Back when you signed up for your first student loan, you might have been grateful to learn you had 10 years or more or more to pay the money back. A longer loan term typically comes with smaller monthly payments—and that can help a lot when you’re just starting out and trying to make ends meet.
Once you’re feeling steadier on your feet financially, though, the idea of dumping that debt a little sooner than planned can be tempting.
One way to do that is by adjusting the frequency of your student loan payments.
Making payments weekly or biweekly instead of monthly, typically allows more money to go towards reducing the principal balance.
That can accelerate the payoff of the student debt and reduces the amount of money spent on interest over the life of the loan by shortening the term—as long as regular loan payments and extra payments continue to be made until payoff.
Here’s an example of how it can work:
Let’s say a recent graduate has a monthly student loan payment of $400. That’s $4,800 a year. But now that she’s working, she realizes she can pay a little more every month.
If she splits that $400 into $100 weekly student loan payments, over the course of the year, she’ll pay $5,200 instead of $4,800. That’s equal to a whole extra payment for the year.
She might not even notice the difference in her budget, but because she’s making 13 full payments instead of 12 each year, over time, she could cut months and hundreds of dollars off what she would have paid over the course of the loan.
It’s pretty much the same thing if she decides to pay biweekly. Her 12 $400 monthly payments would become 26 $200 payments. And again, because she would be paying more toward the principal and paying it sooner, she’d be saving time and money on her loan as long as she keeps making those extra payments.
If this sounds like a strategy that might interest you, here are some things to consider:
Aligning payment frequency with an employer’s payroll schedule (whether it’s weekly or biweekly) may help with budgeting and ensuring money is in the right bank account when payment is due. Whichever you choose, it’s critical that all payments are received by the student loan servicer before the loan’s scheduled due date to avoid any penalties.
If that seems like a lot of extra work and worry, autopay (also called direct debit) might be a solution to staying on top of payments. As a bonus, some lenders, including SoFi, offer a rate reduction discount to those who opt for autopay.
It’s also important that everyone is on board regarding how those extra payments should be applied.
The lender should be instructed to put extra payments toward principal reduction, not the next month’s payment. It may be possible to do this online, by logging into your account and selecting how the extra should be allocated.
If not, it might be necessary to make a call to customer service. Either way, if you decide to go this route, you’ll want to be sure the correct allocation appears on your statement every month.
If you have more than one student loan, things could get a bit more complicated, so you may want to focus on one loan at a time. One option would be to start the accelerated payment strategy with the loan that has the highest interest rate.
Another option could be to choose the loan with the lowest balance first and get it paid as quickly as possible to keep your momentum going.
Are You Ready for Accelerated Payments?
Just about every financial strategy has pros and cons, and that applies to accelerated payments. There are a few scenarios when making extra loan payments wouldn’t necessarily be in a borrower’s best interest.
If a person is carrying high-interest credit card debt, for example, that debt may take priority over a student loan with a lower interest rate.
Another priority could be building an emergency fund first to handle unexpected costs – from car repairs to medical bills.
Alternatives to Accelerated Payments
For those who aren’t quite ready to move into an accelerated payment plan, there are alternative methods that can help with getting ahead of student debt.
To try a test run, you could divide your current monthly payment by 12 and add that amount to each payment whenever possible. For example, a $400 monthly payment would be about $33 extra a month. But when times are tight, you could send the regular amount.
Another approach might be to put lump sums of extra money toward loan payments spontaneously but whenever possible. (If you get a tax refund, for instance, or receive a bonus at work.)
You could also look at a federal Direct Consolidation Loan, which allows you to combine your federal education loans into a single loan with one payment.
That can make repayment more manageable, but because it’s a government program, it doesn’t include private loans. And a federal consolidation loan usually increases the period of time the borrower has to repay the loans, which means one could end up paying more in interest.
If you have a stable income and a solid credit history, you might want to look at combining all your student loans into a new loan with one manageable payment by refinancing with a private lender.
Pros and Cons of Student Loan Refinancing
Refinancing can enable a qualifying borrower to replace existing student loans with a new loan that has a lower interest rate and/or a shorter term.
So if you’re feeling financially fit—and you’re okay to give up some of the benefits and protections offered by your federal loans, like income-driven repayment or loan forgiveness plans—you could research the rates and terms available to you. (Most lenders evaluate an applicant’s past payment history, income, debt-to-income ratio and other financial factors to determine the terms of a new loan.)
While doing your due diligence and researching rates, you may find that not every lender offers the opportunity to combine private and federal loans together into one loan.
But SoFi does. And with SoFi student loan refinancing, you can go online and wrap up the prequalification process in minutes, then (if you qualify and like your rates) move on to selecting an interest rate and term that can get your loans paid off on a schedule that suits you.
Once the “paperwork” is complete (SoFi offers an all-online application process), SoFi pays off old servicers, and approved, qualified applicants can start fresh with the aim of knocking down the debt faster.
Refinancing doesn’t benefit every borrower, but it’s another option to consider if you’re ready to ramp up your student loan repayment.
It is important to remember that if you refinance your federal student loans with a private lender you will lose access to federal benefits such as forgiveness and forbearance.
No matter which option you choose, paying down your student debt faster will eventually help free up your money for other things and allow you to move on to other financial goals.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
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Student Loan Refinancing