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Why Making Minimum Student Loan Payments Isn't Enough

November 09, 2018 · 6 minute read

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Why Making Minimum Student Loan Payments Isn't Enough

Congrats! You’ve got a well-earned college diploma and made those first strides into your career. And as great as it is finally to be working in your chosen field, like many, you’re probably still carrying the albatross of the college experience: student loan debt.

When you stack your paychecks against your student loan debt, it may seem the after-college plan to hit the ground running on making student loan payments is moving slower than planned. But don’t be discouraged. With thoughtful planning, committing to more than making a minimum payment can be a reality. We’ve got ideas that can help you pay more on your student debt each month if you’re able—maybe even getting rid of your debt ahead of schedule.

You should know if you’re struggling with student loans, you’re far from the only one. According to the Federal Reserve Bank , outstanding student loan debt in the United States is more than $1.5 trillion. The latest statistics show the average amount owed by bachelor-degree recipients is about $37,000.

Remember that while you are entitled to make payments on your federal student loans at any time, it’s not a bad idea to notify your lender that you’ll be making prepayments. This way, you can ensure they are applying your payments how you want . (For example, they may automatically apply your additional funds to interest, but you’d prefer to go to paying down principal.) If you feel like you’ve gotten the “all clear” from your lender, here are a few tips that might help you knock that debt out sooner than expected.

Why Would You Pay off Your Student Debt Sooner?

Just because the interest rate is lower on your student loans than your credit cards doesn’t mean your student loans should be put on the back burner. Here are a few reasons to pay your student loans off sooner rather than later.

Your Debt-to-income Ratio May Be Lowered

When you’re taking out a mortgage or a car loan, the lender will usually consider your debt-to-income ratio. And the lower it is, the better you look from a financial perspective. Do you need a new car? Want to buy a house? Start a family? The sooner you get your student loan debt paid off, the more money you will likely have to put toward those dreams being realized.

Your Credit Score Could Improve

Your FICO® score is a powerful component of your total financial picture; tend it like a garden and it can grow. There’s is something to be said for the fact that if you’re managing an open debt responsibly, that may have a positive impact on your credit score. However, paying off student loan debt and wiping it from your credit record altogether can be extremely beneficial. And a higher FICO® score can help you get a better interest rate on a loan you might need for a home or car.

It’s Much Easier to save Money When You’re Not Paying down Debt

The conventional wisdom is obvious: the less debt you have, the more money you likely have to save. Think of successfully managing and paying off debt as a necessary exercise routine, like working your core. As your financial “core” gets stronger, you’re likely to become better able to balance your finances and save more money. In the process, you may start feeling more financially nimble and even more able to handle a financial crisis if one arises.

Interest. Interest. Interest.

Some financial advisors may encourage you to hang on to your student loan debt as a tax break . The bottom line is that though the interest rates are usually lower on student loans than your average credit card, those interest rates continue to accrue for the life of most student loans. (Note: The timetable of when interest starts to accrue on your student loans depends on the type of student loans you’ve been awarded. Contact your lender for all the details.)

But only $2,500 of the interest can be deducted each year—less if your modified adjusted gross income is greater than $65,000 a year. In this case, paying off the debt quickly may be a better decision for your bottom line..

How to Accelerate Your Student Loan Payments

You can pay off your student loan debt more quickly by setting reasonable goals, including payments larger than the minimum required. (Federal and private student loans generally allow for penalty-free prepayment but, as we mentioned above, contact your loan provider before doing so to ensure your prepayments are being applied how you want.) Here is a readymade checklist that may help you get rid of your student loan debt faster.

Calculating Your Costs

Make a list or spreadsheet of all your student loans. You can use a reputable Student Loan Calculator to help determine how much you ultimately owe (including interest) and when, ideally, you’d like to complete your student loan payments.

Making a Budget

Track your spending and make a realistic budget of your monthly and annual expenses. And leave some wiggle room for unexpected expenditures. Be honest with yourself. If you feel you’re spending too much on unnecessary expenses, maybe it’s time to skip your next urge to splurge. .

Setting Manageable Goals

Now that you know how much money you have coming in and where it’s going, it might be time to make some uncomfortable-but-fair spending decisions with the intention of eliminating your student loans by your goal date. That means you may want to sacrifice the daily run to get coffee or a premium cable network. Cutting back on non-necessities isn’t fun, but it may make it easier for you to save.

Paying Beyond the Minimum Required

As we mentioned up top, you can accelerate your loan payoff by paying more than the minimum monthly payment required by your loan provider. It’s okay to start small—even an extra $25 a month can start to add up. Paying more each month can also save you money on interest. You can even ask your loan provider to put that extra cash toward the principal.

Avoiding Late Fees

An easy way to help ensure you pay at the same time every month is to set up an auto-draft from your checking or savings account. If you’re in a pinch, try to avoid charging a loan payment to a credit card—that way you can avoid paying high credit card interest on a lower-interest student loan.

Maximizing “Surprise” Money

Are you doing so well at work that you got a raise or bonus? Rather than buying a virtual reality headset, lighten the burden of your current reality by putting that money toward your student loan debt.

Finding Extra Work

Every little bit of extra income can help. A part-time job could get you closer to your goal more quickly. If fitting in an extra 15 or 20 scheduled hours a week isn’t feasible, try finding a side hustle where you can make your own hours. You can walk dogs, become a rideshare driver, or even recharge electric scooters—all through an app.

Refinancing Your Student Loans

Refinancing your student loans may offer yet another step closer to your goal. Student loan refinancing is when you’re given a new loan (which is used to pay off your original loans) at a new interest rate and/or a new term.

One potential benefit of refinancing is the possibility of securing a lower interest rate. If you have a combination of private and federal loans, it’s possible to roll them into a single refinanced loan, which means only dealing with one monthly payment instead of multiple payments to multiple lenders (and possibly shortening your repayment term). This is what is known as loan consolidation.

Note: Opting to shorten your loan term likely means paying more each month, but it also means getting out of debt a lot sooner.

It’s also very important to understand that by refinancing your federal loans, you lose federal student loan protections such as deferment, forbearance, and access to income-driven repayment programs. Take this into consideration before moving forward with student loan refinancing with a private lender. If you don’t think you’ll want or need to take advantage of federal loan protections, however, refinancing can potentially help you pay less over the life of your loans.

And as long as you refinance with a lender that doesn’t charge prepayment penalties, you can continue your accelerated payment plan and pay more than the minimum on your new, refinanced loan, too.

SoFi offers many resources to help you manage your student loan debt, including more tips to help gain control of your financial future—and student loan refinancing options.


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.
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 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.
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