SoFi

Got credit card debt? You’re certainly not the only one. Americans owe a total of $905 billion n in credit card debt alone. Finding your way out of credit card debt can be pretty stressful. But maybe the energy you’re expending watching your balance creep up could be better spent devising a payoff plan.

Paying off credit card debt is a crucial step toward saving for the future. Credit card debt, unfortunately, might slow you down if you’re saving for a house, or trying to open your own business. That’s why knocking out credit card debt now may help your finances in the long run.

If you’re feeling overwhelmed by your monthly credit card payments, creating a debt payoff plan is an excellent way to reclaim control over your debt and your financial life. Even if you’re making multiple debt payments every month, having a plan to get through it all may put you at ease. This guide will help you make a step-by-step plan to getting debt-free.

Organize Your Budget

Before you clean up your debt, you first have to organize it. Start by figuring out your monthly income after taxes, your non-negotiable expenses, and the debt payments you have to make each month.

And when you’re writing this all down, make sure you include every debt, from your student loan payments to that $500 medical bill you you’re paying off over the next few months. When you’re writing out your expenses, don’t forget about utilities, groceries, gas, and your designated take-out budget.

This is a good time to check if there are expenses in your budget that you could easily cut out. Maybe just in going through your bank statements, you’ve noticed you’re spending too much on eating out. To help you easily track your spending, sign up for SoFi Relay. You can keep tabs on your cash flow and spending habits so you know where you stand.

Or perhaps you could save some cash by shopping at a less expensive grocery store, or using public transportation more. The more excess spending you can shave from your budget, the easier it can be to put more money toward your credit card debt.

Based on your monthly expenses, figure out how much money you are able to contribute to your credit card debt each month. If you are just paying the minimum on your credit card each month, determine how much additional cash you could contribute to your debt each month.

Then factor it right into your budget. If you plan to pay $400 toward your credit card debt each month, for example, and you get paid twice a month, maybe you get into the habit of always paying $200 to your credit card debt the day after you get paid.

Choose a Debt Payoff Method

For some of us, our credit card debt isn’t on one card, but is instead spread out over multiple cards. You can either order your credit card debts from smallest to largest (i.e., “The Snowball Method”) or from highest to lowest interest rate.

If you want to use the Snowball Method, you’re going to pay your smallest credit card debt off first, and then turn your attention toward the next smallest, and so on. By ordering your debts from smallest to largest, you build momentum, because you’re potentially knocking out debts more often.

When you are working on paying off your smallest credit card debt, you may want to put any extra resources you have toward getting rid of that debt. In the meantime, don’t forget to pay the minimum balance due to the rest of your credit cards.

On the flip side, the advantage of paying off your credit card debt starting with the highest interest rate card is pretty straight forward: It saves you the most money. Why? Because the cards with the highest interest rates are, naturally, costing you more.

If you want to pay your debt off in the most cost-effective way, start with the highest interest rate credit card, while paying the minimum balance on all the other cards. Once you’re done with the highest interest rate card, turn your debt payoff attention to the next highest interest rate card. Continue until you’re credit card debt free.

And don’t forget to put extra cash toward your debt when you can. Paying additional money toward your debt is called “The Snowflake Method”—there’s a lot of snow analogies when it comes to debt payoff). Holiday bonuses? Put it toward your debt. Birthday cash? Right to your credit card payment. Tax return? Instead of springing for a vacation, re-route that cash to your credit card.

Consolidating Your Credit Card Debt

If you’re not a number cruncher, complicated debt repayment methods might create more stress than they’re worth. Instead of these methods, you could consider replacing your multiple credit cards with a single credit card consolidation loan. That would mean making one monthly payment, instead of trying to keep up with paying off multiple credit cards.

By taking out a personal loan, it’s finally possible to focus on paying off one bill with one fixed interest rate and a set loan term. Depending on your financial history, you could qualify for a much lower interest rate on a personal loan than you’re paying on your credit cards. And paying your credit card debt off with a low-rate personal loan could help simplify and expedite your credit card debt payoff plan.

SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .
PL18185

You may be wondering whether it makes sense to prepay student loans. The answer, not surprisingly, is that it depends. It depends upon your current financial situation, as well as your projected one. In general, there are three main issues you may want to consider:

•   Your cash reserves
•   The cost of your debt
•   The expected return on any investments

Your cash reserves are simple to understand and can be broadly summarized by your answers to the following questions:

•   Do you have enough cash saved up for unexpected bills? A commonplace goal is to hold six to 12 months in cash or very liquid, safe securities for an “emergency fund.”
•   If you lost your job, would you have enough cash reserves to find another one that you wanted?

If the answers are “no,” then building up sufficient savings before considering early student loan repayment is probably a smart idea. For the sake of this post, though, let’s assume you are okay with your cash reserves. The rest of this post can help you analyze those two key bullet points, as well as help you determine benefits of paying student loans early—and the life stages at which it might make good sense to do so.

Calculating the Cost of Your Debt

To determine the true cost of your debt, you’ll need to know what the real rate of interest is on your loans. With a credit card, it’s your annual percentage rate (APR). With student loans, the net cost of the loan is the rate you pay, adjusted for any tax benefit .

