of the decline in homeownership among young adults can be attributed to their increased student loan debts since 2005.”

So if you are a college student, you should aim to graduate with as little debt as possible and have a plan to pay off your student loans as fast as possible. You don’t want your student loans following you for years. Instead, if you are smart and strategic about the repayment, you could shave years off your repayment and save yourself a substantial amount of money.

Here are 5 ways to pay off your student loans as soon as possible, so you can be debt-free sooner than later.

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1. Opt for free or cheaper alternatives

During your early to mid-20s, your circle of friends will likely want to catch up over dinner, grab a coffee, or go places that cost money. While I am not saying you can’t have fun with your friends, you should look for a free or cheaper alternative to hanging out. Going to bars and clubs can be pricey with cover charges and the price of drinks. Instead, try Happy Hour or find clubs and bars with no cover charge. Free fun is the best type of fun. You shouldn’t have to spend a fortune just catching up with someone. Instead, try inviting someone over for a home-cooked meal, or host a fun activity at home like a game or paint night.

2. Stay in affordable housing

Look for affordable housing, so you can spend less on housing and contribute more to your student loan payments. If having an apartment in New York City is your dream, or if being a homeowner fresh out of college is a goal, seek and compare affordable and financially realistic options. After graduation, it is also smart to live at home for a short period of time so you can save money and repay your loans as soon as possible. Contributing a significant amount of your first two years of income to repaying your loans can make a huge difference in reducing your loan repayment term.

3. Supplement your income

Freelancing is a great way to make money on the side, so find a side hustle that can offer some extra income. Whether you babysit, tutor or write, money made while freelancing can add up and supplement your income. Some people might even turn their side hustle into a business. You never know how successful you could be if you don’t try.

4. Watch your expenses

When you are working, you may be tempted to treat yourself to nice things more than you should. By watching out for unnecessary expenses and reducing them, you can live frugally and contribute more money to paying back your loans. Instead of buying coffee every morning, buy a coffee maker and find a blend that you enjoy. Saving money on “little” purchases, such as coffee and eating out, add up and can save you a lot of money.

5. Save during college

If you are in college, try to save money during your college years. Try to get a job that works with your schedule, such as work study or on-campus jobs, and save the money you make. Avoid expensive habits, such as eating out, ordering in, or buying things you don’t really need. By being frugal in college, you can save your money and have more money to contribute to paying back your loans.

Frugality is not easy, but it is necessary if you want to get rid of your student loans fast. When it gets tough, remind yourself that you have to make sacrifices in the short-term to reap the long-term benefits long-term. Every penny you save and apply towards paying back your student loans will help you shorten the period of repayment and achieve your goal of living debt-free.

Why you should pay off your student loans faster

Here are two scenarios of various student loans and varying repayment periods that will help you understand how student loans work and why you should pay them off sooner than later.

NOTE: These scenarios are just intended as examples. Lenders have different repayment methods, varying interest rates, and there are different variables in these scenarios, which may make payment terms longer or shorter depending on the situation.

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Scenario 1

This scenario examines three repayment options for a student with a loan balance of $15,000, calculates the interest due, and sets out the amount paid over the repayment period. As you will see, the longer the repayment period, the higher the amount a student has to pay.

Payment over 15 years:

Loan Balance: 15,000.00

Loan Interest Rate: 6.00%

Loan Term: 15 years

Minimum Payment: $100.00

Monthly Loan Payment: $126.58

Number of Payments: 180

Cumulative Payments: $22,783.97

Total Interest Paid: $7,783.97

Payment over 10 years:

Loan Balance: $15,000.00

Loan Interest Rate: 6.00%

Loan Term: 10 years

Minimum Payment: $100.00

Monthly Loan Payment: $166.53

Number of Payments: 120

Cumulative Payments: $19,983.72

Total Interest Paid: $4,983.72

Payment over 5 years:

Loan Balance: $15,000.00

Loan Interest Rate: 6.00%

Loan Term: 5 years

Minimum Payment: $100.00

Monthly Loan Payment: $289.99

Number of Payments: 60

Cumulative Payments: $17,399.54

Total Interest Paid: $2,399.54

Comparison for Scenario 1

If you have a $15,000 loan balance with a 6 percent loan interest rate over a 15-year loan term and a minimum payment of $100, your monthly loan payment would be $126.58 and will require 180 payments. You will be paying $22,783.97 back to your lender with a total interest paid of $7,783.97.

If you have $15,000 loan balance with a 6 percent loan interest rate over a 10-year loan term and a minimum payment of $100, your monthly loan payment would be $166.53 and will require 120 payments. You will be paying back $19,983.72 to your lender with a total interest paid of $4,983,72.

If you have $15,000 loan with a 6 percent loan interest rate over a five-year loan term and a minimum payment of $100, your monthly loan payment would be $289.99 and will require 60 payments. You will be paying back $17,399.54 to your lender with a total interest paid of $2,399.54.

By paying your loans over a five-year term instead of a 15-year term, you can reduce your interest payment by an estimated 325 percent.

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Scenario 2

This scenario examines three repayment options for a student with a loan balance of $100,000, calculates the interest due, and sets out the amount paid over the repayment period. As in Scenario 1, the longer the repayment period, the higher the amount a student ends up paying.

Payment over 15 years:

Loan Balance: $100,000.00

Loan Interest Rate: 6.00%

Loan Term: 15 years

Minimum Payment: $100.00

Monthly Loan Payment: $843.86

Number of Payments: 180

Cumulative Payments: $151,893.88

Total Interest Paid: $51,893.88

Payment over 10 years:

Loan Balance: $100,000.00

Loan Interest Rate: 6.00%

Loan Term: 10 years

Minimum Payment: $100.00

Monthly Loan Payment: $1,110.21

Number of Payments: 120

Cumulative Payments: $133,224.38

Total Interest Paid: $33,224.38

Payment over 5 years:

Loan Balance: $100,000.00

Loan Interest Rate: 6.00%

Loan Term: 5 years

Minimum Payment: $100.00

Monthly Loan Payment: $1,933.28

Number of Payments: 60

Cumulative Payments: $115,996.81

Total Interest Paid: $15,996.81

Comparison for Scenario 2

If you have a $100,000 loan with a 6 percent loan interest rate over a 15-year loan term and a minimum payment of $100, your monthly loan payment would be $843.86 and will require 180 payments. You will be paying $151,893.88 back to your lender with a total interest paid of $51,893.88.

If you have $100,000 loan with a 6 percent loan interest rate over a 10-year loan term and a minimum payment of $100, your monthly loan payment would be $1,933.28 and will require 120 payments. You will be paying back $133.224.38 to your lender with a total interest paid of $33.224.38.

If you have $100,000 loan with a 6 percent loan interest rate over a five-year loan term and a minimum payment of $100, your monthly loan payment would be $1,110.21 and will require 60 payments. You will be paying back $115,995.81 to your lender with a total interest paid of $15,996.81.

By paying your loans over a five-year term instead of a 15-year term, you can reduce your interest payment by an estimated 325 percent.

Conclusion

As you can see, you can save a substantial amount of money by paying off your student loans faster. What you save in interest payments can go towards your other life goals, like owning a home.