You may be eligible to deduct up to $2,500 in interest expense on your qualifying federal student loan. However, you only get this full deduction if you are making under $80,000/year ($165,000 for married filing jointly).

Calculating the Expected Return on Investments

Next, you need to determine what your expected return on investment could be for any cash that you’ve freed up and made available for investment purposes. It’s probably wise to consider the risk involved in each investment.

You can find basic information about common types of investments, such as stocks, bonds, mutual funds and alternative investments in our blog post titled, “How Investments Make Money.” This post also shares information about typical levels of risk for various investment vehicles to help you decide your personal investment risk tolerance (or whether to invest at all).

Consider Your Loan and Investment Options

Armed with all this information, you can now more easily assess your options. If it’s important to you to begin investing for retirement, then it may make sense to keep investing and paying down your loans simultaneously, as opposed to dedicating all your resources to debt pay off.

Here are a few more things to consider: First, paying down any loans will generally help improve your FICO® score. That could be important to you if you are considering a large purchase in the future, like buying a home, which takes your credit score into account. Second, when measuring investments against debt, keep in mind whether you can afford to be wrong. What if that great stock tip tanks? Are you in any financial danger having not paid off your loans and put money toward riskier stocks instead?

If you’ve decided it’s time to invest more strategically, then check out an investment account with SoFi Invest®, where you get the combined benefits of automated-investing algorithms and advice from experienced human professionals. And, if student loan prepayment intrigues you, read on, keeping in mind that advice given in this post is shared on the assumption that you have sufficient emergency savings and isn’t intended to be financial or investment advice.

Potential Benefits of Paying Student Loans Early

Paying your student loans off early can make excellent sense because you’ll pay less interest during the life of the loan—sometimes significantly less. Money you would have paid in interest can be spent elsewhere, perhaps contributing to the down payment of your dream home or invested towards your retirement, as just two examples. Just make sure you let your lender know where to apply those prepayments and that you aren’t advancing your due date!

Here’s another possible benefit: If you’re buying a house or making another purchase of significance, lenders typically want to see that your total monthly payments will fit under a certain percentage of gross monthly income, often 43%. This is typically called your debt-to-income ratio. By paying off student loans early, you can reduce your debt-to-income ratio because the size of your debt might decrease once your student loans are out of the picture.

And, let’s face it—paying off debt provides a sense of relief, perhaps even of accomplishment. So, another potential benefit of paying your student loans early is peace of mind, which is priceless.
When It Might Make Sense to Prepay Student Loans

There are some stages in life that make it easier to prepay student loans than others. Times when it often makes sense to pay early include when you don’t have many other debts of significance, when you get a nice bonus at work, or when you get a raise. In fact, any time you discover extra wiggle room in your cash flow or have an unexpected windfall, consider whether it makes sense to pay more on your student loan balance.

Warning: Loan Prepayment Penalties

While student loans do not come with prepayment penalties, other loans sometimes do. If you’re paying off a personal loan early, for example, you may be hit with prepayment penalties. So be sure to check the loan notes you signed to see whether this type of penalty is included in the terms and conditions of your loans.

If there is a prepayment penalty included in one or more of them, this generally means the lender requires you to pay a certain amount of interest before you can pay off your loan. If you pay it off before you’ve fulfilled the minimum interest requirements, you can be charged a penalty.

Different lenders calculate prepayment penalties differently so, if this situation applies to you, find out how yours would be calculated. Some, for example, may charge you a year’s worth of interest as a penalty, while another may use a percentage of remaining principal to calculate the fees. Still others have a flat fee you pay, no matter how early the prepayment or how much you owe.

Check to see if your loan allows a partial payoff without penalty. In that case, you may be able to pay your loan down faster without having a penalty attached. Also, check to see if conditions of your prepayment penalty lessen over the years. Remember, it never hurts to talk to your lender to see if there are ways to sidestep or at least reduce the penalty.

Plus, here’s a piece of information to protect you in the future: Because of the Truth in Lending Act (TILA), personal loan lenders must provide you with a document that lists any fees they will or can charge, including prepayment penalties. Armed with that knowledge, you can shop around for lenders that don’t charge them—such as SoFi.

Refinancing Student Loans with SoFi

SoFi is the leading student loan refinancing provider, with $18 billion in refinanced student loans from more than 250,000 members. Refinancing your student loans can allow you to shorten your term length, lower the interest rate on your loans, or lower your monthly payment by extending your loan term.

If you have unsubsidized federal loans, interest will begin to accrue during your six-month grace period. However, for those who qualify, you can refinance with SoFi during this period, and we will honor the first six months of any existing student loan grace period.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
SLR13100

For doctors and residents carrying high student loan balances, public service loan forgiveness (PSLF), sometimes known incorrectly as public student loan forgiveness, can seem like a sweet deal. After all, when you’ve got tens of thousands of dollars to pay back, who wouldn’t jump at the chance to write off even a few?

But it’s not so easy as just signing up to get it. PSLF is a government-run program that forgives your loans if you meet a certain set of conditions. To actually receive PSLF, you may have to jump through hoops and avoid potential pitfalls.

If you’re thinking about doing PSLF, here are a few considerations to keep in mind ahead of time:

So, PSLF is possible, but there is a lot to keep track of along the way to make sure you qualify once you’ve hit your 120 payments threshold.